-----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, GWoyBsKXDbLYYgLEb5+Kwnud2eboHUB5oMkmYA4JFJ2XYKZshGpC3+MphJgRrOiW Nf++14+dUcLgODSAtXiKYA== 0000912057-00-014846.txt : 20000331 0000912057-00-014846.hdr.sgml : 20000331 ACCESSION NUMBER: 0000912057-00-014846 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBERTY FINANCIAL COMPANIES INC /MA/ CENTRAL INDEX KEY: 0000936372 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 043260640 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-13654 FILM NUMBER: 585926 BUSINESS ADDRESS: STREET 1: 600 ATLANTIC AVE 24TH FLOOR STREET 2: 24TH FL CITY: BOSTON STATE: MA ZIP: 02110-2214 BUSINESS PHONE: 6177226000 MAIL ADDRESS: STREET 1: 600 ATLANTIC AVENUE 24TH FLOOR STREET 2: 600 ATLANTIC AVENUE 24TH FLOOR CITY: BOSTON STATE: MA ZIP: 02210-2214 FORMER COMPANY: FORMER CONFORMED NAME: NEW LFC INC DATE OF NAME CHANGE: 19950130 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------------- FORM 10-K /X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER 1-13654
LIBERTY FINANCIAL COMPANIES, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------------ MASSACHUSETTS 04-3260640 (STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.) 600 ATLANTIC AVENUE 02210-2214 BOSTON, MASSACHUSETTS (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 722-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- ------------------- Common Stock, Par Value $.01 per share New York Stock Exchange Boston Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: None 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, and (2) has been subject to such 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 statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. / / The aggregate market value of Common Stock held by non-affiliates of the registrant as of March 17, 2000 (based on the closing sale price of the Common Stock on the New York Stock Exchange on such date) was approximately $278.6 million. There were 47,726,803 shares of the registrant's Common Stock, $.01 par value, and 324,759 shares of the registrant's Series A Convertible Preferred Stock, $.01 par value, outstanding as of March 17, 2000. ------------------------------ DOCUMENTS INCORPORATED BY REFERENCE Portions of the Company's 1999 Annual Report to Stockholders are incorporated into Part II, Items 6, 7, 7A and 8, and Part IV, Item 14(a)1, of this Form 10-K. Portions of the Company's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on or about May 8, 2000 are incorporated into Part III, Items 10, 11, 12, and 13, of this Form 10-K. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- LIBERTY FINANCIAL COMPANIES, INC. ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1999 TABLE OF CONTENTS
PART I PAGE - ------ -------- Item 1. Business 1 Executive Officers of the Registrant 19 Item 2. Properties 20 Item 3. Legal Proceedings 20 Item 4. Submission of Matters to a Vote of Security Holders 21 PART II -------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 21 Item 6. Selected Financial Data 22 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 22 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 22 Item 8. Financial Statements and Supplementary Data 22 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 22 PART III -------- Item 10. Directors and Executive Officers of the Registrant 22 Item 11. Executive Compensation 22 Item 12. Security Ownership of Certain Beneficial Owners and Management 23 Item 13. Certain Relationships and Related Transactions 23 PART IV -------- Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 23
PART I ITEM 1. BUSINESS OVERVIEW Liberty Financial Companies, Inc. ("Liberty Financial" or the "Company") is an asset accumulation and management company. The Company has two core product lines--retirement-oriented insurance products and investment management products. Retirement-oriented insurance products consist substantially of annuities. Investment management products consist of mutual funds, private capital management and institutional asset management. The Company sells its products through multiple distribution channels, including brokerage firms, banks and other depository institutions, financial planners and insurance agents, as well as directly to investors. The Company's net operating income (i.e., net income excluding net realized investment gains and losses and extraordinary items, net of related income taxes) was $126.7 million in 1999, $122.6 million in 1998 and $112.4 million in 1997. The following table sets forth the Company's assets under management as of December 31, 1999, 1998 and 1997, respectively.
ASSETS UNDER MANAGEMENT -------------------------------------- AS OF DECEMBER 31, -------------------------------------- 1999 1998 1997 -------- -------- -------- (DOLLARS IN BILLIONS) Retirement-oriented insurance products...................... $13.7 $13.1 $12.8 Mutual funds................................................ 29.8 28.6 26.8 Private capital management.................................. 9.1 7.9 6.6 Institutional asset management.............................. 12.5 11.4 5.3 ----- ----- ----- Total....................................................... $65.1 $61.0 $51.5 ===== ===== =====
At March 17, 2000, approximately 70.68% of the combined voting power of Liberty Financial's voting stock was indirectly owned by Liberty Mutual Insurance Company ("Liberty Mutual"). Liberty Financial's principal executive offices are located at 600 Atlantic Avenue, Boston, Massachusetts 02210-2214. Its telephone number is (617) 722-6000. MULTIPLE ASSET ACCUMULATION PRODUCTS. The Company sells a full range of retirement-oriented insurance products, grouped by whether they provide fixed, indexed or variable returns to policyholders. Substantially all of these products currently are annuities that are written by the Company's wholly-owned subsidiary, Keyport Life Insurance Company ("Keyport"). Annuities are insurance products which provide a tax-deferred means of accumulating savings for retirement needs, as well as a tax-efficient source of income in the payout period. The Company's principal fixed annuity products are individual single premium deferred fixed annuities ("SPDAs"), which represented $7.6 billion of policyholder liabilities as of December 31, 1999. In addition to SPDAs, the Company also sells equity-indexed and variable annuities. Equity-indexed annuities are an innovative product first introduced to the marketplace by the Company when it began selling its KeyIndex-Registered Trademark- product in 1995. The Company's equity-indexed annuities credit interest to the policyholder at a "participation rate" equal to a portion of the change in value of a specified equity index (in the case of the Company's equity-indexed products, the Standard & Poor's 500 Composite Stock Index ("S&P 500 Index")).(*) Under a variable annuity, the policyholder has the opportunity to select separate account investment options, consisting of underlying mutual funds, which pass the investment risk directly to the policyholder in return for the potential of higher returns. Variable annuities also include guaranteed fixed interest rate options. - ------------------------ * "S&P," "S&P 500" and "Standard & Poor's 500" are registered trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by Keyport. 1 The Company has seven operating units engaged in investment management: Liberty Funds Group LLC ("LFG"), Colonial Management Associates, Inc., ("Colonial"), Stein Roe & Farnham Incorporated ("Stein Roe"), Newport Pacific Management, Inc. ("Newport"), Crabbe Huson Group, Inc. ("Crabbe Huson"), Progress Investment Management Company ("Progress") and Liberty Asset Management Company ("LAMCO"), each of which carries strong brand name recognition in the markets it serves. As of December 31, 1999, the Company sponsored 85 open-end mutual funds, as well as 10 closed-end funds. The open-end funds consist of 48 intermediary-distributed funds, 20 direct-marketed funds, and 17 other funds included among the investment options available under the Company's variable annuities. The closed-end funds consist of 8 fixed income funds and 2 equity funds. 65 of the Company's 85 open-end mutual funds are long-term funds (defined as open-end funds having at least a three-year performance record, excluding funds that invest solely in money market securities). 41 of those 65 funds (representing 74% of the total assets in those 65 funds as of December 31, 1999) were ranked by Lipper Analytical Services, Inc. ("Lipper") in the top two quartiles of their respective peer groups for the three-year period ended that date. MULTIPLE DISTRIBUTION CHANNELS. Liberty Financial sells its products through multiple distribution channels. The Company distributes its products through all the major third party intermediary channels, including national and regional brokerage firms, banks and other depository institutions, financial planners and insurance agents. To capitalize on the importance of banks and other depository institutions as intermediaries for its products, the Company also operates its own distribution unit, Independent Financial Marketing Group, Inc. ("Independent") which sells annuities and mutual funds through such entities. Certain of the Company's products also are sold directly to investors, including its mutual funds sold without a sales load, private capital management and institutional asset management products. The Company believes that it is one of the few asset accumulators with a significant presence in both the intermediary and direct channels. Total product sales for 1999 were $13.4 billion (including $1.8 billion of reinvested dividends). During 1999, 56% of sales were made through intermediary distributors, with the balance made directly to the investor. Over 38,000 individual brokers and other intermediaries sold Liberty Financial products in 1999. BUSINESS STRATEGY. The Company's business strategy has four interrelated elements: - - DIVERSIFICATION. The Company believes that the diversification in its products and distribution channels allows it to accumulate assets in different market cycles, thereby providing more consistent growth potential and reducing earnings volatility. Within its two core product lines, the Company sells a range of products that serve individuals at different stages of their life and earnings cycle. This mix also is designed to include products that will be in demand under a variety of economic and market conditions. Similarly, the Company reaches customers through a variety of distribution channels. Diversification of distribution channels allows the Company to reach many segments of the marketplace and lessens its dependence on any one source of assets. - - INTEGRATION. Liberty Financial actively promotes integration of its operating units and believes that such efforts will enable it to accumulate additional assets by leveraging distribution capabilities and to reduce expenses by consolidating redundant back office functions. The Company has consolidated under Liberty Funds Group its mutual fund administration and transfer agency operations and has consolidated under Liberty Funds Distributor the distribution of the Company's intermediary distributed mutual funds and annuity insurance products, while retaining the distinctive styles and processes of its investment management subsidiaries. Stein Roe manages the majority of Keyport's general account assets and together with Colonial, Newport and LAMCO manages certain of the funds underlying Keyport's variable annuity products. Independent was the largest distributor of Keyport's annuities and the largest distributor of the Company's mutual funds in 1999. 2 - - ACQUISITIONS. Where appropriate, the Company seeks acquisitions that provide additional assets, new or complementary investment management capabilities, distribution capabilities or other integration or diversification opportunities in its core product areas. Acquisitions are an integral part of Liberty Financial's business strategy. Stein Roe (acquired in 1986), Keyport (acquired in 1988), LFG (acquired in 1995), Newport (acquired in 1995), Crabbe Huson (acquired in 1998), Progress (acquired in 1998) and major components of the Company's bank distribution unit (including Independent, acquired in 1996) all joined Liberty Financial by acquisition. The Company is constantly evaluating acquisition opportunities. As of the date of this Report, the Company has not entered into any definitive agreement for a material acquisition. - - INNOVATION. Liberty Financial believes that product and distribution innovations are essential in order to grow its asset base and meet the ever changing financial needs of its customers. The Company believes that it has an impressive track record in such innovations. For example, the Stein Roe Young Investor-TM- Fund was the first mutual fund to be coupled with an educational program to teach young people about investing, while offering parents an excellent device to save for educational and other family needs. The Company also introduced the first equity-indexed annuity product to the marketplace, was an early adopter of internet technology to support its business, and recently began to sell annuities over the internet. The Company's business strategy is based on its belief that its products have attractive growth prospects due to important demographic and economic trends. These trends include the need for the aging baby boom generation to both increase savings and investment and plan for retirement income, lower public confidence in the adequacy of government and employer-provided retirement benefits, longer life expectancies, and rising health care costs. The Company believes that its product mix and distribution strength are well suited to exploit these demographic and economic trends and will help the Company maintain and enhance its position as a leading asset accumulation and management company. RETIREMENT-ORIENTED INSURANCE PRODUCTS The Company sells a full range of retirement-oriented insurance products, grouped by whether they provide fixed, indexed or variable returns to policyholders. Annuities are insurance products designed to offer individuals protection against the risk of outliving their financial assets during retirement. Annuities offer a tax-deferred means of accumulating savings for retirement needs and provide a tax-efficient source of income in the payout period. The Company earns spread income from fixed and indexed annuities; variable annuities primarily produce fee income for the Company. The Company's primary financial objectives for its annuities business are to increase policyholder balances through new sales and asset retention and to earn acceptable investment spreads on its fixed and indexed return products. PRODUCTS The Company's principal retirement-oriented insurance products are categorized as follows: FIXED ANNUITIES. The Company's principal fixed annuity products are SPDAs. A SPDA policyholder makes a single premium payment at the time of issuance. The Company obligates itself to credit interest to the policyholder's account at a rate that is guaranteed for an initial term (typically one year) and is reset annually thereafter, subject to a guaranteed minimum rate. Interest crediting continues until the policy is surrendered or the policyholder dies or turns age 90. EQUITY-INDEXED ANNUITIES. Equity-indexed annuities are an innovative product first introduced to the marketplace in 1995 by the Company when it began selling its KeyIndex product. The Company's equity-indexed annuities credit interest to the policyholder at a "participation rate" equal to a portion (ranging for existing policies from 25% to 100%) of the change in value of a specified equity index. KeyIndex is currently offered for one, five and seven-year terms with interest earnings based on a 3 percentage of the increase in the S&P 500 Index. With the five and seven-year terms, the interest earnings are based on the highest policy anniversary date value of the S&P 500 Index during the term. KeyIndex also provides a guarantee of principal at the end of the term. Thus, unlike a direct equity investment, even if the S&P 500 Index declines there is no market risk to the policyholder's principal. In late 1996, the Company introduced a market value adjusted ("MVA") annuity product, KeySelect, which offers a choice between an equity-indexed account similar to KeyIndex and a fixed annuity-type interest account. KeySelect offers terms for each equity-indexed account of one, three, five, six and seven years, as well as a ten-year term for the fixed interest account. KeySelect shifts some investment risk to the policyholder, since surrender of the policy before the end of the policy term will result in increased or decreased account values based on the change in rates of designated U.S. Treasury securities since the beginning of the term. The Company is continuing to develop new versions of its equity-indexed annuities, including versions registered under the Securities Act of 1933 (the "Securities Act") which are designed to be sold through major national brokerage firms. VARIABLE ANNUITIES. Variable annuities offer a selection of underlying investment alternatives which may satisfy a variety of policyholder risk/return objectives. Under a variable annuity, the policyholder has the opportunity to select separate account investment options (consisting of underlying mutual funds) which pass the investment risk directly to the policyholder in return for the potential of higher returns. Variable annuities also include guaranteed fixed interest options. Keyport has several different variable annuity products that currently offer from 18 to 24 separate account investment choices, depending on the product, and four guaranteed fixed-interest options. INSTITUTIONAL ANNUITIES. Institutional annuity products are principally single premium deposits made by financial institutions that provide fixed or variable returns over a specified period. While the Company currently does not offer traditional life insurance products, it manages a closed block of single premium whole life insurance policies ("SPWLs"), a retirement-oriented tax-advantaged life insurance product. The Company discontinued sales of SPWLs in response to certain tax law changes in the 1980s. The Company had SPWL policyholder balances of $1.9 billion as of December 31, 1999. Under the Internal Revenue Code (the "Code"), returns credited on annuities and life insurance policies during the accumulation period (the period during which interest or other returns are credited) are not subject to federal income tax. Proceeds payable on death from a life insurance policy are also free from such taxes. At the maturity or payment date of an annuity policy, the policyholder is entitled to receive the original deposit plus accumulated returns. The policyholder may elect to take this amount in either a lump sum or an annualized series of payments over time. The return component of such payments is taxed at the time of receipt as ordinary income at the recipient's then applicable tax rate. The demand for the Company's retirement-oriented insurance products could be adversely affected by changes in the tax law. 4 The following table sets forth certain information regarding Keyport's retirement-oriented insurance products for the periods indicated.
AS OF OR FOR THE YEAR ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 --------- --------- -------- (DOLLARS IN MILLIONS, EXCEPT POLICY DATA) POLICY AND SEPARATE ACCOUNT LIABILITIES: Fixed annuities............................................. $ 7,197 $ 7,834 $ 8,417 Equity Indexed annuities.................................... 2,503 2,125 1,527 Variable annuities.......................................... 2,666 1,744 1,277 Institutional annuities..................................... 950 412 -- Life insurance.............................................. 2,095 2,112 2,129 -------- -------- ------- Total....................................................... $ 15,411 $ 14,227 $13,350 ======== ======== ======= NUMBER OF IN FORCE POLICIES: Fixed annuities............................................. 182,858 205,508 222,903 Equity Indexed annuities.................................... 49,691 46,484 39,224 Variable annuities.......................................... 43,677 37,049 27,429 Institutional annuities..................................... 6 2 -- Life insurance.............................................. 21,640 23,097 24,921 -------- -------- ------- Total....................................................... 297,872 312,140 314,477 ======== ======== ======= AVERAGE IN FORCE POLICY AMOUNT: Fixed annuities............................................. $ 39,356 $ 38,122 $37,710 Equity Indexed annuities.................................... $ 50,372 $ 45,720 $38,943 Variable annuities.......................................... $ 61,048 $ 47,070 $46,542 Institutional annuities..................................... $158,342 $205,977 -- Life insurance.............................................. $ 96,789 $ 91,435 $83,709
5
AS OF OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------ 1999 1998 1997 -------- -------- -------- (DOLLARS IN MILLIONS, EXCEPT POLICY DATA) PREMIUMS (STATUTORY BASIS): Fixed annuities............................................. $ 462 $ 306 $ 426 Equity Indexed annuities.................................... 170 278 524 Variable annuities.......................................... 866 508 173 Institutional annuities..................................... 500 400 -- Life insurance (net of reinsurance)......................... (2) (1) (1) ------ ------ ------ Total....................................................... $1,996 $1,491 $1,122 ====== ====== ====== NEW CONTRACTS AND POLICIES: Fixed annuities............................................. 17,301 10,448 13,744 Equity Indexed annuities.................................... 6,395 9,249 16,076 Variable annuities.......................................... 14,886 12,238 4,333 Institutional annuities..................................... 4 2 -- ------ ------ ------ Total....................................................... 38,586 31,937 34,153 ====== ====== ====== AGGREGATE AMOUNT SUBJECT TO SURRENDER CHARGES: Fixed annuities............................................. $5,708 $6,643 $6,982 Equity Indexed annuities.................................... $2,482 $2,125 $1,527 WITHDRAWALS AND TERMINATIONS (STATUTORY BASIS): Fixed Annuities: Death....................................................... $ 28 $ 29 $ 60 Maturity.................................................... $ 141 $ 118 $ 110 Surrender................................................... $1,220 $1,135 $ 947 Indexed Annuities: Death....................................................... $ 11 $ 11 $ 4 Maturity.................................................... -- -- -- Surrender................................................... $ 28 $ 19 $ 10 Variable Annuities: Death....................................................... $ 17 $ 7 $ 4 Maturity.................................................... $ 223 $ 87 $ 28 Surrender................................................... $ 199 $ 125 $ 97 Life Insurance: Death....................................................... $ 76 $ 63 $ 66 Surrender................................................... $ 74 $ 77 $ 96 SURRENDER RATES: Fixed annuities............................................. 15.39% 13.63% 11.11% Equity Indexed annuities.................................... 1.22% 1.05% 0.86% Variable annuities.......................................... 8.04% 8.26% 8.18% Life insurance.............................................. 3.53% 3.65% 4.51%
SALES AND ASSET RETENTION Product sales are influenced primarily by overall market conditions affecting the attractiveness of the Company's retirement-oriented insurance products, and by product features including interest crediting and participation rates, and innovations and services that distinguish the Company's products from those of its competitors. 6 The Company's mix of annuity products is designed to include products in demand under a variety of economic and market conditions. Sales of SPDAs, variable annuities and equity-indexed annuities tend to be sensitive to prevailing interest rates. Sales of SPDAs can be expected to increase and surrenders to decrease in interest rate environments when SPDA rates are higher than rates offered by competing conservative fixed return investments, such as bank certificates of deposit. SPDA sales can be expected to decline and surrenders to increase in interest rate environments when this differential in rates is not present. SPDA sales also can be adversely affected by low interest rates. Conversely, sales of variable annuities can be expected to increase and surrenders of such products to decrease in a rising equity market, low interest rate environment. While sales of equity-indexed annuities can be expected to increase and surrenders to decrease in a rising equity market and low interest rate environment, sales of these products can be affected by the participation rate credited by the Company which may be reduced in a rising but relatively volatile equity market (as was the case during 1999 and at the date of filing of this Report). The Company's insurance products include important features designed to promote both sales and asset retention, including crediting rates and surrender charges. Initial interest crediting and participation rates on fixed and indexed products significantly influence the sale of new policies. Resetting of rates on SPDAs impacts retention of SPDA assets, particularly on policies where surrender penalties have expired. At December 31, 1999, crediting rates on 91.0% of the Company's in force SPDA policy liabilities were subject to reset during the succeeding 12 months. In setting crediting and participation rates, the Company takes into account yield characteristics on its investment portfolio, surrender rate assumptions and competitive industry pricing. Interest crediting rates on the Company's in force SPDAs ranged from 3.65% to 7.75% at December 31, 1999. Such policies had guaranteed minimum rates ranging from 3.0% to 4.5% as of such date. Initial interest crediting rates on new policies issued in 1999 ranged from 4.0% to 7.3%. Guaranteed minimum rates on new policies issued during 1999 ranged from 3.0% to 4.5%. Substantially all of the Company's annuity insurance products permit the policyholder at anytime to withdraw all or any part of the accumulated policy value. Premature termination of a policy results in the loss by the Company of anticipated future earnings related to the premium deposit and the accelerated recognition of the expenses related to policy acquisition (principally commissions), which otherwise are deferred and amortized over the life of the policy. Surrender charges provide a measure of protection against premature withdrawal of policy values. Substantially all of the Company's insurance products currently are issued with surrender charges or similar penalties. Such surrender charges for all policies, except KeyIndex, typically start at 7% of the policy premium and then decline to zero over a five- to seven-year period. KeyIndex imposes a penalty on surrender of up to 10% of the premium deposit for the life of the policy. At December 31, 1999, 76% of the Company's fixed annuity policyholder balances remained in the surrender charge period. Surrender charges generally do not apply to withdrawals by policyholders of, depending on the policy, either up to 10% per year of the then accumulated value or the accumulated returns. In addition, certain policies may provide for charge-free withdrawals in certain circumstances and at certain times. All policies except for certain variable annuities also are subject to "free look" risk (the legal right of the policyholder to cancel the policy and receive back the initial premium deposit, without interest, for a period ranging from ten days to one year, depending upon the policy). To the extent a policyholder exercises the "free look" option, the Company may realize a loss as a result of any investment losses on the underlying assets during the free look period, as well as the commissions paid on the sale of the policy. While SPWLs also permit withdrawal, the withdrawal generally would produce significant adverse tax consequences to the policyholder. Keyport's financial ratings are important to its ability to accumulate and retain assets. Keyport is rated "A" (excellent) by A.M. Best, "AA-" (strong) by S&P, "A2" (good) by Moody's and AA- (very high claims paying ability) by Duff & Phelps. Rating agencies periodically review the ratings they issue. S&P reduced Keyport's rating from "AA" to "AA-" in December 1999. In January 1999, A.M. Best reduced 7 Keyport's rating from "A+" to "A". These ratings reflect the opinion of the rating agency as to the relative financial strength of Keyport and Keyport's ability to meet its contractual obligations to its policyholders. Such ratings are not "market" ratings or recommendations to use or invest in Keyport or Liberty Financial and should not be relied upon when making a decision to invest in the Company. Many financial institutions and broker-dealers focus on the claims-paying ability rating of an insurer in determining whether to market the insurer's annuities. If any of Keyport's ratings were downgraded from their current levels or if the ratings of Keyport's competitors improved and Keyport's did not, sales of Keyport's products, the level of surrenders on existing policies and the Company's relationships with distributors could be materially adversely affected. No assurance can be given that Keyport will be able to maintain its financial ratings. Customer service also is essential to asset accumulation and retention. The Company believes Keyport has a reputation for excellent service to its distributors and its policyholders. Keyport has developed advanced technology systems for immediate response to customer inquiries, and rapid processing of policy issuances and commission payments (often at the point of sale). These systems also play an important role in controlling costs. Keyport's annualized operating expenses for 1999 were 0.40% of assets, which reflects Keyport's low cost operations. GENERAL ACCOUNT INVESTMENTS Premium deposits on fixed and indexed annuities are credited to the Company's general account investments (which at December 31, 1999 totaled $13.1 billion) and to certain separate account investments (which at December 31, 1999 totaled $0.6 billion). Total general account investments include cash and cash equivalents. To maintain its investment spreads at acceptable levels, the Company must earn returns on its general account sufficiently in excess of the fixed or indexed returns credited to policyholders. The key element of this investment process is asset/liability management. Successful asset/liability management requires both a quantitative assessment of overall policy liabilities (including maturities, surrenders and crediting of interest) and prudent investment of general account assets. The two most important tools in managing policy liabilities are setting crediting rates and establishing surrender periods. The investment process requires portfolio techniques that earn acceptable yields while effectively managing both interest rate risk and credit risk. The Company emphasizes a conservative approach to asset/liability management, which is oriented toward reducing downside risk in adverse markets, as opposed to maximizing spread in favorable markets. The approach is also designed to reduce earnings volatility. Various factors can impact the Company's investment spread, including changes in interest rates and other factors affecting the Company's general account investments. The bulk of the Company's general account and certain separate account investments are invested in fixed maturity securities (81.0% at December 31, 1999). The Company's principal strategy for managing interest rate risk is to closely match the duration of its general account investment portfolio and its policyholder balances. The Company also employs hedging strategies to manage this risk, including interest rate swaps and caps. In the case of equity-indexed products, the Company purchases S&P 500 Index call options, futures and certain total return swaps to hedge its obligations to provide returns based upon this index. Credit risk is managed by careful credit analysis and monitoring. A portion of general account and certain separate account investments (8.9% at December 31, 1999) is invested in below investment grade fixed maturity securities to enhance overall portfolio yield. Below investment grade securities pose greater risks than investment grade securities. The Company actively manages its 8 below investment grade portfolio in an effort to optimize its risk/return profile. At December 31, 1999, the carrying value of fixed maturity investments that were non-income producing was $22.6 million, which constituted 0.2% of the Company's general account investments. For a more detailed description of the management of the Company's general account investments see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quantitative and Qualitative Disclosures About Market Risk" beginning at page 33 of the Company's 1999 Annual Report To Shareholders (the "1999 Annual Report"). As of December 31, 1999, the Company owned approximately $3.4 billion of mortgage-backed securities (24.8% of its general account and certain separate account investments), 96.7% of which were investment grade. Mortgage-backed securities are subject to prepayment and extension risks, since the underlying mortgages may be repaid more or less rapidly than scheduled. As of December 31, 1999, approximately $3.4 billion (24.8% of the Company's general account and certain separate account investments) were invested in securities which were sold without registration under the Securities Act and were not freely tradeable under the Securities Act or which were otherwise illiquid. These securities may be resold pursuant to an exemption from registration under the Securities Act. If the Company sought to sell such securities, it might be unable to do so at the then current carrying values and might have to dispose of such securities over extended periods of time at uncertain levels. Stein Roe manages the majority ($6.9 billion at December 31, 1999) of the Company's general account investments. In addition, several unaffiliated parties manage portions of its general account investments in order to obtain diversification of investment styles and asset classes. The Company's general account investments, all of which pertain to the Company's annuity insurance operations, were comprised of the following as of the dates indicated (in millions):
DECEMBER 31, --------------------------------- 1999 1998 1997 --------- --------- --------- Fixed maturities.......................................... $10,516.1 $11,277.2 $11,246.5 Policy loans.............................................. 599.5 578.9 554.7 Other invested assets..................................... 894.5 717.6 501.5 Equity securities......................................... 37.9 24.6 40.8 --------- --------- --------- Investments............................................. 12,048.0 12,598.3 12,343.5 Cash and cash equivalents................................. 1,075.9 719.6 1,162.4 --------- --------- --------- General account investments............................... $13,123.9 $13,317.9 $13,505.9 ========= ========= =========
INVESTMENT MANAGEMENT Liberty Financial has three types of investment management product lines: mutual funds, private capital management, and institutional asset management. The Company has seven separate operating units engaged in investment management: LFG, Colonial, Stein Roe, Newport, Crabbe Huson, Progress and LAMCO. The Company's primary financial objectives with respect to its investment management businesses are to increase assets under management in each of its three core product lines, and to improve operating margins through increasing scale and cost savings produced by integration. PRODUCTS AND SERVICES MUTUAL FUNDS. As of December 31, 1999 the Company sponsored 85 open-end mutual funds, as well as 10 closed-end funds. The open-end funds include 48 intermediary-distributed mutual funds, 20 direct-marketed funds, and 17 other funds included among the investment options available under the Company's variable annuities. The closed-end funds include 8 fixed income funds and 2 equity funds. At December 31, 1999, total mutual fund assets were $29.8 billion. At December 31, 1999, 56.1% of these 9 assets were invested in equity funds, 25.3% in taxable fixed income funds and 18.6% in tax-exempt fixed income funds. The Company seeks to increase equity mutual fund assets, which generally carry higher fees than funds that invest in fixed income securities. PRIVATE CAPITAL MANAGEMENT. At December 31, 1999, the Company managed $9.1 billion in investment portfolios for high net worth individuals and families and smaller institutional investors, all of which are managed by Stein Roe. INSTITUTIONAL ASSET MANAGEMENT. At December 31, 1999, the Company managed $12.5 billion of investment portfolios for institutional investors such as insurance companies, public and private retirement funds, endowments, foundations and other institutions. These assets are managed by Stein Roe, LFG, Crabbe Huson, Newport and Progress. In addition, Stein Roe manages the majority of Keyport's general account assets supporting Keyport's insurance products. See "--Retirement-Oriented Insurance Products--General Account Investments." The Company's investment management business focuses on managing the investments of each client's portfolios in accordance with the client's investment objectives and policies. The Company also provides related administrative and support services to clients, such as portfolio pricing, accounting and reporting. Investment management fees and related administrative and support fees generally are charged as a percentage of assets under management. Client accounts are managed pursuant to a written agreement which, with limited exceptions, is terminable at any time upon relatively short notice (typically 30-60 days). In the case of mutual fund clients, all services provided by the Company are subject to the supervision of the fund's Board of Trustees. Additional administrative services provided to mutual funds include provision of office space, other facilities and personnel, marketing and distribution services, and transfer agency and other shareholder support services. Investment management fees paid by a mutual fund must be approved annually by the fund's Board of Trustees, including a majority of the independent Trustees. Any increases in such fees also must be approved by fund shareholders. Most of the Company's mutual fund assets are held in open-end funds. Shareholders of open-end funds generally can redeem their shares on any business day. The Company's direct-market mutual funds are sold without a sales load. The Company's intermediary-distributed mutual funds generally offer investors a choice of three pricing options: (1) a traditional front-end load option, in which the investor pays a sales charge at the time of purchase; (2) a contingent deferred sales charge, in which the investor pays no sales charge at the time of purchase, but is subject to an asset-based sales charge paid by the fund generally for eight years after purchase and a declining contingent deferred sales charge paid by the investor if shares are redeemed generally within six years after purchase; and (3) a level-load option, in which the investor pays a small initial sales charge, and is subject to an on-going asset-based sales charge paid by the fund and a small contingent deferred sales charge paid by the investor if shares are redeemed within one year after purchase. The following tables present certain information regarding the Company's assets under management for each year in the three-year period ended December 31, 1999. Such information includes Keyport's assets (including its general account investments managed by Stein Roe, as well as loans to 10 policyholders and Keyport's general account investments managed by unaffiliated investment managers). In addition, certain information is provided separately for mutual fund assets.
AS OF DECEMBER 31, ------------------------------ TOTAL ASSETS UNDER MANAGEMENT 1999 1998 1997 - ------------------------------------------------------------ -------- -------- -------- (DOLLARS IN BILLIONS) Mutual funds: Intermediary-distributed.................................. $18.3 $17.9 $16.1 Direct-marketed........................................... 6.7 6.8 7.2 Closed-end................................................ 2.7 2.4 2.2 Variable annuity.......................................... 2.1 1.5 1.3 ----- ----- ----- Total mutual funds...................................... 29.8 28.6 26.8 Private capital management.................................. 9.1 7.9 6.6 Institutional asset management.............................. 12.5 11.4 5.3 Retirement-oriented insurance products...................... 13.7 13.1 12.8 ----- ----- ----- Total............................................... $65.1 $61.0 $51.5 ===== ===== =====
AS OF DECEMBER 31, ------------------------------ TOTAL ASSETS UNDER MANAGEMENT BY ASSET CLASS (1) 1999 1998 1997 - ------------------------------------------------------------ -------- -------- -------- (DOLLARS IN BILLIONS) Fee-based assets: Equity.................................................... $29.1 $26.0 $18.2 Fixed-income.............................................. 22.3 21.9 20.5 ----- ----- ----- Total fee-based assets.................................. 51.4 47.9 38.7 Retirement-oriented insurance products...................... 13.7 13.1 12.8 ----- ----- ----- Total............................................... $65.1 $61.0 $51.5 ===== ===== =====
- ------------------------ (1) Balanced funds are classified as equity funds; all categories include cash and other short-term investments in applicable portfolios.
AS OF DECEMBER 31, ------------------------------ TOTAL MUTUAL FUND ASSETS UNDER MANAGEMENT BY ASSET CLASS (1) 1999 1998 1997 - ------------------------------------------------------------ -------- -------- -------- (DOLLARS IN BILLIONS) Equity funds................................................ $16.7 $15.0 $13.3 Fixed-income funds: Taxable................................................... 7.5 7.3 7.0 Tax-exempt................................................ 5.6 6.3 6.5 ----- ----- ----- Total............................................... $29.8 $28.6 $26.8 ===== ===== =====
- ------------------------ (1) Balanced funds are classified as equity funds; all categories include cash and other short-term investments in applicable portfolios. 11
FOR THE YEAR ENDED DECEMBER 31, ------------------------------ TOTAL ASSETS UNDER MANAGEMENT--ASSET FLOW SUMMARY 1999 1998 1997 - ------------------------------------------------------------ -------- -------- -------- (DOLLARS IN BILLIONS) Assets under management--beginning.......................... $61.0 $51.5 $48.0 Sales and reinvestments..................................... 13.4 9.6 7.5 Redemptions and withdrawals................................. (12.2) (8.2) (7.8) Asset acquisitions.......................................... -- 5.4 -- Net insurance cash flows.................................... 0.5 0.6 0.7 Market appreciation......................................... 2.4 2.1 3.1 ----- ----- ----- Assets under management--ending............................. $65.1 $61.0 $51.5 ===== ===== =====
SALES AND ASSET RETENTION The Company believes that the most important factors in accumulating and retaining investment management assets are investment performance, customer service and brand name recognition. Strong investment performance is crucial to asset accumulation and retention, regardless of the product or distribution channel. Performance is particularly important for mutual funds, whether intermediary-distributed or direct-marketed. Sixty-five of the Company's 85 open-end mutual funds were long-term funds as of December 31, 1999 (defined as open-end funds having at least a three-year performance record, excluding funds that invest solely in money market securities). Forty-one of those 65 funds (representing 74% of the total assets in those 65 funds as of December 31, 1999) were ranked by Lipper in the top two quartiles of their respective peer groups for the three-year period ended that date. The Company believes that over time, more sophisticated tools, such as those employed by consultants to institutional investors, will become available to consumers for analyzing mutual fund performance and risk. The Company's investment performance must remain competitive for the Company to continue to grow investment management product sales and assets. The Company believes that, in light of the proliferation of mutual funds and investment managers, strong brand name recognition in relevant distribution channels is essential to asset accumulation and retention, particularly with respect to mutual funds. The Company believes that the Colonial name carries strong brand name recognition among brokers and other intermediaries selling mutual funds, and that the Stein Roe name carries similar recognition in the direct sales channel. Similarly, the Company believes that Stein Roe has a franchise presence in the private capital management market and that Newport is a recognized leader in investments in the Asian markets. The Company believes that Crabbe Huson is a leader in its specialty area of contrarian value investing and that Progress and LAMCO have strong reputations in the selection and management of multiple investment managers. Sales of mutual funds and other investment management products are subject to market forces, such as changes in interest rates and stock market performance. Changes in the financial markets, including significant increases or decreases in interest rates or stock prices, can increase or decrease fund sales and redemptions, as well as the values of assets in such portfolios, all of which impact investment management fees. The competitiveness of the Company's investment management products (both in terms of new sales and asset retention) also is dependent on the relative attractiveness of their underlying investment philosophies and methods. DISTRIBUTION Liberty Financial sells its products through multiple distribution channels. Total product sales during 1999 were $13.4 billion (including $1.8 billion of reinvested dividends and similar reinvested returns). During 1999, 56% of these sales were made through intermediary distributors, with the balance made 12 directly to the investor. Over 38,000 individual brokers and other intermediaries sold Liberty Financial products in 1999. DISTRIBUTION THROUGH INTERMEDIARIES The Company sells both annuities and mutual funds through various intermediaries, including national and regional brokerage firms, banks and other depository institutions, financial planners and insurance agents. The Company's annuities and mutual funds are most often sold to middle and upper-middle class investors and savers. Many of these individuals seek the help of an investment professional in selecting investment and retirement income and savings products. In each of these intermediary channels, the Company provides products, as well as promotional materials and other support services. Reflecting its diversification strategy, the Company maintains distribution relationships with several different types of intermediaries. Intermediary-distributed mutual funds and annuities historically have been distributed through brokerage firms and insurance agents. Banks and financial planners also have become significant distributors of these products. The Company employs wholesalers and other sales professionals to promote sales of its intermediary-distributed products. These representatives meet with intermediaries' sales forces to educate them on matters such as product objectives, features, performance records and other key selling points. The Company also produces marketing material designed to help intermediaries sell the Company's products, and provides after-sale support to both the intermediaries and their customers. The degree and mix of these services vary with the requirements of the particular intermediary. The Company was a pioneer in selling through banks, both in terms of helping banks develop marketing programs and in establishing wholesaling relationships with banks. Liberty Financial operates a sales unit, Independent, that sells mutual funds and annuities through banks. The Company acquired Independent in March, 1996. Since the acquisition, the Company has consolidated its prior bank sales unit, the Liberty Financial Bank Group, with Independent. These businesses design and implement programs that sell annuities and mutual funds through their client banks, license and train sales personnel, and provide related financial services and administrative support. Program structures and the degree of the Company's involvement vary widely depending upon the particular needs of each bank. Products sold include the Company's proprietary products, as well as non-proprietary products (including in some cases the bank's proprietary mutual funds). At December 31, 1999, Independent had 55 bank relationships involving over 575 registered salespersons and over 2,100 licensed bank branch employees. The proliferation of competing products and the market presence of certain large competitors requires the Company to compete to establish and maintain distribution relationships and to maintain "shelf space" with distributors. Many of the larger distributors have begun to reduce the number of companies for whom they distribute. Product features, relative performance, pricing and support services to distributors and their customers are important factors in competing for distribution relationships. Some distributors assess fee sharing payments or similar charges as additional compensation for fund sales. The Company can be confronted with the choice of absorbing these charges or limiting its access to certain distributors. An interruption in the Company's continuing relationship with certain of these distributors could materially adversely affect the Company's ability to sell its products. There can be no assurance that the Company would be able to find alternative sources of distribution in a timely manner. The sales practices and support needs of the Company's distributors are constantly evolving. The Company must respond to these changes in order to maintain and grow its intermediary distribution relationships. Pricing structures in these channels, particularly with respect to mutual funds, have expanded in recent years from one-time up-front sales loads to additional options that shift investors' payments over time and move somewhat toward fee-based pricing. The Company's intermediary- 13 distributed mutual funds now are sold with alternate pricing structures. Intermediaries also increasingly demand that product providers supply new value-added services. DIRECT DISTRIBUTION The Company's direct-marketed mutual funds, as well as its private capital management and institutional asset management services, are sold directly to investors. The Company's direct-marketed mutual funds are purchased predominantly by middle and upper-middle class investors and savers who choose to select their own funds and who wish to avoid paying sales loads and similar fees. Private capital management clients typically are high net worth individuals and families. Institutional asset management clients typically are larger institutional investors managed by in-house professional staffs that select and oversee asset managers, often with the advice of third party consultants. In each of the direct sales markets served by the Company, investment performance is essential to generating sales and retaining customers. Mutual fund sales also require robust marketing campaigns using print, radio and television advertising and direct mail that highlight performance and other selling points. The Company believes that certain technology-based customer service and support tools it is developing, including on-line account access and interactive illustrative investment tools, can become important devices in accumulating and retaining assets in the direct distribution channels. The reputation of the Company's high quality asset managers is an important factor in generating new private capital and institutional asset management clients. Active management of the client relationship, including frequent personal contacts, is necessary to retain these clients. So-called "mutual fund supermarkets," such as Charles Schwab & Co., Inc.'s OneSource-TM-, have become an important source of customers for direct-marketed mutual funds. To access these marketplaces, the Company pays the supermarket sponsor a fee based upon a percentage of mutual fund assets held by supermarket customers in return for certain services provided by the supermarket sponsor, such as omnibus shareholder accounting. Financial planners and similar unaffiliated advisors sometimes serve as sources of referrals for private capital management clients, in some cases in return for referral fees or other compensation. INDUSTRY SEGMENT INFORMATION Liberty Financial conducts its business in two industry segments: annuity insurance and asset management. Annuity insurance operations relate primarily to the Company's fixed, indexed and variable annuities and its closed-block of SPWLs. Asset management operations relate to its mutual funds, private capital management and institutional asset management products. For information on these reportable segments, see Note 12 of Notes to the Consolidated Financial Statements of the Company contained in the 1999 Annual Report. REGULATION OVERVIEW The Company's business activities are extensively regulated. The following briefly summarizes the principal regulatory requirements and certain related matters. The regulatory requirements applicable to the Company include, among other things, (i) regulation of the form and in certain cases the content of the Company's products, (ii) regulation of the manner in which those products are sold and (iii) compliance oversight of the Company's business units, including frequent reporting obligations to and inspections by regulators. Changes in or the failure by the Company to comply with applicable law and regulations could have a material adverse effect on the Company. 14 ANNUITY INSURANCE The Company's retirement-oriented insurance products generally are issued to individuals. The policy is a contract between the issuing insurance company and the policyholder. Policy forms, including all principal contract terms, are regulated by state law. In most cases, the policy form must be approved by the insurance department or similar agency of a state in order for the policy to be sold in that state. Keyport issues most of the Company's retirement-oriented insurance products. Independence Life & Annuity Company ("Independence Life") and Keyport Benefit Life Insurance Company ("Keyport Benefit"), Keyport subsidiaries, also issue certain policies. Keyport and Independence Life are each chartered in the state of Rhode Island, and the Rhode Island Insurance Department is their primary oversight regulator. Keyport Benefit is chartered in the state of New York, and the New York Department of Insurance is its primary oversight regulator. Keyport Benefit, acquired by Keyport in January, 1998, operates exclusively in New York and Rhode Island. Keyport and Independence Life also must be licensed by the state insurance regulators in each other jurisdiction in which they conduct business. They currently are licensed to conduct business in 49 states (the exception being New York) and in the District of Columbia and the Virgin Islands. State insurance laws generally provide regulators with broad powers related to issuing licenses to transact business, regulating marketing and other trade practices, operating guaranty associations, regulating certain premium rates, regulating insurance holding company systems, establishing reserve requirements, prescribing the form and content of required financial statements and reports, performing financial and other examinations, determining the reasonableness and adequacy of statutory capital and surplus, regulating the type and amount of investments permitted, limiting the amount of dividends that can be paid and the size of transactions that can be consummated without first obtaining regulatory approval, and other related matters. The regulators also make periodic examinations of individual companies and review annual and other reports on the financial condition of all companies operating within their respective jurisdictions. The Rhode Island Insurance Department has commenced a periodic examination of Keyport for the period ended December 31, 1988. The Rhode Island Insurance Department has not communicated the results of their examination as of the date of this Report. Keyport and Independence Life prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the Rhode Island Insurance Department. Keyport Benefit prepares its statutory-basis financial statements in accordance with accounting practices prescribed or permitted by the New York Department of Insurance. Certain statutory accounting practices are prescribed by state law. Permitted statutory accounting practices encompass all accounting practices that are not proscribed; such practices may differ between the states and companies within a state. The National Association of Insurance Commissioners (the "NAIC") is currently in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of prescribed statutory accounting practices. That project, which is expected to be completed in 2000, may result in changes to the accounting practices that Keyport uses to prepare its statutory-basis financial statements. The impact of any such changes on Keyport's statutory surplus cannot be determined at this time. No assurance can be given that such changes would not have a material adverse effect on the Company. 15 RISK-BASED CAPITAL REQUIREMENTS. In recent years, various states have adopted new quantitative standards promulgated by the NAIC. These standards are designed to reduce the risk of insurance company insolvencies in part by providing an early warning of financial or other difficulties. These standards include the NAIC's risk-based capital ("RBC") requirements. RBC requirements attempt to measure statutory capital and surplus needs based on the risks in a company's mix of products and investment portfolio. The requirements provide for four different levels of regulatory attention which implement increasing levels of regulatory control (ranging from development of an action plan to mandatory receivership). As of December 31, 1999, Keyport's capital and surplus exceeded the level at which the least severe of these regulatory attention levels would be triggered. GUARANTY FUND ASSESSMENTS. Under the insurance guaranty fund laws existing in each state, insurers can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. Because assessments typically are not made for several years after an insurer fails, Keyport cannot accurately determine the precise amount or timing of its exposure to known insurance company insolvencies at this time. For certain information regarding Keyport's historical and estimated future assessments in respect of insurance guaranty funds, see Note 16 to the Notes to the Consolidated Financial Statements contained in the 1999 Annual Report. The insolvency of large life insurance companies in future years could result in material assessments to Keyport by state guaranty funds. No assurance can be given that such assessments would not have a material adverse effect on the Company. INSURANCE HOLDING COMPANY REGULATION. Current Rhode Island insurance law imposes prior approval requirements for certain transactions with affiliates and generally regulates dividend payments by a Rhode Island-chartered insurance subsidiary to its parent company. Keyport may not make distributions or dividend payments to Liberty Financial which, together with distributions and dividends paid during the preceding 12 months, exceed the lesser of (i) 10% of its statutory surplus as of the preceding December 31 or (ii) its statutory net gain from operations for the preceding fiscal year, without prior approval by the Rhode Island Commissioner of Insurance. As of December 31, 1999, such restriction would limit dividends without such approval to $57.8 million. Keyport paid $30.0 million in dividends during 1999. In addition, no person or group may acquire, directly or indirectly, 10% or more of the voting stock or voting power of Liberty Financial unless such person has provided certain required information to the Rhode Island Department of Business Regulation and such acquisition is approved by the Department. GENERAL REGULATION AT FEDERAL LEVEL AND CERTAIN RELATED MATTERS. Although the federal government generally does not directly regulate the insurance business, federal initiatives often have an impact on the business in a variety of ways. Current and proposed federal measures that may significantly affect the insurance business include limitations on antitrust immunity, minimum solvency requirements and the removal of barriers restricting banks from engaging in the insurance business. In particular, several proposals to repeal or modify the Bank Holding Company Act of 1956 (which prohibits banks from being affiliated with insurance companies) have been made by members of Congress and the Clinton Administration. Moreover, the United States Supreme Court held in 1995 in NATIONSBANK OF NORTH CAROLINA V. VARIABLE ANNUITY LIFE INSURANCE COMPANY that annuities are not insurance for purposes of the National Bank Act. In addition, the Supreme Court also held in 1995 in BARNETT BANK OF MARION CITY V. NELSON that state laws prohibiting national banks from selling insurance in small town locations are preempted by federal law. The Office of the Comptroller of the Currency adopted a ruling in November 1996 that permits national banks, under certain circumstances, to expand into other financial services, thereby increasing competition for the Company. At present, the extent to which banks can sell insurance and annuities without regulation by state insurance departments is being litigated in various courts in the United States. Although the effect of these recent developments on the Company and its competitors is uncertain, there can be no assurance that such developments would not have a material adverse effect on the Company. 16 On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 was signed into law. The major provisions of this new law took effect on March 12, 2000. While the Gramm-Leach-Bliley Act eliminates legal barriers to affiliates among banks, insurance companies and other financial services companies and therefor effectively repeals the Glass-Steagall Act of 1933 (which restricted banks from engaging in securities-related businesses), the effect on the Company and its competitors is uncertain. DISTRIBUTION Sales of the Company's annuities and mutual funds are also subject to extensive regulation. Annuities must be sold through an entity registered as an insurance agency in the particular state. The sales person must be properly licensed under state insurance law. Variable annuities and certain indexed annuities also require the sales person to be registered with the National Association of Securities Dealers ("NASD") and the applicable state securities commission. Mutual fund shares must be sold through an entity registered as a broker-dealer under the Exchange Act and applicable state law. The sales person must be registered with the NASD and the applicable state securities commission. Various business units of the Company are registered as broker-dealers. These include certain units which operate the Company's bank marketing business, as well as other units through which mutual fund and certain annuities are sold. Certain bank marketing units also are registered as insurance agencies in states where they sell annuities. These laws regulate the licensing of sales personnel and sales practices. They impose minimum net capital requirements. They also impose reporting, records maintenance, and other requirements, and provide for penalties in the event of non-compliance, similar in scope to the regulations applicable to asset managers. Certain securities sales through the Company's bank marketing units are conducted in accordance with the provisions of a "no-action" letter issued by the staff of the SEC requiring, among other things, that securities sales activities be conducted by sales personnel who are registered representatives of the Company and are subject to its supervision and control. The letter limits the functions of non-registered bank personnel to ministerial duties. The letter is not binding on the courts, however, and no assurance can be given that the SEC will not change its position. Banks are an important distribution channel for the Company's annuities and mutual funds. The recent growth in sales of mutual funds, annuities and other investment and insurance products through or at banks and similar institutions has prompted increased scrutiny by federal bank regulators, the SEC and other regulators. Regulations promulgated by federal banking authorities impose additional restrictions and duties with respect to bank sales practices, including obligations to disclose that the products are not subject to deposit insurance. ASSET MANAGEMENT PRODUCTS The primary sources of regulation of the Company's asset management operations are the federal securities laws. Asset management products are subject to the Investment Advisers Act (the "Advisers Act"). The mutual funds and closed-end funds sponsored by the Company also are subject to the Investment Company Act of 1940 (the "Investment Company Act"). Mutual fund shares are securities, and, as such, must be registered under the federal securities laws. The foregoing laws impose various restrictions on the Company's asset management products, including fee structures, the timing and content of advertising, and, in the case of the funds, certain investment restrictions. Mutual funds also must be managed to comply with certain other investment restrictions imposed by the Internal Revenue Code. Accounts subject to the Employee Retirement Income Security Act of 1974 ("ERISA") must comply with certain investment and other restrictions imposed by ERISA. The Company's subsidiaries directly engaged in asset management (including LFG, Colonial, Stein Roe, Newport, Crabbe Huson, Progress and LAMCO) are registered with the Securities and Exchange Commission (the "SEC") as investment advisers under the Advisers Act. They also are subject to the 17 Investment Company Act insofar as it relates to investment advisers to registered investment companies. These securities laws and the related regulations of the SEC require reporting, maintenance of books and records in prescribed forms, mandatory custodial arrangements, approval of employees and representatives and other compliance procedures. Possible sanctions in the event of noncompliance include the suspension of individual employees, limitations on the firm's engaging in business for specified periods of time, revocation of the firm's registrations, censures and fines. In the ordinary course of its investment management business, the Company enters into investment advisory agreements with mutual funds and others. As required by the Investment Company Act and the Advisers Act, Liberty Financial's investment advisory agreements provide that the agreements terminate automatically upon their "assignment." The Investment Company Act and the Advisers Act define the term "assignment" to include any "direct or indirect transfer" of a "controlling block of the voting securities" of the issuer's outstanding voting securities. The Investment Company Act presumes that any person holding more than 25% of the voting stock of any person "controls" such person. Sales by Liberty Mutual or other stockholders or new issuances of capital stock by Liberty Financial, among other things, may raise issues relating to assignments of the Company's investment advisory agreements. The Company's Restated Articles of Organization include provisions limiting the voting power of shares of the Company's Voting Stock (as defined in the Company's Restated Articles of Organization) held by holders of 20% or more of such Voting Stock in certain circumstances. These provisions do not apply to Liberty Mutual, subsidiaries or affiliates of Liberty Mutual, direct or indirect subsidiaries of the Company and certain employee plans established or to be established by the Company or certain of its subsidiaries. Liberty Financial's Board of Directors may approve the exemption of other persons or groups from the provisions described above. While this voting limitation is in place to reduce the likelihood, under certain circumstances, of inadvertent terminations of Liberty Financial's advisory agreements as a result of "assignments" thereof, there can be no assurance that this limitation will prevent such a termination from occurring. In addition, such limitation could be deemed to have an anti-takeover effect and to make changes in management more difficult. COMPETITION The Company's businesses operate in extremely competitive markets. These markets are highly fragmented, although in the case of annuities and mutual funds, a few companies do have relatively substantial market shares. Certain of the Company's competitors are significantly larger and have access to significantly greater financial and other resources. The Company's products compete with every other investment or savings vehicle available to a prospective customer, including those offered by other insurance companies, investment management firms and banks. The Company believes that the most important competitive factor affecting the marketability of its products is the degree to which they meet customer expectations, both in terms of returns (after fees and expenses) and service. These competitive pressures apply to competition for customers in general, as well as competition to access and maintain distribution relationships in the case of products sold through intermediaries. Product and service innovations also are important devices for generating new sales and maintaining distribution relationships. Sales of particular products may be affected by conditions in the financial markets, such as increases or decreases in interest rates or stock prices. Product features of particular relevance to annuities include interest crediting and participation rates, surrender charges and innovation in product design. Maintenance of Keyport's financial ratings at a high level also is important. The Company believes that the most important factors affecting competition for investment management clients are investment performance, customer service and brand name recognition. Pricing policies and product innovations also are important competitive factors. The Company's ability to increase and retain clients' assets could be materially adversely affected if client accounts underperform the market or competing products or if key investment managers leave the 18 Company. The ability of the Company's asset management subsidiaries to compete with other asset management products also is dependent, in part, on the relative attractiveness of their underlying investment philosophies and methods under prevailing market conditions. EMPLOYEES As of December 31, 1999, the Company had 2,038 full-time employees summarized by activity as follows: 420 in annuity insurance operations; 1,197 in asset management activities; 371 in marketing and distribution operations; and 50 in general corporate. The Company provides its employees with a broad range of employee benefit programs. The Company believes that its relations with its employees are excellent. EXECUTIVE OFFICERS OF THE REGISTRANT Set forth below are the names, ages at March 31, 2000, and principal occupations for the last five years of each executive officer of the Company. All such persons have been elected to serve until the next annual election of officers and their successors are elected or until their earlier resignation or removal. Executive Officers of the Registrant
NAME AGE POSITION ---- -------- -------- Gary L. Countryman 60 Chairman, President and Chief Executive Officer John V. Carberry 52 Senior Vice President Lindsay Cook 48 Executive Vice President Frank A. Faggiano 60 Senior Vice President, Human Resources Stephen E. Gibson 46 President, Liberty Funds Group J. Andrew Hilbert 41 Senior Vice President, Chief Financial Officer and Treasurer C. Allen Merritt, Jr. 59 Chief Operating Officer Porter P. Morgan 59 Senior Vice President, Marketing Philip Polkinghorn 42 President, Keyport Life Insurance Company
Mr. Countryman has been Chairman (since 1991) and Chief Executive Officer (from 1986 until April 1998) of Liberty Mutual and Liberty Mutual Fire Insurance Company (an affiliate of Liberty Mutual). He currently serves as a director of the Company, Liberty Mutual and certain of its affiliates, FleetBoston Financial Corporation, NSTAR and Harcourt General, Inc. Mr. Countryman became President and Chief Executive Officer of the Company on January 13, 2000. Mr. Carberry joined Liberty Financial as Senior Vice President in February, 1998. Prior to that time he was a Managing Director of Salomon Brothers Inc. Mr. Cook became Executive Vice President of Liberty Financial in February, 1997. He became a Senior Vice President of Liberty Financial in February, 1994, having been a Vice President prior to that time. Mr. Faggiano became Senior Vice President, Human Resources in August, 1997. Prior to that time he was Vice President, Human Resources. Mr. Gibson became President of Liberty Funds Group, a subsidiary of Liberty Financial, in January, 1997. He was Executive Vice President of Liberty Funds Group from July, 1996 to January, 1997. Prior to that, he was Managing Director of Marketing at Putnam Investments from 1995 to July, 1996, and prior thereto was Executive Vice President of Putnam Mutual Funds. 19 Mr. Hilbert joined the Company as Senior Vice President and Chief Financial Officer in March, 1997. He became Treasurer in March, 1998. From October 1995 until that time, he was Senior Vice President and Chief Financial Officer of Paul Revere Corporation. Prior to joining Paul Revere, Mr. Hilbert was a partner at Price Waterhouse. Mr. Merritt became Chief Operating Officer of Liberty Financial in March, 1998. From February, 1997 to March, 1998 he was Executive Vice President. He was Senior Vice President of Liberty Financial prior to that time. Mr. Morgan has been Senior Vice President, Marketing of Liberty Financial since 1991. Mr. Polkinghorn became President of Keyport Life Insurance Company in May, 1999. From December, 1996 to April, 1999 he was Senior Vice President and Chief Marketing Officer of American General Life Insurance Company. From March to December, 1996 he was Vice President Products of First Colony Life Insurance Company, and prior to that time he was Chief Marketing Officer of Allmerica Insurance Company. Mr. John A. Benning, age 65, retired as Senior Vice President and General Counsel of the Company on December 31, 1999, having served in that role since October, 1989. Mr. Benning is currently employed by Liberty Mutual, and is serving as Acting General Counsel of the Company. ITEM 2. PROPERTIES As of December 31, 1999, the Company leased its various office facilities. The Company's principal leasing arrangements can be summarized as follows: The Company's principal executive offices occupy approximately 30,300 square feet in a single facility in downtown Boston under a lease which expires in 2002. Keyport leases approximately 96,500 square feet in two buildings in downtown Boston under leases which expire in 2008, approximately 19,800 square feet in a single facility in Lincoln, Rhode Island under a lease which expires in 2007, and 13,300 square feet in a single facility in Lake Mary, Florida under a lease which expires in 2004. LFG leases approximately 219,000 square feet in two buildings in downtown Boston under leases which expire in 2006 and approximately 31,200 square feet in Aurora, Colorado under a lease which expires in 2000. Stein Roe leases 141,300 square feet in downtown Chicago under a lease which expires in 2009. Newport leases approximately 10,400 square feet in downtown San Francisco under a lease which expires in 2004. Crabbe Huson leases approximately 17,700 square feet in downtown Portland, Oregon under a lease which expires in 2003. Progress leases approximately 9,000 square feet in downtown San Francisco under a lease which expires in 2005. Independent leases approximately 29,500 square feet in Purchase, New York under a lease which expires in 2007. ITEM 3. LEGAL PROCEEDINGS The Company is from time to time involved in litigation incidental to its businesses. In the opinion of Liberty Financial's management, the resolution of such litigation is not expected to have a material adverse effect on the Company's financial condition or results of operations. 20 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the New York Stock Exchange ("NYSE") under the symbol "L". The Company's Common Stock is also listed on the Boston Stock Exchange. On December 31, 1999, the closing price of the Company's Common Stock on the NYSE was $22 15/16 per share. As of March 17, 2000 there were approximately 225 shareholders of record. In addition, the Company estimates that there are approximately 4,000 beneficial shareholders whose shares are held in street name. The high and low sales prices for each quarter during 1999 and 1998, as traded on the NYSE Composite Tape, were as follows:
1999 QUARTER HIGH LOW - -------------------------------------------------------------------- January-March $28 $21 3/16 April-June 29 11/16 20 1/8 July-September 29 20 15/16 October-December 26 11/16 20 7/16
1998 QUARTER HIGH LOW - -------------------------------------------------------------------- January-March $39 3/4 $33 April-June 40 5/8 32 3/4 July-September 38 9/16 25 3/4 October-December 30 5/8 20 1/8
The Company currently has a policy of paying quarterly cash dividends of $0.10 per share and has paid such quarterly dividends regularly since becoming a public company in 1995. The declaration and payment of any dividends on the Common Stock are dependent upon the Company's results of operations, financial condition, cash requirements, capital requirements, regulatory considerations and other relevant factors, and in all events are subject to the discretion of the Board of Directors and to any preferential dividend rights of the outstanding Series A Convertible Preferred Stock ("Preferred Stock") of Liberty Financial. The holders of the issued and outstanding shares of Preferred Stock are entitled to receive cumulative cash dividends at the rate of $2.875 per annum per share, payable in equal quarterly installments. The terms of the Preferred Stock preclude the payment of any dividends on the Common Stock unless cumulative dividends on the outstanding Preferred Stock have been paid or declared and set aside in full. Accordingly, there is no requirement, and no assurances can be given, that dividends will be paid on the Common Stock. The Company's Board of Directors established an optional dividend reinvestment plan ("DRIP") for holders of Common Stock and Preferred Stock. Liberty Mutual has participated in the DRIP since its inception. Such participation may be terminated at any time. For a further discussion of the Company's ability to pay dividends in cash on its Common Stock, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity" in the 1999 Annual Report. 21 SALES OF UNREGISTERED SECURITIES Liberty Financial issued shares of its Common Stock since the beginning of 1999 without registration under the Securities Act of 1933 (the "Securities Act") in the transaction described below: On January 30, 2000, the Company reserved 66,051 shares of Common Stock for issuance to the former shareholders of IFMG, pursuant to the February 1996 Merger Agreement pursuant to which the Company acquired the business of IFMG. The IFMG shareholders made customary investment representations to the Company, and the issuance of these shares will be exempt from registration pursuant to Section 4(2) of the Securities Act. ITEM 6. SELECTED FINANCIAL DATA Selected Consolidated Financial Data, which appears on page 27 in the 1999 Annual Report, are incorporated herein 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, which appears beginning on page 28 in the 1999 Annual Report, is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Quantitative and Qualitative Disclosure About Market Risk is included in Management's Discussion and Analysis of Financial Condition and Results of Operations beginning at page 33 of the 1999 Annual Report, and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Company's Consolidated Financial Statements which appear beginning on page 40 in the 1999 Annual Report, and the report thereon of Ernst & Young LLP as of and for the year ended December 31, 1999, which appears on page 63 in the 1999 Annual Report, are incorporated herein 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 relating to the executive officers of the Company appears under the caption "Executive Officers of the Registrant" in Part I of this Form 10-K on page 19. Information relating to the directors of the Company is incorporated herein by reference from Liberty Financial's definitive Proxy Statement for the Annual Meeting of Stockholders to be held on or about May 8, 2000 (the "Proxy Statement") under the caption "Election of Directors." In addition, the information appearing in the Proxy Statement under the caption "Security Ownership of Management and Certain Beneficial Owners--Section 16(a) Beneficial Ownership Reporting Compliance" is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information relating to executive compensation is incorporated herein by reference from the Proxy Statement under the following captions: "Compensation of Executive Officers" (excluding, however, the 22 portions thereof under the subcaptions "Compensation Committee Report on Executive Compensation" and "Stockholder Return Comparisons") and "Election of Directors--1999 Meetings and Standard Fee Arrangements." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information relating to security ownership of certain beneficial owners and management is incorporated herein by reference from the Proxy Statement under the caption "Security Ownership of Management and Certain Beneficial Owners" (excluding the material under the sub-caption "Section 16(a) Beneficial Ownership Reporting Compliance"). ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information relating to Certain Relationships and Related Transactions is incorporated herein by reference from the Proxy Statement under the captions "Certain Relationships and Related Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. FINANCIAL STATEMENTS The following Consolidated Financial Statements of the Company, which appear beginning on page 40 of the 1999 Annual Report, are incorporated herein by reference: Consolidated Balance Sheets as of December 31, 1999 and 1998 Consolidated Income Statements for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES The following financial statement schedules are included as part of this Report: I Summary of Investments II Condensed Financial Information of Registrant III Supplementary Insurance Information All other schedules are omitted because they are not applicable or are not required, or because the required information is included in the Consolidated Financial Statements or notes thereto. 3. EXHIBITS The exhibits filed as part of this Report are listed on the Exhibit Index immediately following the financial statement schedules included in this Report. The following exhibits are management contracts or compensatory plans or arrangements: 10.4 through 10.14.2, 10.22, 10.28, 10.29, and 10.32. (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Registrant during the fourth quarter of 1999. 23 SIGNATURES Pursuant to the requirements of Section 13 of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Boston and the Commonwealth of Massachusetts on March 30, 2000. LIBERTY FINANCIAL COMPANIES, INC. By: /s/ GARY L. COUNTRYMAN ----------------------------------------- Gary L. Countryman Chief Executive Officer, President and Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and as of the dates stated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ GARY L. COUNTRYMAN Chief Executive Officer, ------------------------------------------- President and Chairman March 30, 2000 Gary L. Countryman Senior Vice President, Chief /s/ J. ANDREW HILBERT Financial Officer and ------------------------------------------- Treasurer (Principal Financial March 30, 2000 J. Andrew Hilbert and Accounting Officer) /s/ GERALD E. ANDERSON Director ------------------------------------------- March 30, 2000 Gerald E. Anderson /s/ MICHAEL J. BABCOCK Director ------------------------------------------- March 30, 2000 Michael J. Babcock /s/ CHARLES I. CLOUGH Director ------------------------------------------- March 30, 2000 Charles I. Clough /s/ WILLIAM F. CONNELL Director ------------------------------------------- March 30, 2000 William F. Connell /s/ PAUL J. DARLING, II Director ------------------------------------------- March 30, 2000 Paul J. Darling, II /s/ JOHN P. HAMILL Director ------------------------------------------- March 30, 2000 John P. Hamill /s/ MARIAN L. HEARD Director ------------------------------------------- March 30, 2000 Marian L. Heard
24
SIGNATURE TITLE DATE --------- ----- ---- /s/ EDMUND F. KELLY Director ------------------------------------------- March 30, 2000 Edmund F. Kelly /s/ SABINO MARINELLA Director ------------------------------------------- March 30, 2000 Sabino Marinella /s/ THOMAS J. MAY Director ------------------------------------------- March 30, 2000 Thomas J. May /s/ RAY B. MUNDT Director ------------------------------------------- March 30, 2000 Ray B. Mundt /s/ KENNETH L. ROSE Director ------------------------------------------- March 30, 2000 Kenneth L. Rose /s/ GLENN P. STREHLE Director ------------------------------------------- March 30, 2000 Glenn P. Strehle
25 SCHEDULE I LIBERTY FINANCIAL COMPANIES, INC. SUMMARY OF INVESTMENTS (IN MILLIONS)
DECEMBER 31, 1999 ---------------------------------- BALANCE AMORTIZED SHEET TYPE OF INVESTMENT COST FAIR VALUE AMOUNT - ------------------ --------- ---------- --------- Fixed maturity securities: U.S. Treasury securities and obligations of U.S. government corporations and agencies.................. $ 1,236.5 $ 1,221.8 $ 1,221.8 Foreign governments..................................... 169.4 178.2 178.2 Corporate and other securities.......................... 7,114.8 6,863.4 6,863.4 Mortgage backed securities.............................. 2,325.7 2,252.7 2,252.7 --------- --------- --------- Total fixed maturity securities..................... 10,846.4 10,516.1 10,516.1 Equity securities: Common stocks: Industrial, miscellaneous and all other............... 31.0 37.9 37.9 Policy loans.............................................. 599.5 599.5 599.5 Other long term investments............................... 1,041.6 1,145.1 1,041.6 --------- --------- --------- Total investments................................... $12,518.5 $12,298.6 $12,195.1 ========= ========= =========
26 SCHEDULE II LIBERTY FINANCIAL COMPANIES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (IN MILLIONS, EXCEPT PER SHARE DATA) BALANCE SHEETS
DECEMBER 31 ------------------- 1999 1998 -------- -------- ASSETS: Investments............................................... $ 147.1 $ -- Cash and cash equivalents................................. 81.0 180.4 Investments in subsidiaries............................... 1,368.6 1,357.4 Notes receivable--subsidiaries............................ 31.5 152.1 Accounts receivable--subsidiaries......................... 17.0 16.3 Other assets.............................................. 63.0 50.9 -------- -------- $1,708.2 $1,757.1 ======== ======== LIABILITIES: Note payable.............................................. $ 447.0 $ 446.9 Accounts payable and accrued expenses..................... 59.3 23.6 -------- -------- 506.3 470.5 -------- -------- Redeemable convertible preferred stock...................... 16.0 15.3 -------- -------- STOCKHOLDERS' EQUITY: Common stock.............................................. 0.5 0.5 Additional paid-in capital................................ 923.0 901.5 Retained earnings......................................... 425.2 346.4 Accumulated other comprehensive income.................... (158.1) 27.2 Unearned compensation..................................... (4.7) (4.3) -------- -------- Total stockholders' equity............................ 1,185.9 1,271.3 -------- -------- $1,708.2 $1,757.1 ======== ========
INCOME STATEMENTS
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- Interest expense, net....................................... $(16.7) $ (2.6) $ (1.8) Realized investment gains (losses).......................... (0.7) 0.3 (0.6) Operating expenses.......................................... (0.6) (0.6) (0.8) ------ ------ ------ Loss before income taxes.................................... (18.0) (2.9) (3.2) Benefit for income taxes.................................... 5.1 7.5 19.2 Equity in net income of subsidiaries........................ 112.2 119.9 113.5 ------ ------ ------ Income before extraordinary item............................ 99.3 124.5 129.5 Extraordinary loss on extinguishment of debt, net of tax.... -- (9.7) -- ------ ------ ------ Net Income.................................................. $ 99.3 $114.8 $129.5 ====== ====== ====== Net income per share--basic: Income before extraordinary item.......................... $ 2.11 $ 2.72 $ 2.94 ====== ====== ====== Net income................................................ $ 2.11 $ 2.51 $ 2.94 ====== ====== ====== Net income per share--assuming dilution: Income before extraordinary item.......................... $ 2.07 $ 2.63 $ 2.77 ====== ====== ====== Net income................................................ $ 2.07 $ 2.42 $ 2.77 ====== ====== ======
See Notes to Consolidated Financial Statements contained in the 1999 Annual Report incorporated herein by reference. 27 SCHEDULE II (CONTINUED) LIBERTY FINANCIAL COMPANIES, INC. CONDENSED FINANCIAL INFORMATION OF REGISTRANT (IN MILLIONS) STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31 ------------------------------ 1999 1998 1997 -------- -------- -------- Cash flows from operating activities: Net income................................................ $ 99.3 $ 114.8 $ 129.5 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on extinguishment of debt, net of tax................................................. -- 9.7 -- Equity in net income of subsidiaries.................. (112.2) (119.9) (113.5) Net change in accounts receivable--subsidiaries, other assets and accounts payable......................... 33.0 13.7 (9.2) ------ ------- ------- Net cash provided by operating activities................. 20.1 18.3 6.8 ------ ------- ------- Cash flows from investing activities: Investments purchased available for sale.................. (157.7) -- -- Acquisitions, net of cash acquired........................ (94.7) -- ---- Capital contributions to subsidiaries..................... (131.6) (29.1) (25.0) ------ ------- ------- Net cash used in investing activities..................... (289.3) (123.8) (25.0) ------ ------- ------- Cash flows from financing activities: Change in notes payable to affiliates..................... -- (244.0) -- Change in notes receivable from subsidiaries.............. 120.6 (13.0) (0.7) Change in notes payable................................... 0.1 446.9 -- Exercise of stock options................................. 5.5 7.4 7.6 Dividends, net............................................ 43.6 69.2 23.3 ------ ------- ------- Net cash provided by financing activities................. 169.8 266.5 30.2 ------ ------- ------- Increase (decrease) in cash and cash equivalents............ (99.4) 161.0 12.0 Cash and cash equivalents at beginning of year.............. 180.4 19.4 7.4 ------ ------- ------- Cash and cash equivalents at end of year.................... $ 81.0 $ 180.4 $ 19.4 ====== ======= =======
See Notes to Consolidated Financial Statements contained in the 1999 Annual Report incorporated herein by reference. 28 SCHEDULE III LIBERTY FINANCIAL COMPANIES, INC. SUPPLEMENTARY INSURANCE INFORMATION (IN MILLIONS)
THREE YEARS ENDED DECEMBER 31, 1999 - ------------------------------------------------------------------------------------------------------------------------ COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H - -------- ---------- ------------- ---------- ------------- --------- ---------- ------------- DEFERRED POLICYHOLDER UNEARNED POLICY INSURANCE NET INTEREST POLICY ACCOUNT PREMIUMS CONTRACT REVENUES INVESTMENT CREDITED TO ACQUISITION BALANCES AND CLAIMS AND INCOME POLICYHOLDERS COSTS FUTURE POLICY OTHER AND POLICY BENEFITS POLICYHOLDERS' BENEFITS AND FUNDS CLAIMS DECEMBER 31, 1999 Interest sensitive products........... $739.2 $12,040.0 NA $69.6 $51.2 $810.3 $530.2 ====== ========= == ===== ===== ====== ====== DECEMBER 31, 1998 Interest sensitive products........... $407.6 $12,446.0 NA $58.1 $38.1 $820.9 $565.1 ====== ========= == ===== ===== ====== ====== DECEMBER 31, 1997 Interest sensitive products........... $285.3 $12,031.8 NA $54.3 $33.1 $853.1 $598.0 ====== ========= == ===== ===== ====== ====== THREE YEARS ENDED DECEMBER 31, 1999 - --------------------- -------------------------------------- COLUMN A COLUMN I COLUMN J COLUMN K - -------- ------------ ---------- ---------- AMORTIZATION OTHER PREMIUMS OF DEFERRED OPERATING WRITTEN POLICY EXPENSES ACQUISITION COSTS DECEMBER 31, 1999 Interest sensitive products........... $97.4 $55.7 NA ===== ===== == DECEMBER 31, 1998 Interest sensitive products........... $77.4 $54.8 NA ===== ===== == DECEMBER 31, 1997 Interest sensitive products........... $86.4 $51.1 NA ===== ===== ==
29 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 3.1 (1) Form of Restated Articles of Organization of the Company 3.2 (1) Form of Certificate of Designation of Series A Convertible Preferred Stock of the Company 3.3 (2) Restated By-laws of the Company, as amended 4.1 (1) Form of Certificate for Common Stock of the Company 4.2 (1) Form of Certificate for Series A Convertible Preferred Stock of the Company 4.3 (3) Form of Indenture between the Company and State Street Bank and Trust Company as Trustee 4.4 (3) Form of Senior Note 10.1 (1) Form of Intercompany Agreement between Liberty Mutual and the Company 10.2 (4) Form of Registration Rights Agreement between Liberty Mutual and the Company 10.3 (4) Form of Tax Sharing Agreement between Liberty Mutual and the Company 10.4 (1) Form of 1990 Stock Option Plan of the Company, together with amendments 1 and 2 thereto 10.5 (10) Form of Restated Savings and Investment Plan of the Company 10.6 (1) Form of Amended and Restated Supplemental Savings Plan of the Company 10.7 (1) Form of Stein Roe Profit Sharing Plan and amendments thereto 10.8 (10) Form of Amended and Restated Pension Plan of the Company 10.9 (1) Form of Amended and Restated Supplemental Pension Plan of the Company 10.10 (5) Form of Amended and Restated 1995 Stock Incentive Plan of the Company 10.11 (4) Form of 1995 Employee Stock Purchase Plan of the Company 10.12 (1) Form of Deferred Compensation Plan of the Company 10.12.1 (1) Letters from the Company, setting forth additional retirement benefits for John A. Benning and Sabino Marinella 10.13 (1) Form of Keyport Deferred Compensation Plan 10.14 (1) Form of Stein Roe Deferred Compensation Plan 10.14.1 (1) Form of Stein Roe Non-Qualified Supplemental Retirement Plan 10.14.2 (1) Form of Stein Roe Long Term Incentive Plan 10.16 (1) Lease Agreement with respect to 600 Atlantic Avenue, Boston, Massachusetts 10.17 (1) Lease Agreement with respect to 125 High Street, Boston, Massachusetts, as amended 10.17.1 (10) Third and Fourth Amendments to 125 High Street Lease 10.18 (1) Lease Agreement with respect to One South Wacker Drive, Chicago, Illinois, as amended 10.19 (1) Unconditional Guarantee Agreement dated November 7, 1991 executed by Liberty Mutual and related Mortgage Maintenance Agreement by and among LRE Properties, Inc., Atlantic Real Estate Limited Partnership and Keyport Life Insurance Company 10.20 (1) Administrative Services Agreement dated as of June 9, 1993 between Liberty Life Assurance Company of Boston and Keyport Life Insurance Company 10.21 (6) Lease Agreement with respect to One Financial Center, Boston, Massachusetts 10.22 (10) Agreement between the Company and Stephen E. Gibson, President and Chief Executive Officer of Colonial 10.23 (7) Revolving Credit Agreement dated as of April 12, 1999 among Liberty Funds Group LLC, Corporate Receivables Corporation, Citibank, N.A. and Citicorp North America, Inc.
30
EXHIBIT NUMBER DESCRIPTION - --------------------- ------------------------------------------------------------ 10.23.1 (7) Undertaking Agreement dated as of April 12, 1999 among the Company, Colonial Management Associates, Inc., Newport Fund Management, Inc., Crabbe Huson Group, Inc., Stein Roe & Farnham Incorporated and Citicorp North America, Inc. 10.23.2 (7) Pledge and Security Agreement dated as of April 12, 1999 between Liberty Funds Distributor, Inc. and Citicorp North America, Inc. 10.23.3 Agreement of Amendment dated as of January 31, 2000 amending the Pledge and Security Agreement dated as of April 12, 1999. 10.28 (8) Colonial Profit Sharing Plan (and Amendment Nos. 1-3 thereto) 10.29 (8) Colonial Split-Dollar Insurance Coverage description 10.30 (9) Coinsurance Agreement between Fidelity and Guaranty Life Insurance Company and Keyport Life Insurance Company, and first and second amendments thereto 10.31 (9) Dividend Reinvestment Plan of the Company 10.32 Settlement Agreement and General Release between the Company and Kenneth R. Leibler 12 Statement re computation of ratios 13 Portions of Annual Report to Stockholders incorporated by reference into this Report 21 Subsidiaries of the Company 23 Consent of Ernst & Young LLP 27 Financial Data Schedule 99.3 (1) Form of Stockholders' Agreement among the Company, Liberty Mutual Insurance Company and certain holders of the Company's Series A Convertible Preferred Stock
- ------------------------ (1) Incorporated by reference to the same Exhibit Number in the Company's Registration Statement on Form S-4 (filed under the name NEW LFC, INC.) (Registration No. 33-88824). (2) Incorporated by reference to the same Exhibit Number in the Company's 1997 Annual Report on Form 10-K filed March 31, 1998. (3) Incorporated by reference to the same Exhibit number in the Company's Registration Statement on Form S-3 (Registration No. 333-63349). (4) Incorporated by reference to the same Exhibit Number in the Company's 1994 Annual Report on Form 10-K filed March 30, 1995. (5) Incorporated by reference to the same Exhibit Number in the Company's Registration Statement on Form S-3 (Registration Number 333-29315). (6) Incorporated by reference to the same Exhibit Number in the Company's 1996 Annual Report on Form 10-K filed March 28, 1997. (7) Incorporated by reference to Exhibits 10.1, 10.2 and 10.3, in the Company's Quarterly Report on Form 10-Q filed May 14, 1999. (8) Incorporated by reference to the same Exhibit Number in the Company's 1995 Annual Report on Form 10-K filed March 29, 1996. (9) Incorporated by reference to Prospectus contained in the Company's Registration Statement on Form S-3 (Registration Number 333-20067). (10) Incorporated by reference to the same Exhibit Number in the Company's 1998 Annual Report on Form 10-K filed March 30, 1999. 31 EX-10.23(3) 2 EXHIBIT 10.23.3 AGREEMENT OF AMENDMENT Dated as of January 31, 2000 Reference is made to (i) that certain Revolving Credit Agreement dated as of April 12, 1999 (the "Credit Agreement"), between Liberty Funds Group LLC (the "Borrower"), Corporate Receivables Corporation, Citibank, N.A. and Citicorp North America, Inc. as agent (the "Agent"), and (ii) that certain Pledge and Security Agreement dated as of April 12, 1999 (the "Security Agreement") between Liberty Funds Distributor, Inc. (the "Distributor") and the Agent. Unless otherwise defined herein, capitalized terms used herein shall have the meanings set forth in Appendix A to the Credit Agreement. The parties hereto agree that, effective as of the date hereof, Schedule II to the Security Agreement is hereby replaced in its entirety with Annex A to this Agreement of Amendment. The parties hereto agree that, effective as of the date hereof, Schedule III to the Security Agreement is hereby replaced in its entirety with Annex B to this Agreement of Amendment. The Borrower represents and warrants to each of the Secured Parties that immediately after giving effect to this Agreement of Amendment, (i) it is in full compliance with the Borrowing Base Test, and (ii) each of its representations and warranties set forth in the Credit Agreement are true and correct as if made on such date. This Agreement of Amendment may be executed in any number of counterparts and by different parties hereto on separate counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same agreement. THIS AGREEMENT OF AMENDMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed as of the date first above written. LIBERTY FUNDS DISTRIBUTOR, INC., as Distributor By: /s/ NANCY L. CONLIN ----------------------------- Name: Nancy L. Conlin Title: Clerk LIBERTY FUNDS GROUP LLC, as Borrower By: /s/ NANCY L. CONLIN ----------------------------- Name: Nancy L. Conlin Title: Secretary CITICORP NORTH AMERICA, INC., as Agent By: /s/ FRANK FORESTER III ----------------------------- Name: Frank Forester III Title: Vice President CORPORATE RECEIVABLES CORPORATION, as Agent By: /s/ FRANK FORESTER III ----------------------------- Name: Frank Forester III Title: Vice President CITIBANK, N.A., as Agent By: /s/ FRANK FORESTER III ----------------------------- Name: Frank Forester III Title: Vice President 2 ANNEX A SCHEDULE II CDSC PAYMENT CHART
- ---------------------------------------------------------------------------------------------------------------- TYPE OF FEE STRUCTURE: B1 B2 B3 B4 B5 B6 B7 B8 - ---------------------------------------------------------------------------------------------------------------- REDEMPTION FEE: - ---------------------------------------------------------------------------------------------------------------- Year 1 5% 5% 5% 5% 4% 3% 2% 4% - ---------------------------------------------------------------------------------------------------------------- Year 2 4% 4% 4% 4% 3% 2% 2% 3% - ---------------------------------------------------------------------------------------------------------------- Year 3 3% 4% 3% 3% 2% 1% 1% 2% - ---------------------------------------------------------------------------------------------------------------- Year 4 3% 3% 3% 3% 2% 0% 1% - ---------------------------------------------------------------------------------------------------------------- Year 5 2% 2% 2% 2% 1% 0% - ---------------------------------------------------------------------------------------------------------------- Year 6 1% 1% 1% 1% 0% 0% - ---------------------------------------------------------------------------------------------------------------- Year 7 0% 0% 0% 0% 0% - ---------------------------------------------------------------------------------------------------------------- Year 8 0% 0% 0% 0% 0% - ----------------------------------------------------------------------------------------------------------------
Companies currently using B1 Structure: Colonial Trust I; Colonial Trust II; Colonial Trust III, Colonial Trust IV; Colonial Trust V. Companies currently using B2 Structure: Colonial Trust I; Colonial Trust II; Colonial Trust III; Colonial Trust IV; Colonial Trust VI; Colonial Trust VII. Companies currently using B3 Structure: Colonial Trust I. Companies currently using B8 Structure: Colonial Trust II; Colonial Trust IV. 3 With respect to each of the following Funds (each a "Discount Program Fund" and collectively, the "Discount Program Funds"): - ---------------------------------------------------------------------------------------------------------------------- COLONIAL HIGH YIELD SECURITIES FUND COLONIAL TAX-EXEMPT FUND* COLONIAL INCOME FUND* COLONIAL TAX-EXEMPT INSURED FUND* COLONIAL STRATEGIC INCOME FUND COLONIAL INTERMEDIATE TAX-EXEMPT FUND(1) STEIN ROE ADVISOR TAX-MANAGED GROWTH FUND COLONIAL MUNICIPAL MONEY MARKET FUND* STEIN ROE ADVISOR TAX-MANAGED VALUE FUND COLONIAL UTILITIES FUND COLONIAL MONEY MARKET FUND* COLONIAL CALIFORNIA TAX-EXEMPT FUND* NEWPORT JAPAN OPPORTUNITIES FUND COLONIAL CONNECTICUT TAX-EXEMPT FUND* NEWPORT TIGER CUB FUND COLONIAL FLORIDA TAX-EXEMPT FUND* NEWPORT GREATER CHINA FUND COLONIAL MASSACHUSETTS TAX-EXEMPT FUND* COLONIAL SHORT DURATION U.S. GOVERNMENT FUND(1) COLONIAL MICHIGAN TAX-EXEMPT FUND* COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND* COLONIAL MINNESOTA TAX-EXEMPT FUND* COLONIAL FEDERAL SECURITIES FUND* COLONIAL NEW YORK TAX-EXEMPT FUND* CRABBE HUSON CONTRARIAN FUND COLONIAL NORTH CAROLINA TAX-EXEMPT FUND* CRABBE HUSON REAL ESTATE FUND COLONIAL OHIO TAX-EXEMPT FUND* CRABBE HUSON EQUITY FUND COLONIAL SMALL CAP VALUE FUND CRABBE HUSON MANAGED INCOME & EQUITY FUND COLONIAL U.S. GROWTH & INCOME FUND CRABBE HUSON OREGON TAX-FREE FUND* COLONIAL VALUE FUND COLONIAL GLOBAL EQUITY FUND NEWPORT ASIA PACIFIC FUND COLONIAL INTERNATIONAL HORIZONS FUND NEWPORT EUROPE FUND COLONIAL GLOBAL UTILITIES FUND NEWPORT TIGER FUND COLONIAL SELECT VALUE FUND COLONIAL COUNSELOR SELECT INCOME PORTFOLIO* COLONIAL STRATEGIC BALANCED FUND COLONIAL COUNSELOR SELECT BALANCED PORTFOLIO THE COLONIAL FUND COLONIAL COUNSELOR SELECT GROWTH PORTFOLIO COLONIAL HIGH YIELD MUNICIPAL FUND* LIBERTY ALL-STAR GROWTH AND INCOME FUND - ----------------------------------------------------------------------------------------------------------------------
The following information supplements the information in the CDSC Payment Chart with respect to each Discount Program Fund: The CDSCs for larger purchases of Class B shares of the Discount Program Funds through participating financial advisor firms are being reduced, effective February 1, 2000, as follows: - The reductions apply only to Class B shares purchased on or after February 1, 2000. - The reductions apply only to customers of financial advisor firms that have elected to participate in these reductions. (Some financial advisors firms are not able to participate, because their record keeping or transaction processing systems are not designed to accommodate these reductions.) With respect to Class B shares of Discount Program Funds purchased through a participating financial advisor firm, the CDSCs will be as follows: 4 PURCHASES OF LESS THAN $250,000 - ------------------------------------------------------------------------------------------------------------ HOLDING PERIOD AFTER PURCHASE CDSC AS % DEDUCTED WHEN SHARES SOLD - ------------------------------------------------------------------------------------------------------------ Through first year 5.00 - ------------------------------------------------------------------------------------------------------------ Through second year 4.00 - ------------------------------------------------------------------------------------------------------------ Through third year 3.00 - ------------------------------------------------------------------------------------------------------------ Through fourth year 3.00 - ------------------------------------------------------------------------------------------------------------ Through fifth year 2.00 - ------------------------------------------------------------------------------------------------------------ Through sixth year 1.00 - ------------------------------------------------------------------------------------------------------------ Longer than six years 0.00 - ------------------------------------------------------------------------------------------------------------
PURCHASES OF $250,000 TO LESS THAN $500,000 - ------------------------------------------------------------------------------------------------------------ HOLDING PERIOD AFTER PURCHASE CDSC AS % DEDUCTED WHEN SHARES SOLD - ------------------------------------------------------------------------------------------------------------ Through first year 3.00 - ------------------------------------------------------------------------------------------------------------ Through second year 2.00 - ------------------------------------------------------------------------------------------------------------ Through third year 1.00 - ------------------------------------------------------------------------------------------------------------ Longer than four years 0.00 - ------------------------------------------------------------------------------------------------------------
PURCHASES OF $500,000 TO LESS THAN $1 MILLION - ------------------------------------------------------------------------------------------------------------ HOLDING PERIOD AFTER PURCHASE CDSC AS % DEDUCTED WHEN SHARES SOLD - ------------------------------------------------------------------------------------------------------------ Through first year 3.00 - ------------------------------------------------------------------------------------------------------------ Through second year 2.00 - ------------------------------------------------------------------------------------------------------------ Through third year 1.00 - ------------------------------------------------------------------------------------------------------------ Longer than four years 0.00 - ------------------------------------------------------------------------------------------------------------
For purchases through financial advisor firms that do not participate in the Class B discount program, the CDSC, conversion period and commission to the financial advisor will continue to be as described in the CDSC Payment Chart. For shares purchased through a financial advisor firm which participates in the discount program, purchases of over $1 million can only be made Class A or Class C shares. For shares purchased through a financial advisor firm which does not participate in the Class B discount program, purchases of more than $250,000 but less than $1 million can only be made in Class A or Class C shares. If a shareholder exchanges shares from any Fund which is not a Discount Program Fund into shares of a Discount Program Fund, or transfers any Fund account from a financial advisor firm that does not participate in the Class B discount program to a financial advisor firm that does participate, the exchanged or transferred shares will retain their pre-existing CDSC and conversion schedule, but additional purchases of shares which cause the exchanged or transferred Fund account to exceed the applicable discount level will receive the lower CDSC and reduced holding period for amounts exceeding the discount level and the financial advisor firm will receive the lower commission. If a shareholder exchanges shares from a Discount Program Fund into a Fund which is not a Discount Program Fund or 5 transfers any Fund account from a financial advisor that participates in the Class B discount program to a financial advisor that does not participate, the exchanged or transferred shares will retain the pre-existing CDSC but all additional purchases of Class B shares will be in accordance with the higher CDSC and longer holding period of the non-participating fund or financial advisor. An additional way shareholders can pay a lower CDSC and be subject to the applicable reduced holding period when purchasing Class B shares through participating financial advisor firms is through RIGHTS OF ACCUMULATION. If the combined value of the Fund accounts maintained by a shareholder, the shareholder's spouse and minor children reaches a discount level, any additional shares purchased in any of the accounts will be subject to the applicable lower CDSC and reduced holding period. ***************** (1) THE COLONIAL SHORT DURATION U.S. GOVERNMENT FUND and COLONIAL INTERMEDIATE TAX-EXEMPT FUND will be affected by only some of the above changes. The Funds' policies regarding the purchase of Class B shares through participating financial advisor firms of less than $250,000 will not change from what appears in each Fund's current Prospectus. For purchases of $250,000 to less than $500,000 and of $500,000 to less than $1 million, the applicable charts above will apply. 6 ANNEX B SCHEDULE III Permitted Conversion Features Commission Shares of each Fund will automatically convert to Class A shares no earlier than the date which is eight (8) years after the date on which such shares were purchased. With respect to each of the following Funds (the "Discount Program Funds"): - ---------------------------------------------------------------------------------------------------------------------- COLONIAL HIGH YIELD SECURITIES FUND COLONIAL TAX-EXEMPT FUND COLONIAL INCOME FUND COLONIAL TAX-EXEMPT INSURED FUND COLONIAL STRATEGIC INCOME FUND COLONIAL INTERMEDIATE TAX-EXEMPT FUND STEIN ROE ADVISOR TAX-MANAGED GROWTH FUND COLONIAL MUNICIPAL MONEY MARKET FUND STEIN ROE ADVISOR TAX-MANAGED VALUE FUND COLONIAL UTILITIES FUND COLONIAL MONEY MARKET FUND COLONIAL CALIFORNIA TAX-EXEMPT FUND NEWPORT JAPAN OPPORTUNITIES FUND COLONIAL CONNECTICUT TAX-EXEMPT FUND NEWPORT TIGER CUB FUND COLONIAL FLORIDA TAX-EXEMPT FUND NEWPORT GREATER CHINA FUND COLONIAL MASSACHUSETTS TAX-EXEMPT FUND COLONIAL SHORT DURATION U.S. GOVERNMENT FUND COLONIAL MICHIGAN TAX-EXEMPT FUND COLONIAL INTERMEDIATE U.S. GOVERNMENT FUND COLONIAL MINNESOTA TAX-EXEMPT FUND COLONIAL FEDERAL SECURITIES FUND COLONIAL NEW YORK TAX-EXEMPT FUND CRABBE HUSON CONTRARIAN FUND COLONIAL NORTH CAROLINA TAX-EXEMPT FUND CRABBE HUSON REAL ESTATE FUND COLONIAL OHIO TAX-EXEMPT FUND CRABBE HUSON EQUITY FUND COLONIAL SMALL CAP VALUE FUND CRABBE HUSON MANAGED INCOME & EQUITY FUND COLONIAL U.S. GROWTH & INCOME FUND CRABBE HUSON OREGON TAX-FREE FUND COLONIAL VALUE FUND COLONIAL GLOBAL EQUITY FUND NEWPORT ASIA PACIFIC FUND COLONIAL INTERNATIONAL HORIZONS FUND NEWPORT EUROPE FUND COLONIAL GLOBAL UTILITIES FUND NEWPORT TIGER FUND COLONIAL SELECT VALUE FUND COLONIAL COUNSELOR SELECT INCOME PORTFOLIO COLONIAL STRATEGIC BALANCED FUND COLONIAL COUNSELOR SELECT BALANCED PORTFOLIO THE COLONIAL FUND COLONIAL COUNSELOR SELECT GROWTH PORTFOLIO COLONIAL HIGH YIELD MUNICIPAL FUND LIBERTY ALL-STAR GROWTH AND INCOME FUND - ----------------------------------------------------------------------------------------------------------------------
With respect to Class B shares of Discount Program Funds purchased on or after February 1, 2000 through a participating financial advisor firm, the shares will automatically convert to Class A shares as follows: - For purchases of $250,000 to less than $500,000, Class B shares will automatically convert to Class A shares on the date which is four (4) years after the date on which such shares were purchased. 7 - For purchases of $500,000 to less than $1,000,000, Class B shares will automatically convert to Class A shares on the date which is three (3) years after the date on which such shares were purchased. If a shareholder exchanges shares from any Fund which is not a Discount Program Fund into shares of a Discount Program Fund, or transfers any Fund account from a financial advisor firm that does not participate in the Class B discount program to a financial advisor firm that does participate, the exchanged or transferred shares will retain their pre-existing conversion schedule, but additional purchases of shares which cause the exchanged or transferred Fund account to exceed the applicable discount level will receive the lower conversion period for amounts exceeding the discount level. If a shareholder exchanges shares from a Discount Program Fund into a Fund which is not a Discount Program Fund or transfers any Fund account from a financial advisor that participates in the Class B discount program to a financial advisor that does not participate, the exchanged or transferred shares will retain the pre-existing conversion schedule but all additional purchases of Class B shares will be in accordance with the longer conversion period of the non-participating fund or financial advisor. An additional way shareholders can fall within the reduced holding period when purchasing Class B shares through participating financial advisor firms is through RIGHTS OF ACCUMULATION. If the combined value of the Fund accounts maintained by a shareholder, the shareholder's spouse and minor children reaches a discount level, any additional shares purchased in any of the accounts will be subject to the reduced automatic conversion period. 8 EX-10.32 3 EXHIBIT 10.32 SETTLEMENT AGREEMENT AND GENERAL RELEASE This Settlement Agreement and General Release (hereinafter referred to as the "Agreement") is made as of February 7, 2000 by and between Kenneth R. Leibler and Liberty Financial Companies, Inc. In this Agreement, "Leibler" refers to Kenneth R. Leibler; "Company" refers to Liberty Financial Companies, Inc., its subsidiaries and affiliates, as well as their current and former officers, directors, agents and employees in such capacities. For purposes of Paragraphs 8 through 22, inclusive, of this Agreement, the term Company shall also include Liberty Mutual Insurance Company and Liberty Mutual Fire Insurance Company, their subsidiaries and affiliates, as well as their current and former officers, directors, agents and employees in such capacities. WHEREAS, Leibler served as an employee-at-will of the Company in the position of President and Chief Executive Officer and also served as a Director until his resignation, which was effective on January 13, 2000; and WHEREAS, the parties have mutually agreed to resolve any and all disagreements arising out of such employment relationship and the termination of Leibler's employment and his resignation as Director; NOW, THEREFORE, in consideration of the mutual covenants to be performed by each of the parties hereto, and set forth in their entirety herein, the parties to this Agreement agree as follows: 1.The Company shall pay Leibler salary and benefits accrued through January 13, 2000, including payment for any accrued but unused vacation, personal or other flexible time off program. The Company shall also reimburse Leibler for expenses incurred by him in the ordinary course of his employment prior to January 13, 2000. 2.Leibler is no longer an employee of the Company and therefore not eligible to receive any payment of any bonus, salary or benefit of whatever nature or amount, other than as provided in Paragraph 1 or elsewhere in this Agreement. The Company agrees to pay Leibler separation payments in the aggregate amount of $3,480,000, less all applicable withholdings for state and federal income taxes and payroll taxes, which shall be paid as follows: (a) $1,200,000 after expiration of the time periods described in Paragraphs 18 and 19, but in no event later than March 1, 2000; (b) $1,140,000 over a period of 18 months in accordance with the Company's regular payroll schedule of two payments per month, commencing February 15, 2000, resulting in 36 payments in the gross amount of $31,666.67, and (c) $1,140,000 on August 15, 2001. The Company shall not be obligated to fund benefits of any nature or in any amount for Leibler during this period such as 401(k) matches, health plans, or retirement plans after January 13, 2000, except as expressly provided herein. 3.The Company shall make all payments to health plans, dental plans and vision plans pursuant to the COBRA benefit selected by Leibler for a period of eighteen months from January 13, 2000. The Company will pay for the current plans and coverage selection elected by Leibler. The Company shall also continue to pay for Leibler's financial planning and tax preparation service from AYCO for calendar year 2000, including preparation of Leibler's 1999 and 2000 income tax filings. Payments for the foregoing benefits shall be made on the same basis as during Leibler's tenure as an employee of the Company, and the Company accordingly shall (a) gross up the payments for the AYCO benefit to eliminate any after tax cost to Leibler, and (b) deduct Leibler's contribution to the benefits described in the first sentence of this paragraph (calculated as if he had remained an employee) from the payments described in Paragraph 2(b) above. The Company shall also continue to pay the premium on Leibler's two $1 million term life insurance policies until the earlier of one year from the date of this Agreement or the commencement by Leibler of full-time employment (other than self-employment). Leibler shall be obligated to inform the Company promptly of his commencement of full- time employment (other than self-employment). 4.Leibler may exercise, through April 12, 2000, any vested stock options pursuant to the Company's 1990 Stock Option Plan and 1995 Stock Incentive Plan in accordance with the provisions of the award grants and the underlying plans. Leibler shall only be entitled to exercise such options or other rights as are vested as of January 13, 2000 pursuant to the terms of the plans and grants. Notwithstanding the foregoing, the Company and Leibler agree that the vested stock options granted to Leibler in 1995 and 1996 are hereby cancelled. Any unvested options and restricted stock or other grants as of January 13, 2000 shall be forfeited. 5.The Company shall provide Leibler, at the Company's expense, with senior executive outplacement assistance by a firm of his choice, subject to the reasonable approval of the Company, such service to run until the date Leibler commences full-time employment or permanent full-time self-employment. Leibler shall be obligated to inform the Company promptly of his commencement of full-time employment or permanent full-time self-employment. 6.Leibler shall be entitled to payment, distribution, or other appropriate treatment of Leibler's vested or accrued benefits as of January 13, 2000 under all of the Company's benefit plans in which Leibler participated prior to January 13, 2000 (including, without limitation, as applicable, the Company's Savings and Investment Plan, Pension Plan, Supplemental Savings Plan and Supplemental Pension Plan) in accordance with the applicable terms and conditions of such benefit plans. 7.Leibler acknowledges and agrees that the aforesaid payments and agreements are made by the Company in consideration for the promises made by Leibler in this Agreement. Leibler further acknowledges and agrees that he is not otherwise entitled to receive said monies under any Company benefit plan, policy or procedure, or otherwise. The Company's payment of these amounts shall not restore Leibler's employment status or any of his Company employment benefits. 8.Leibler states that he has not previously filed or joined in any complaints, charges or lawsuits against the Company before any governmental agency or court of law. Leibler further represents that he has not given or sold any portion of any claim discussed in this Agreement to anyone else. 9.Leibler agrees to release, and hereby releases, the Company from all claims or demands of whatever nature which Leibler currently may have based on his employment with the Company, his service as Director, or his separation from that employment or resignation as Director, whether known or unknown, and whether asserted or not. This includes a release of any rights or claims Leibler may have under the Age Discrimination in Employment Act and the Older Worker Benefit Protection Act, which prohibit age discrimination in employment; Title VII of the Civil Rights Act of 1964 and the Civil Rights Act of 1991, which prohibit discrimination in employment based on race, sex, color, national origin, or religion; the Americans With Disabilities Act, which prohibits discrimination against persons with disabilities; the Equal Pay Act, which prohibits paying men and women unequal pay for equal work; any claims under the Employee Retirement Income Security Act, which regulates the 2 administration of retirement and other employee benefit plans; any state law relating to employment benefits; the Massachusetts Law Against Discrimination, codified at Section 151B et seq. of Massachusetts General Laws; any Company management incentive plan, stock option plan, phantom or restricted stock plan or other equity or benefit plan, Short-Term Disability or Long-Term Disability Plans, except as provided elsewhere in this Agreement; and any other federal, state or local statutory or common law claims affecting or relating to the claims or rights of employees. This release also includes a release by Leibler of any claims for wrongful discharge, breach of implied or express contract or claims that the Company has dealt with Leibler unfairly or in bad faith. This does not include a release of (a) any claims Leibler may have in the future for breach by the Company of its obligations under this Agreement, or (b) any rights Leibler may have to indemnification or under any directors and officers liability insurance policy for claims arising from his service as a director or officer of the Company or as fiduciary of any Company benefit plan under applicable law and/or the charter documents of the Company or other applicable documents. 10. The Company agrees to release, and hereby releases, Leibler and his executors, administrators, successors and assigns, from all claims or demands of whatever nature which the Company currently may have based on Leibler's employment with the Company or his service as a Director, whether known or unknown, and whether asserted or not. This release does not include a release of any claims the Company may have in the future for breach by Leibler of his obligations under this Agreement. 11. Leibler promises never to file, join or participate in any capacity in a complaint, charge or lawsuit asserting any claims that are released in Paragraph 9, provided, however, that the foregoing shall not apply to class actions if Leibler opts out at the first opportunity provided. Leibler further agrees not to voluntarily encourage or voluntarily offer any information to any individual or entity or otherwise participate in the pursuit of any potential or actual complaints, charges or lawsuits against the Company, including but not limited to any and all complaints or lawsuits alleging employment discrimination or wrongful discharge, arising or based upon facts or circumstances during Leibler's active tenure at the Company. However, this provision shall not interfere with Leibler's ability to communicate with public agencies if required to do so under applicable law or legal process. If Leibler is so required under applicable law or legal process, he shall provide prompt written notice to the Company prior to compliance with such request, such written notice to include a copy of any court or administrative order or other notice or document received by Leibler together with all enclosures or attachments thereto. 12. The Company makes this Agreement to avoid the cost of defending against any possible legal and/or administrative action of any nature whatsoever. By making this Agreement, the Company does not admit that it has violated any federal, state, or local law, rule or regulation or that any action taken with respect to Leibler was wrongful or unlawful or that the Company breached any of its policies or procedures. The parties agree that this Agreement may not be used as evidence in any subsequent proceeding of any kind except one in which either of the parties or Company alleges a breach of this Agreement or one in which any of the parties or Company elects to use the Agreement as a defense to any claim. 13. Except to comply with legal process, Leibler agrees to keep the terms, amount and fact of this Agreement completely confidential and that he will not disclose any information concerning this Agreement to anyone other than his immediate family, attorney and financial and tax advisors, and shall be responsible for any breach by them of this non-disclosure provision. The Company likewise agrees to keep the terms, amount and fact of this Agreement completely confidential and, except as required by law, will not disclose any information concerning this Agreement other than to its employees on a need-to-know basis, and to its legal, 3 accounting and tax advisors, and shall be responsible for any breach by them of this non-disclosure provision. The agreements of the parties in this paragraph shall be of no further force and effect if and when this Agreement is disclosed publicly by the Company pursuant to the disclosure requirements of the federal securities laws. 14. Leibler acknowledges that he had access to proprietary and/or confidential information regarding the Company's customers, employees, and business during his employment with the Company. Leibler acknowledges and agrees that all such proprietary and/or confidential information, including but not limited to documents, computer software, electronic information or copies thereof, is and shall remain the property of the Company. Leibler warrants and represents that he has returned to the Company any originals and/or copies of all such proprietary and/or confidential information whether in written or electronic form. Furthermore, Leibler acknowledges and reaffirms his continuing obligation to preserve as confidential all such information obtained by him during, or by reason of, his employment with the Company and agrees that it will not be disclosed by him to any person, firm or corporation or otherwise utilized by him, except as may be required by law or legal process. If Leibler is so required under applicable law or legal process, he shall provide prompt written notice to the Company prior to the compliance with such request, such written notice to include a copy of any court or administrative order or other notice or document received by Leibler together with all enclosures or attachments thereto. 15. Leibler covenants that he will not, with any reasonable expectation of public disclosure, intentionally make any disparaging comment, statement or communication of any kind, whether written or oral, about the Company or any affiliated companies or any officer, director, agent, successor or assign in such capacity, and that he shall refrain from making any harassing or disparaging statement concerning the Company or the above entities or persons in any public forum including, but not limited to, any interview, lecture, news conference or other public audience or any form of media including, but not limited to, radio, television, newspapers, magazines, the internet, or any private forum where a fee or gratuity of any kind is being paid or make any disclosure that is reasonably intended to become a public communication. For purposes of this Paragraph 15 and the following Paragraph 16, disparaging and/or harassing conduct, comment, statement or communications includes, but is not limited to, any conduct, comment, statement or communication that discredits, belittles, defames or is untrue or misleading and is made to negatively influence, tends to negatively influence or negatively influences or prejudices the reputation, business or image of the other party or any affiliated companies or any current or former officer, director, agent, successor or assign. 16. The Company covenants that it will not, with any reasonable expectation of public disclosure, intentionally make any disparaging comment, statement or communication of any kind, whether written or oral, about Leibler or any successor or assign in such capacity, and that it shall refrain from making any harassing or disparaging statement concerning Leibler or the above persons in any public forum including, but not limited to, any interview, lecture, news conference or other public audience or any form of media including, but not limited to, radio, television, newspapers, magazines, the internet, or any private forum where a fee or gratuity of any kind is being paid or make any disclosure that is reasonably intended to become a public communication. 17. The prevailing party in any lawsuit or other action or proceeding for breach of this Agreement shall be entitled to be paid by the other party, in addition to any costs and disbursements provided by law, reasonable attorneys fees and other expenses of litigation if deemed appropriate by the court or other forum of such action or proceeding. 4 The parties further agree that, if they file or join in a complaint, charge, or lawsuit based on claims which it is finally determined that such party has released (other than a class action from which a party opts out at the first opportunity provided), such party will pay for all costs incurred by the other party, any related companies or the directors or employees of any of them, including reasonable attorneys fees, incurred in defending against such a released claim. 18. Leibler was first provided with this Agreement on January 26, 2000. Leibler will be afforded at least 21 days from that date to consider the meaning and effect of this Agreement. Leibler acknowledges that he has had the opportunity to consult with an attorney. Leibler agrees that any modification, material or otherwise, to this Agreement does not restart or affect in any manner the original 21 day consideration period for this separation proposal made to Leibler. 19. Leibler may revoke this Agreement for a period of seven (7) days following the day Leibler executes this Agreement. Any revocation within this period must be submitted in writing, to Frank Faggiano, Senior Vice President, Human Resources of the Company and state, "I hereby revoke my acceptance of the Settlement Agreement and General Release dated February 7, 2000." The revocation must be personally delivered to Mr. Faggiano, or his designee, or mailed to Frank Faggiano, Senior Vice President, Human Resources, Liberty Financial Companies, Inc., Federal Reserve Plaza, 600 Atlantic Avenue, Boston, MA 02210-2214, and postmarked within seven (7) days of execution of this Agreement. This Agreement shall not become effective or enforceable until the revocation period has expired. If the last day of the revocation period is a Saturday, Sunday, or legal holiday in Massachusetts, then the revocation period shall not expire until the next following day which is not a Saturday, Sunday, or legal holiday. 20. Leibler acknowledges that he has had the opportunity to consult with an attorney before signing this Agreement and that he understood that it was his decision whether or not to do so. Leibler agrees that the Company shall not be required to pay any of his attorneys' fees in this or any related matter or lawsuit, now or later, except as provided in Paragraph 17, and that the payments provided for this Agreement are in complete settlement of all matters between Leibler and the Company, including but not limited to attorneys fees and costs. This Agreement shall be interpreted in accordance with the laws of the Commonwealth of Massachusetts. 21. All notices or other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given when actually received. Notices for the Company shall be sent to: Liberty Financial Companies, Inc. 600 Atlantic Avenue Boston, Massachusetts 02210-2214 Attention: Robert A. Licht, General Counsel Fax: 617-742-7338 Notices to Leibler shall be sent to: Kenneth R. Leibler 386 Commonwealth Ave Newton, MA 02467 Fax: 617-558-0397 The Company and Leibler shall be obligated to notify the other party of any change in address, which shall be effective when made in accordance with this Paragraph. 5 22. This is the whole Agreement between Leibler and the Company. Other than as stated herein, the parties acknowledge that no promise or inducement has been offered for this Agreement and that this Agreement is executed without reliance on any statement of the parties or their representatives. If any portion of this Agreement is found to be unenforceable, then both Leibler and the Company desire that all other portions that can be separated from it or appropriately limited in scope shall remain fully valid and enforceable. Executed this 7th day of February, 2000. /s/Kenneth R. Leibler ------------------------------------ Kenneth R. Leibler Subscribed and sworn to by the above-named individual before the undersigned notary this 7th day of February, 2000. SEAL: /s/Cindy M. Leal ------------------------------------ Notary Public My Commission Expires: October 21, 2005 Executed this 7th day of February, 2000. Liberty Financial Companies, Inc. By /s/Gary L. Countryman -------------------------------------- Gary L. Countryman, President and Chief Executive Officer 6 EX-12 4 EXHIBIT 12 LIBERTY FINANCIAL COMPANIES, INC. EXHIBIT 12 - STATEMENT RE COMPUTATION OF RATIOS ($ IN MILLIONS)
Years Ended December 31 ------------------------------------------------- 1999 1998 1997 --------------- --------------- -------------- Earnings: Pretax income $ 154.4 $ 178.9 $ 192.1 Add fixed charges: Interest on indebtedness 36.6 24.1 21.4 Portion of rent representing the interest factor 4.9 4.1 3.7 Accretion to face value of redeemable convertible preferred stock 0.8 0.8 0.8 --------------- --------------- -------------- Sub-total of income as adjusted 196.7 207.9 218.0 Interest on fixed annuities and financial products 526.6 562.2 594.1 =============== =============== ============== Total income as adjusted $723.3 $ 770.1 $ 812.1 --------------- --------------- -------------- Fixed charges: Interest on indebtedness $ 36.6 $ 24.1 $ 21.4 Portion of rent representing the interest factor 4.9 4.1 3.7 Accretion to face value of redeemable convertible preferred stock 0.8 0.8 0.8 --------------- --------------- -------------- Sub-total of fixed charges 42.3 29.0 25.9 Interest on fixed annuities and financial products 526.6 562.2 594.1 --------------- --------------- -------------- Sub-total of fixed charges 568.9 591.2 620.0 Preferred stock dividends 1.4 1.4 1.4 --------------- --------------- -------------- Total fixed charges $570.3 $592.6 $621.4 =============== =============== ============== Ratio of earnings to fixed charges: Excluding interest on fixed annuities and financial products 4.65 x 7.17 x 8.42 x =============== =============== ============== Including interest on fixed annuities and financial products 1.27 x 1.30 x 1.31 x =============== =============== ============== Ratio of earnings to combined fixed charges and preferred stock dividends: Excluding interest on fixed annuities and financial products 4.50 x 6.84 x 7.99 x =============== =============== ============== Including interest on fixed annuities and financial products 1.27 x 1.30 x 1.31 x =============== =============== ==============
EX-13 5 EX 13 [GRAPHIC] FINANCIAL REVIEW Selected Financial Data 27 Management's Discussion 28-39 Consolidated Financial Statements 40-43 Notes to Consolidated Financial Statements 44-62 Report of Independent Auditors 63 - -------------------------------------------------------------------------------- SELECTED FINANCIAL DATA - --------------------------------------------------------------------------------
Selected Consolidated Financial Data(1) (in millions, except per share data) As of or for the Year Ended December 31 1999 1998 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------------- Income Statement Data Investment income $ 810.3 $ 820.9 $ 853.1 $ 796.4 $ 761.8 Interest credited to policyholders (526.6) (562.2) (594.1) (572.7) (555.8) - ----------------------------------------------------------------------------------------------------------------------------------- Investment spread 283.7 258.7 259.0 223.7 206.0 - ----------------------------------------------------------------------------------------------------------------------------------- Net realized investment gains (losses) (42.2) 2.4 25.9 8.0 (4.0) - ----------------------------------------------------------------------------------------------------------------------------------- Fee income: Investment advisory and administrative fees 268.5 237.7 217.9 196.4 155.8 Distribution and service fees 60.4 52.7 49.2 44.9 28.9 Transfer agency fees 51.7 49.0 47.7 43.9 30.8 Surrender charges and net commissions 36.5 33.7 36.1 34.7 23.4 Separate account fees 33.5 20.6 17.1 16.0 13.2 - ----------------------------------------------------------------------------------------------------------------------------------- Total fee income 450.6 393.7 368.0 335.9 252.1 - ----------------------------------------------------------------------------------------------------------------------------------- Expenses: Operating expenses (360.4) (328.2) (309.7) (277.9) (225.1) Amortization of deferred policy acquisition costs (97.4) (77.4) (86.4) (70.4) (68.0) Amortization of deferred distribution costs (40.3) (40.1) (34.2) (33.9) (18.8) Amortization of intangible assets (20.3) (15.3) (13.5) (15.4) (12.2) Interest expense, net (19.3) (14.9) (17.0) (19.7) (16.2) - ----------------------------------------------------------------------------------------------------------------------------------- Total expenses (537.7) (475.9) (460.8) (417.3) (340.3) - ----------------------------------------------------------------------------------------------------------------------------------- Pretax income 154.4 178.9 192.1 150.3 113.8 Income tax expense (55.1) (54.4) (62.6) (49.6) (39.9) - ----------------------------------------------------------------------------------------------------------------------------------- Income before extraordinary item 99.3 124.5 129.5 100.7 73.9 Extraordinary loss on extinguishment of debt, net of tax -- (9.7) -- -- -- - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 99.3 $ 114.8 $ 129.5 $ 100.7 $ 73.9 =================================================================================================================================== Per Share Data(2) Net income per share - basic $ 2.11 $ 2.51 $ 2.94 $ 2.36 $ 1.85 Net income per share - assuming dilution 2.07 2.42 2.77 2.24 1.76 Dividends on common stock(3) 0.40 0.40 0.40 0.40 0.30 Dividends on convertible preferred stock 2.88 2.88 2.88 2.88 2.21 Book value 24.99 27.41 26.82 24.42 23.03 Other Operating Data Net operating income(4) $ 126.7 $ 122.6 $ 112.4 $ 94.8 $ 76.5 Extraordinary loss on extinguishment of debt, net of tax -- (9.7) -- -- -- Net realized investment gains (losses), net of taxes (27.4) 1.9 17.1 5.9 (2.6) - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 99.3 $ 114.8 $ 129.5 $ 100.7 $ 73.9 =================================================================================================================================== Balance Sheet Data Total investments $12,195.1 $12,598.3 $12,343.5 $11,537.9 $10,144.7 Intangible assets 282.0 292.8 199.0 205.4 192.3 Total assets 18,372.5 16,519.1 15,851.6 14,427.7 12,749.4 Notes payable to affiliates -- -- 229.0 229.0 229.0 Notes payable 552.0 486.4 26.5 52.5 61.0 Series A redeemable convertible preferred stock 16.0 15.3 14.6 13.8 13.0 Stockholders' equity 1,185.9 1,271.3 1,198.9 1,051.4 956.4 Shares of common stock outstanding(2) 47.5 46.4 44.7 43.1 41.5
1 Includes data for acquired entities from and after the applicable acquisition date (the most significant being Colonial, which was acquired on March 24, 1995). The data presented should be read in conjunction with the Consolidated Financial Statements and the Notes thereto and other financial information included herein and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." 2 Share and per share amounts have been adjusted for a three-for-two common stock split effected in the form of a 50 percent stock dividend distributed on December 10, 1997. 3 The amount for 1995 does not include a non-cash dividend of $30.0 million to an affiliate of Liberty Mutual. 4 Net operating income is defined as net income, excluding extraordinary items and net realized investment gains and losses, net of related income taxes. 27 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Net Income was $99.3 million or $2.07 per share in 1999 compared to $114.8 million or $2.42 per share in 1998 and $129.5 million or $2.77 per share in 1997. The decrease in 1999 compared to 1998 resulted primarily from net realized investment losses in 1999 compared to net realized investment gains in 1998. Operating expenses, amortization expense and interest expense, net also increased, largely offset by higher fee and investment spread income. Although pretax income decreased in 1999 compared to 1998, income tax expense increased as the effective tax rate was significantly higher in 1999 compared to 1998. In addition, net income for 1998 included an extraordinary loss on extinguishment of debt, net of tax, of $9.7 million. The decrease in 1998 compared to 1997 resulted primarily from lower net realized investment gains and higher operating expenses. Partially offsetting these items were increased fee income and decreased amortization expense, interest expense, net and income tax expense. Pretax Income was $154.4 million in 1999 compared to $178.9 million in 1998 and $192.1 million in 1997. The lower pretax income in 1999 compared to 1998 resulted primarily from net realized investment losses in 1999 compared to net realized investment gains in 1998. Operating expenses, amortization expense and interest expense, net also increased, largely offset by higher fee and investment spread income. The lower pretax income in 1998 compared to 1997 resulted primarily from lower net realized investment gains and higher operating expenses. Partially offsetting these items were increased fee income and decreased amortization expense and interest expense, net. Investment Spread is the amount by which investment income earned on the Company's investments exceeds interest credited on policyholder balances. Investment spread was $283.7 million in 1999 compared to $258.7 million in 1998 and $259.0 million in 1997. The amount by which the average yield on investments exceeds the average interest credited rate on policyholder balances is the investment spread percentage. The investment spread percentage in 1999 was 2.01% compared to 1.83% for 1998 and 1.96% for 1997. Investment income was $810.3 million in 1999 compared to $820.9 million in 1998 and $853.1 million in 1997. The decrease of $10.6 million in 1999 compared to 1998 primarily relates to a $15.0 million decrease as a result of a lower average investment yield, partially offset by a $4.4 million increase resulting from a higher level of average invested assets. The 1999 investment income was net of $77.2 million of S&P 500 Index call option amortization expense related to the Company's equity-indexed annuities compared to $70.8 million in 1998. The average investment yield was 6.29% in 1999 compared to 6.41% in 1998. The decrease of $32.2 million in 1998 compared to 1997 primarily relates to a $66.0 million decrease as a result of a lower average investment yield, partially offset by a $33.8 million increase resulting from a higher level of average invested assets. The 1997 investment income was net of $47.6 million of S&P 500 Index call option amortization expense. The average investment yield was 6.95% in 1997. Interest credited to policyholders totaled $526.6 million in 1999 compared to $562.2 million in 1998 and $594.1 million in 1997. The decrease of $35.6 million in 1999 compared to 1998 primarily relates to a $36.9 million decrease resulting from a lower average interest credited rate. Policyholder balances averaged $12.3 billion (including $10.1 billion of fixed products, consisting of fixed annuities and a closed block of single premium whole life insurance, and $2.2 billion of equity-indexed annuities) in 1999 compared to $12.3 billion (including $10.5 billion of fixed products and $1.8 billion of equity-indexed annuities) in 1998. The average interest credited rate was 4.28% (5.00% on fixed products, consisting of fixed annuities and a closed block of single premium whole life insurance, and 0.85% on 28 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report equity-indexed annuities) in 1999 compared to 4.58% (5.23% on fixed products and 0.85% on equity-indexed annuities) in 1998. Keyport's equity-indexed annuities credit interest to the policyholder at a "participation rate" equal to a portion (ranging for existing policies from 25% to 100%) of the change in value of the S&P 500 Index. Keyport's equity-indexed annuities also provide a full guarantee of principal if held to term, plus interest at 0.85% annually. For each of the periods presented, the interest credited to equity-indexed policyholders related to the participation rate was offset by investment income recognized on the S&P 500 Index call options and futures, resulting in a 0.85% net credited rate. The decrease of $31.9 million in 1998 compared to 1997 primarily relates to a $48.6 million decrease resulting from a lower average interest credited rate, partially offset by a $16.7 million increase as a result of a higher level of average policyholder balances. Policyholder balances in 1997 averaged $11.9 billion (including $10.8 billion of fixed products and $1.1 billion of equity-indexed annuities). The average interest credited rate in 1997 was 4.99% (5.45% on fixed products and 0.85% on equity-indexed annuities). Average investments in the Company's general account (computed without giving effect to Statement of Financial Accounting Standards No. 115), including cash and cash equivalents in the Company's annuity operations, were $12.9 billion in 1999 compared to $12.8 billion in 1998 and $12.3 billion in 1997. The increase of $0.1 billion in 1999 compared to 1998 was primarily due to the reinvestment of portfolio earnings, partially offset by net redemptions and transfers to separate accounts. The increase of $0.5 billion in 1998 compared to 1997 was primarily due to the reinvestment of portfolio earnings. Net Realized Investment Gains (Losses) were $(42.2) million in 1999 compared to $2.4 million in 1998 and $25.9 million in 1997. The net realized investment losses in 1999 and net realized investment gains in 1998 included losses of $18.3 million and $28.3 million, respectively, for certain fixed maturity investments where the decline in value was determined to be other than temporary. Investment Advisory and Administrative Fees are based on the market value of assets managed for mutual funds, private capital management and institutional investors. Investment advisory and administrative fees were $268.5 million in 1999 compared to $237.7 million in 1998 and $217.9 million in 1997. These increases primarily reflect a higher level of average fee-based assets under management. Average fee-based assets under management were $48.4 billion in 1999 compared to $41.9 billion in 1998 and $37.2 billion in 1997. The increase during 1999 compared to 1998 resulted from market appreciation and net sales for the year ended December 31, 1999 and the full year impact of 1998 acquisitions. The increase during 1998 compared to 1997 resulted from acquisitions, market appreciation and net sales for the year ended December 31, 1998. Investment advisory and administrative fees were 0.55% of average fee-based assets under management in 1999, 0.57% in 1998 and 0.59% in 1997. The amount of fee-based assets under management are affected by product sales and redemptions, acquisitions, and changes in the market values of such assets under management. Fee-based assets under management and changes in such assets are set forth in the tables below (in billions). 29 Fee-Based Assets Under Management As of December 31 --------------------------- Mutual Funds: 1999 1998 1997 --------------------------- Intermediary-distributed $18.3 $17.9 $16.1 Direct-marketed 6.7 6.8 7.2 Closed-end 2.7 2.4 2.2 Variable annuity 2.1 1.5 1.3 - -------------------------------------------------------------------------------- 29.8 28.6 26.8 Private Capital Management 9.1 7.9 6.6 Institutional 12.5 11.4 5.3 - -------------------------------------------------------------------------------- Total fee-based assets under management* $51.4 $47.9 $38.7 ================================================================================ * As of December 31, 1999, 1998 and 1997, Keyport's insurance assets of $13.7 billion, $13.1 billion and $12.8 billion, respectively, bring total assets under management to $65.1 billion, $61.0 billion and $51.5 billion, respectively. Changes in Fee-Based Assets Under Management Year Ended December 31 --------------------------- 1999 1998 1997 --------------------------- Fee-based assets under management - beginning $47.9 $38.7 $35.9 Sales and reinvestments 11.9 8.5 6.6 Redemptions and withdrawals (10.6) (6.8) (6.6) Acquisitions -- 5.4 -- Market appreciation 2.2 2.1 2.8 - ------------------------------------------------------------------------------- Fee-based assets under management - ending $51.4 $47.9 $38.7 =============================================================================== Distribution and Service Fees are based on the market value of the Company's intermediary-distributed mutual funds. Distribution fees of 0.75% are generally earned on the average assets attributable to such funds sold with 12b-1 distribution fees and contingent deferred sales charges and service fees of 0.25% (net of amounts passed on to selling brokers) are generally earned on the total of such average mutual fund assets. These fees totaled $60.4 million in 1999 compared to $52.7 million in 1998 and $49.2 million in 1997. These increases in 1999 and 1998 were primarily attributable to the higher asset levels of mutual funds with 12b-1 distribution fees and contingent deferred sales charges. As a percentage of intermediary-distributed average mutual fund assets, distribution and service fees were approximately 0.35% in 1999, 0.32% in 1998 and 0.31% in 1997. Transfer Agency Fees are based on the market value of the assets managed in the Company's intermediary-distributed, direct-marketed and variable annuity mutual funds. Such fees were $51.7 million on average assets of $26.1 billion in 1999, $49.0 million on average assets of $24.9 billion in 1998 and $47.7 million on average assets of $24.1 billion in 1997. As a percentage of total average assets under management, transfer agency fees were approximately 0.20% in each of 1999, 1998 and 1997. Surrender Charges and Net Commissions are revenues earned on: a) the early withdrawal of annuity policyholder balances and redemptions of the intermediary-distributed mutual funds which were sold with 12b-1 distribution fees and contingent deferred sales charges; b) the distribution of the Company's intermediary-distributed mutual funds (net of the substantial portion of commissions that is passed on to the selling brokers); and c) the sales of non-proprietary 30 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report products in the Company's bank marketing businesses (net of commissions that are paid to the Company's client banks and brokers). Total surrender charges and net commissions were $36.5 million in 1999 compared to $33.7 million in 1998 and $36.1 million in 1997. Surrender charges on fixed and variable annuity withdrawals generally are assessed at declining rates applied to policyholder withdrawals during the first five to seven years of the contract; contingent deferred sales charges on mutual fund redemptions are assessed at declining rates on amounts redeemed generally during the first six years. Such charges totaled $24.5 million, $21.9 million and $21.4 million in 1999, 1998 and 1997, respectively. Total annuity withdrawals represented 14.7%, 13.2% and 11.6% of the total average annuity policyholder and separate account balances in 1999, 1998 and 1997, respectively. Net commissions were $12.0 million in 1999, $11.8 million in 1998 and $14.7 million in 1997. Separate Account Fees include mortality and expense charges earned on variable annuity and variable life policyholder balances. In addition, for certain separate institutional accounts, the difference between investment income and interest credited on these institutional accounts is included in separate account fees. These fees, which are primarily based on the market values of the assets in separate accounts supporting the contracts, were $33.5 million in 1999 compared to $20.6 million in 1998 and $17.1 million in 1997. Such fees represented 1.32%, 1.44% and 1.54% of average variable annuity, variable life and institutional separate account balances in 1999, 1998 and 1997, respectively. Operating Expenses primarily represent compensation, marketing and other general and administrative expenses. These expenses were $360.4 million in 1999 compared to $328.2 million in 1998 and $309.7 million in 1997. These increases were primarily due to the acquisitions of Crabbe Huson and Progress in the second half of 1998 and to increases in compensation and marketing expenses. Operating expenses expressed as a percent of average total assets under management were 0.59%, 0.60% and 0.63% in 1999, 1998 and 1997, respectively. Amortization of Deferred Policy Acquisition Costs relates to the costs of acquiring new business which vary with, and are primarily related to, the production of new annuity business. Such costs include commissions, costs of policy issuance and underwriting and selling expenses. Amortization was $97.4 million in 1999 compared to $77.4 million in 1998 and $86.4 million in 1997. The increase in amortization in 1999 compared to 1998 was primarily related to the increase in investment spread from the growth of business in force associated with fixed and indexed products and the increased sales of variable annuity products in 1999. The decrease in amortization in 1998 compared to 1997 was primarily related to revisions in investment spread assumptions, partially offset by increased amortization from the growth of business in force associated with increased sales of variable annuity products during 1998. Amortization expense represented 30.7%, 27.7% and 31.3% of investment spread and separate account fees in 1999, 1998 and 1997, respectively. Amortization of Deferred Distribution Costs relates to the distribution of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. Amortization was $40.3 million in 1999 compared to $40.1 million in 1998 and $34.2 million in 1997. Amortization of Intangible Assets relates to goodwill and certain identifiable intangible assets arising from business combinations accounted for as purchases. Amortization was $20.3 million in 1999 compared to $15.3 million in 1998 and $13.5 million in 1997. These increases in amortization in 1999 and 1998 were primarily attributable to acquisitions during 1998. Interest Expense, Net was $19.3 million in 1999 compared to $14.9 million in 1998 and $17.0 million in 1997. Interest expense primarily consists of interest on notes payable and interest on the Liberty Funds Group revolving credit facility which is utilized to finance sales commissions paid in connection with the distribution of mutual fund shares 31 sold with 12b-1 distribution fees and contingent deferred sales charges. Interest expense was net of interest income of $17.3 million, $8.4 million and $4.6 million in 1999, 1998 and 1997, respectively. Income Tax Expense was $55.1 million or 35.7% of pretax income in 1999 compared to $54.4 million or 30.4% of pretax income in 1998 and $62.6 million or 32.6% of pretax income in 1997. The significantly lower effective tax rates on pretax income in 1998 and 1997 were primarily attributable to reductions in the deferred tax asset valuation allowance on federal net operating loss carryforwards. Financial Condition Stockholders' Equity as of December 31, 1999 was $1.19 billion compared to $1.27 billion as of December 31, 1998. Net income in 1999 was $99.3 million and cash dividends on the Company's preferred and common stock totaled $6.3 million. Common stock totaling $7.3 million was issued in connection with the exercise of stock options and awards of nonvested stock. A decrease in accumulated other comprehensive income which consists of net unrealized investment losses, net of adjustments to deferred policy acquisition costs and income taxes, during the period decreased stockholders' equity by $185.3 million. Book Value Per Share amounted to $24.99 at December 31, 1999 compared to $27.41 at December 31, 1998. Excluding net unrealized gains (losses) on investments (computed pursuant to Statement of Financial Accounting Standards No. 115), book value per share amounted to $28.32 at December 31, 1999 and $26.82 at December 31, 1998. As of December 31, 1999, there were 47.5 million common shares outstanding compared to 46.4 million common shares outstanding as of December 31, 1998. Investments not including cash and cash equivalents, totaled $12.2 billion at December 31, 1999 compared to $12.6 billion at December 31, 1998. The Company manages the majority of its invested assets internally. The Company's general investment policy is to hold fixed maturity securities for long-term investment and, accordingly, the Company does not have a trading portfolio. To provide for maximum portfolio flexibility and appropriate tax planning, the Company classifies its entire portfolio of fixed maturity securities as "available for sale" and accordingly carries such investments at fair value. The Company's total investments at December 31, 1999 and 1998 reflected net unrealized (losses) gains of $(318.6) million and $105.3 million, respectively. Approximately $11.1 billion or 81.0% of the Company's general account investments at December 31, 1999 were rated by Standard & Poor's Corporation, Moody's Investors Service or under comparable statutory rating guidelines established by the National Association of Insurance Commissioners ("NAIC"). At December 31, 1999, the carrying value of investments in below investment grade securities totaled $1.2 billion or 8.9% of general account investments, including cash and cash equivalents in the Company's annuity operations, and certain separate account investments of $13.7 billion. Below investment grade securities generally provide higher yields and involve greater risks than investment grade securities because their issuers typically are more highly leveraged and more vulnerable to adverse economic conditions than investment grade issuers. In addition, the trading market for these securities may be more limited than for investment grade securities. The Company routinely reviews its portfolio of investment securities. The Company identifies monthly any investments that require additional monitoring, and carefully reviews the carrying value of such investments at least quarterly to determine whether specific investments should be placed on a nonaccrual basis and to determine declines in value that may be other than temporary. In making these reviews, the Company principally considers the adequacy of collateral (if any), compliance with contractual covenants, the borrower's recent financial performance, news reports, and other 32 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report externally generated information concerning the borrower's affairs. In the case of publicly traded fixed maturity securities, management also considers market value quotations if available. As of December 31, 1999 and 1998, the carrying value of fixed maturity securities that were non-income producing was $22.6 million and $30.0 million, respectively, which constituted 0.2% of investments in each year. Quantitative and Qualitative Disclosures About Market Risk MARKET-SENSITIVE INSTRUMENTS AND RISK MANAGEMENT Market risk is the risk that the Company will incur losses due to adverse changes in market rates and prices. The Company's primary market risk exposures are to changes in interest rates and to changes in equity prices. The active management of market risk is integral to the Company's operations. The Company may use the following approaches to manage its exposure to market risk within defined tolerance ranges: rebalance its existing asset and liability portfolios, change the character of future investment purchases, or use derivative instruments to modify the market risk characteristics of existing assets and liabilities or assets expected to be purchased. CORPORATE OVERSIGHT The Company generates substantial investable funds from its annuity operations. The Company believes that its fixed and indexed policyholder balances should be backed by investments, principally comprised of fixed maturities, which generate predictable rates of return. The Company does not have a specific target rate of return. Instead, its rates of return vary over time depending on the current interest rates, the slope of the yield curve and the excess at which fixed maturities are priced over the yield curve. The Company's portfolio strategy is designed to achieve acceptable risk-adjusted returns by effectively managing portfolio liquidity and credit quality. The Company administers and oversees the investment risk management processes primarily through its Investment Committee and its Board of Directors. The Investment Committee and Board of Directors provide executive oversight of investment activities. The Investment Committee is a committee consisting of the Chief Executive Officer and other members of senior management of the Company. The Investment Committee meets monthly to provide detailed oversight of investment risk, including market risk. The Company has investment guidelines that define the overall framework for managing market and other investment risks, including the accountability and control over these activities. In addition, the Company has specific investment policies that delineate the investment limits and strategies that are appropriate given the Company's liquidity, product and regulatory requirements. The Company monitors and manages its exposure to market risk through asset allocation limits, duration limits, and stress tests. Asset allocation limits place restrictions on the aggregate fair value which may be invested within an asset class. Duration limits on the aggregate investment portfolio, and, as appropriate, on individual components of the portfolio, place restrictions on the amount of interest rate risk that may be taken. Stress tests measure downside risk to fair value and earnings over longer time intervals and for adverse market scenarios. The day-to-day management of market risk within defined tolerance ranges occurs as portfolio managers buy and sell within their respective markets based upon the acceptable boundaries established by asset allocation, duration and other limits, including but not limited to credit and liquidity. INTEREST RATE RISK Interest rate risk is the risk that the Company will incur economic losses due to adverse changes in interest rates. This risk arises from the Company's primary activities, as the Company invests substantial funds in interest-sensitive 33 assets and also has interest-sensitive liabilities. The Company's asset/liability management emphasizes a conservative approach, which is oriented toward reducing downside risk in adverse markets, as opposed to maximizing spread in favorable markets. The Company manages the interest rate risk inherent in its assets relative to the interest rate risk inherent in its liabilities. One of the measures the Company uses to quantify this exposure is effective duration. Effective duration is a common measure for the price sensitivity of assets and liabilities to changes in interest rates. It measures the approximate percentage change in the market value of assets and liabilities when interest rates change by 100 basis points. This measure includes the impact of estimated changes in portfolio cash flows from features such as prepayments and bond calls. The effective duration of assets and related liabilities are produced using standard financial valuation techniques. At December 31, 1999 and 1998, the estimated difference between the Company's asset and liability duration was approximately 1.85 and 1.24, respectively. This positive duration gap indicates that the fair value of the Company's assets is somewhat more sensitive to interest rate movements than the fair value of its liabilities. The Company seeks to invest premiums and deposits to create future cash flows that will fund future benefits, claims, and expenses, and earn stable margins across a wide variety of interest rate and economic scenarios. In order to achieve this objective and limit its exposure to interest rate risk, the Company adheres to a philosophy of managing the effective duration of assets and related liabilities. The Company uses interest rate and total return swaps, futures and caps to reduce the interest rate risk resulting from effective duration mismatches between assets and liabilities. To the extent that actual results differ from the assumptions utilized, the Company's effective duration could be significantly impacted. Important assumptions include the timing of cash flows on mortgage-related assets and liabilities subject to policyholder surrenders. Additionally, the Company's calculation assumes that the current relationship between short-term and long-term interest rates (the term structure of interest rates) will remain constant over time. As a result, these calculations may not fully capture the impact of non-parallel changes in the term structure of interest rates and/or large changes in interest rates. The Company's potential exposure due to a 10% increase in prevailing interest rates from their December 31, 1999 and 1998 levels was a loss of $146.3 million and $87.0 million, respectively, in fair value of its fixed-rate assets that were not offset by a decrease in the fair value of its fixed-rate liabilities. The increase in potential exposure is primarily due to higher prevailing market interest rates and the increase in the positive duration gap. The Company expects that its exposure to loss as interest rate changes occur will be minimized and that actual losses will be less than the estimated potential loss due to the combination of asset/liability management strategies and flexibility in adjusting crediting rate levels. EQUITY PRICE RISK Equity price risk is the risk that the Company will incur economic losses due to adverse changes in a particular stock or stock index. At December 31, 1999 and 1998, the Company had approximately $37.9 million and $24.6 million, respectively, in common stocks and $701.1 million and $535.1 million, respectively, in other equity investments (primarily equity options and equity futures). At December 31, 1999 and 1998, the Company had $2.4 billion and $2.0 billion, respectively, in equity-indexed annuity liabilities which provide customers with contractually guaranteed participation in price appreciation of the Standard & Poor's 500 Composite Price Index ("S&P 500 Index"). The Company purchases equity-indexed options and futures to hedge the risk associated with the price appreciation component of equity-indexed annuity liabilities. 34 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report The Company manages the equity risk inherent in its assets relative to the equity risk inherent in its liabilities by conducting detailed computer simulations that model its S&P 500 Index derivatives and its equity-indexed annuity liabilities under stress-test scenarios in which both the index level and the index option implied volatility are varied through a wide range. Implied volatility is a value derived from standard option valuation models representing an implicit forecast of the standard deviation of the returns on the underlying asset over the life of the option or future. The fair values of S&P 500 Index linked securities, derivatives, and annuities are produced using standard derivative valuation techniques. The derivatives portfolio is constructed to maintain acceptable interest margins under a variety of possible future S&P 500 Index levels and option and futures cost environments. In order to achieve this objective and limit its exposure to equity price risk, the Company measures and manages these exposures using methods based on the fair value of assets and the price appreciation component of related liabilities. The Company uses derivatives, including futures, options and total return swaps to modify its net exposure to fluctuations in the S&P 500 Index. Based upon the information and assumptions the Company uses in its stress-test scenarios at December 31, 1999, management estimates that if the S&P 500 Index decreases by 10%, the net fair value of its assets and liabilities described above would decrease by approximately $0.2 million. Based upon the information and assumptions the Company used in its stress-test scenarios at December 31, 1998, management estimated that if the S&P 500 Index increased by 10%, the net fair value of its assets and liabilities described above would have decreased by approximately $2.0 million. If option implied volatilities were to increase by 100 basis points, management estimates that the net fair value of its assets and liabilities would have decreased by approximately $5.2 million and $6.0 million as of December 31, 1999 and 1998, respectively. The simulations do not consider the effects of other changes in market conditions that could accompany changes in the equity option and futures markets including the effects of changes in implied dividend yields, interest rates, and equity-indexed annuity policy surrenders. Derivatives As a component of its investment strategy and to reduce its exposure to interest rate risk, the Company utilizes interest rate and total return swap agreements and interest rate cap agreements to match assets more closely to liabilities. Interest rate swap agreements are agreements to exchange with a counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an underlying principal balance (notional principal) to hedge against interest rate changes. The Company currently utilizes interest rate swap agreements to reduce asset duration and to better match interest earned on longer-term fixed-rate assets with interest credited to policyholders. A total return swap agreement is an agreement to exchange payments based upon an underlying notional balance and changes in variable rate and total return indices. The Company utilizes total return swap agreements to hedge its obligations related to certain separate account liabilities. The Company had 67 and 42 outstanding swap agreements with an aggregate notional principal amount of $3.4 billion and $2.4 billion as of December 31, 1999 and 1998, respectively. Interest rate cap agreements are agreements with a counterparty which require the payment of a premium for the right to receive payments for the difference between the cap interest rate and a market interest rate on specified future dates based on an underlying principal balance (notional principal) to hedge against rising interest rates. The Company had interest rate cap agreements with an aggregate notional amount of $50.0 million and $250.0 million as of December 31, 1999 and 1998, respectively. With respect to the Company's equity-indexed annuities and certain separate account liabilities, the Company buys call options, futures and certain total return swap agreements on the S&P 500 Index to hedge its obligations to provide 35 returns based upon this index. The Company had call options with a carrying value of $701.1 million and $535.7 million as of December 31, 1999 and 1998, respectively. The Company had futures with a carrying value of $(0.6) million as of December 31, 1998. The Company had total return swap agreements with a carrying value of $37.8 million as of December 31, 1999. There are risks associated with some of the techniques the Company uses to match its assets and liabilities. The primary risk associated with swap, cap and call option agreements is counterparty non-performance. The Company believes that the counterparties to its swap, cap and call option agreements are financially responsible and that the counterparty risk associated with these transactions is minimal. Futures contracts trade on organized exchanges and therefore have minimal credit risk. In addition, swap and cap agreements have interest rate risk and call options, futures and certain total return swap agreements have stock market risk. These swap and cap agreements hedge fixed-rate assets and the Company expects that any interest rate movements that adversely affect the market value of swap and cap agreements would be offset by changes in the market values of such fixed rate assets. However, there can be no assurance that these hedges will be effective in offsetting the potential adverse effects of changes in interest rates. Similarly, the call options, futures and certain total return swap agreements hedge the Company's obligations to provide returns on equity-indexed annuities and certain separate account liabilities based upon the S&P 500 Index, and the Company believes that any stock market movements that adversely affect the market value of S&P 500 Index call options, futures and certain total return swap agreements would be substantially offset by a reduction in policyholder and certain separate account liabilities. However, there can be no assurance that these hedges will be effective in offsetting the potentially adverse effects of changes in S&P 500 Index levels. The Company's profitability could be adversely affected if the value of its swap and cap agreements increase less than (or decrease more than) the change in the market value of its fixed rate assets and/or if the value of its S&P 500 Index call options, futures and certain total return swap agreements increase less than (or decrease more than) the value of the guarantees made to equity-indexed and certain separate account policyholders. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting for derivative instruments and the derivative portion of certain other contracts that have similar characteristics by requiring that an entity recognize those instruments on the balance sheet at fair value. This statement also requires a new method of accounting for hedging transactions, prescribes the type of items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. Upon adoption, the Company will be required to record a cumulative effect adjustment to reflect this accounting change. At this time, the Company has not completed its analysis and evaluation of the requirements and impact of this statement. Liquidity The Company is a holding company whose liquidity needs include the following: (i) operating expenses; (ii) debt service; (iii) dividends on preferred stock and common stock; (iv) acquisitions; and (v) working capital where needed by its operating subsidiaries. The Company's principal sources of cash are dividends from its operating subsidiaries, and, in the case of funding for acquisitions and certain long-term capital needs of its subsidiaries, long-term borrowings and offerings of preferred and common stock. In connection with the Crabbe Huson acquisition, the Company entered into a $100.0 million revolving credit facility with a commercial bank (the "Bridge Facility"). The Bridge Facility matured on March 36 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report 30, 1999 and bore interest at a per annum rate equal to LIBOR plus twenty-five basis points. The Company borrowed $90.0 million under the Bridge Facility to finance the acquisition of Crabbe Huson. In November 1998, the Company issued $450.0 million of senior debt securities. The offering consisted of $300.0 million of 6 3/4% 10-year notes due November 15, 2008 and $150.0 million of 7 5/8% 30-year debentures due November 15, 2028. The proceeds were utilized to repay the $90.0 million borrowed under the Bridge Facility, to repay notes payable to affiliates of $229.0 million and for general corporate purposes. The Company also has a $150.0 million revolving credit facility (the "Facility") which is utilized to finance sales commissions paid in connection with the distribution of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. The Facility was established in April 1999 and replaced a $60.0 million revolving credit facility which was used for the same purpose. This five year Facility is secured by such 12b-1 distribution fees and contingent deferred sales charges. Interest accrues on the outstanding borrowings under the Facility at a rate determined by sales of highly rated commercial paper backed in part by the security interest in such fees and charges. At December 31, 1999, the interest paid on borrowings under the Facility was at the rate of 6.13% per annum. Current Rhode Island insurance law applicable to Keyport permits the payment of dividends or distributions, which, together with dividends and distributions paid during the preceding 12 months, do not exceed the lesser of (i) 10% of Keyport's statutory surplus as of the preceding December 31 or (ii) Keyport's statutory net gain from operations for the preceding fiscal year. Any proposed dividend in excess of this amount is called an "extraordinary dividend" and may not be paid until it is approved by the Commissioner of Insurance of the State of Rhode Island. As of December 31, 1999, the amount of dividends that Keyport could pay without such approval was $57.8 million. Keyport paid dividends totaling $30.0 million during 1999. Future regulatory changes and credit agreements may create additional limitations on the ability of the Company's subsidiaries to pay dividends. Based upon the historical cash flow of the Company, the Company's current financial condition and the Company's expectation that there will not be a material adverse change in the results of operations of the Company and its subsidiaries during the next twelve months, the Company believes that cash flow provided by operating activities over this period will provide sufficient liquidity for the Company to meet its working capital, capital investment and other operational cash needs, its debt service obligations, its obligations to pay dividends on the preferred stock and its intentions to pay dividends on the common stock. The Company may require external sources of liquidity in order to finance material acquisitions where the purchase price is not paid in equity. Each of the Company's business segments has its own liquidity needs and financial resources. In the Company's annuity insurance operations, liquidity needs and financial resources pertain to the management of the general account assets and policyholder balances. In the Company's asset management business, liquidity needs and financial resources pertain to the investment management and distribution of mutual funds, private capital management and institutional accounts. The Company expects that, based upon their historical cash flow and current prospects, these operating subsidiaries will be able to meet their liquidity needs from internal sources and, in the case of LFG, from its credit facility used to finance sales of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. Keyport uses cash for the payment of annuity and life insurance benefits, operating expenses and policy acquisition costs, and the purchase of investments. Keyport generates cash from annuity premiums and deposits, net investment income, and from the sales and maturities of fixed investments. Annuity premiums, maturing investments and net investment income have historically been sufficient to meet Keyport's cash requirements. Keyport monitors cash and cash 37 equivalents in an effort to maintain sufficient liquidity and has strategies in place to maintain sufficient liquidity in changing interest rate environments. Consistent with the nature of its obligations, Keyport has invested a substantial amount of its general account assets in readily marketable securities. As of December 31, 1999, $10.3 billion, or 75.6%, of Keyport's general account investments are considered readily marketable. To the extent that unanticipated surrenders cause Keyport to sell for liquidity purposes a material amount of securities prior to their maturity, such surrenders could have a material adverse effect on the Company. Although no assurances can be given, Keyport believes that liquidity to fund anticipated withdrawals would be available through incoming cash flow and the sale of short-term or floating-rate instruments, thereby precluding the sale of fixed maturity investments in a potentially unfavorable market. In addition, the Company's fixed-rate products incorporate surrender charges to encourage persistency and to make the cost of its policyholder balances more predictable. Approximately 76.0% of the Company's fixed annuity policyholder balances were subject to surrender charges or restrictions as of December 31, 1999. Year 2000 The Year 2000 issue relates to computer programs that use two digits to identify a year in the date field and therefore may not be able to correctly process dates after December 31, 1999. As the Company relies significantly on computer systems and applications in its operations, it completed a remediation plan that included repairing or replacing programs that were identified as not being Year 2000 compliant. As a result, the Company did not experience any significant Year 2000 problems with respect to computer systems, application programs, and non-information technology systems. In addition, the Company did not experience any significant disruptions related to interactions with third parties. The Company is continuing to closely monitor critical systems and applications to ensure that no unexpected Year 2000 issues develop. There can be no assurance that there will be no such issues. During 1999, the external cost of the Year 2000 project was approximately $1.9 million, which was primarily related to consultants and replacement hardware and software. Such external costs for 1998 were approximately $2.5 million. The Company has not segregated payroll or other internal costs specifically devoted to its efforts to address Year 2000 issues. The costs of the Year 2000 project have been funded through operating cash flows and have been expensed as incurred. In the opinion of management, any additional costs of addressing the Year 2000 issue are not expected to have a material adverse effect on the Company's financial condition or its results of operations. Effects of Inflation Inflation has not had a material effect on the Company's consolidated results of operations to date. The Company manages its investment portfolio in part to reduce its exposure to interest rate fluctuations. In general, the market value of the Company's fixed maturity portfolio increases or decreases in inverse relationship with fluctuations in interest rates, and the Company's net investment income increases or decreases in direct relationship with interest rate changes. For example, if interest rates decline, the Company's fixed maturity investments generally will increase in market value, while net investment income will decrease as fixed maturity investments mature or are sold and the proceeds are reinvested at reduced rates. Inflation may result in increased operating expenses that may not be readily recoverable in the prices of the services charged by the Company. Forward-Looking Statements The Company desires to take advantage of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Investors are cautioned that all statements, trend analyses and other information contained 38 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report in this report or in any of the Company's filings under Section 13 or 15 (d) of the Securities Exchange Act of 1934 (the "Exchange Act"), relative to the markets for the Company's products and trends in the Company's operations or financial results, as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend" and other similar expressions, constitute forward-looking statements under the Reform Act. These forward-looking statements are subject to known and unknown risks, uncertainties and other factors, many of which are beyond the Company's control, that may cause actual results to be materially different from those contemplated by the forward-looking statements. Such factors include, among other things: (1) general economic conditions and market factors, such as prevailing interest rate levels, stock market performance and fluctuations in the market for retirement-oriented savings products and investment management products, which may adversely affect the ability of the Company to sell its products and services and the market value of the Company's investments and assets under management and, therefore, the portion of its revenues that are based on a percentage of assets under management; (2) the Company's ability to manage effectively its investment spread (i.e. the amount by which investment income exceeds interest credited to annuity and life insurance policyholders) as a result of changes in interest rates and crediting rates to policyholders, market conditions and other factors (the Company's results of operations and financial condition are significantly dependent on the Company's ability to manage effectively its investment spread); (3) levels of surrenders, withdrawals and net redemptions of the Company's retirement-oriented insurance products and investment management products; (4) relationships with investment management clients, including levels of assets under management; (5) the ability of the Company to manage effectively certain risks with respect to its investment portfolio, including risks relating to holding below investment grade securities and the ability to dispose of illiquid and/or restricted securities at desired times and prices, and the ability to manage and hedge against interest rate changes through asset/liability management techniques; (6) competition in the sale of the Company's products and services, including the Company's ability to establish and maintain relationships with distributors of its products; (7) changes in financial ratings of Keyport or those of its competitors; (8) the Company's ability to attract and retain key employees, including senior officers, portfolio managers and sales executives; (9) the impact of and compliance by the Company with existing and future regulation, including restrictions on the ability of certain subsidiaries to pay dividends and any obligations of the Company under any guaranty fund assessment laws; (10) changes in applicable tax laws which may affect the relative tax advantages and attractiveness of some of the Company's products; (11) the result of any litigation or legal proceedings involving the Company; (12) changes in generally accepted accounting principles and the impact of accounting principles and pronouncements on the Company's financial condition and results of operations; (13) changes in the Company's senior debt ratings; and (14) the other risk factors or uncertainties contained from time to time in any document incorporated by reference in this report or otherwise filed by the Company under the Exchange Act. Given these uncertainties, prospective investors are cautioned not to place undue reliance on such forward-looking statements and no assurances can be given that the estimates and expectations reflected in such statements will be achieved. 39 - -------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Consolidated Balance Sheets ($ in millions)
December 31 1999 1998 - --------------------------------------------------------------------------------------------------- Assets Assets: Investments $12,195.1 $12,598.3 Cash and cash equivalents 1,232.6 984.1 Accrued investment income 162.0 161.0 Deferred policy acquisition costs 739.2 407.6 Deferred distribution costs 153.7 130.2 Intangible assets 282.0 292.8 Other assets 244.8 179.6 Separate account assets 3,363.1 1,765.5 - --------------------------------------------------------------------------------------------------- $18,372.5 $16,519.1 =================================================================================================== Liabilities and Stockholders' Equity Liabilities: Policyholder balances $12,109.6 $12,504.1 Notes payable 552.0 486.4 Payable for investments purchased and loaned 754.9 240.4 Other liabilities 453.1 278.4 Separate account liabilities 3,301.0 1,723.2 - --------------------------------------------------------------------------------------------------- Total liabilities 17,170.6 15,232.5 - --------------------------------------------------------------------------------------------------- Series A redeemable convertible preferred stock, par value $.01; authorized, issued and outstanding 324,759 shares in 1999 and 1998 16.0 15.3 - --------------------------------------------------------------------------------------------------- Stockholders' Equity: Common stock, $.01 par value, authorized 100,000,000 shares; issued and outstanding 47,462,995 shares in 1999 and 46,384,015 shares in 1998 0.5 0.5 Additional paid-in capital 923.0 901.5 Retained earnings 425.2 346.4 Accumulated other comprehensive income (loss) (158.1) 27.2 Unearned compensation (4.7) (4.3) - --------------------------------------------------------------------------------------------------- Total stockholders' equity 1,185.9 1,271.3 - --------------------------------------------------------------------------------------------------- $18,372.5 $16,519.1 ===================================================================================================
See accompanying notes to consolidated financial statements. 40 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report Consolidated Income Statements (in millions, except per share data)
Year Ended December 31 1999 1998 1997 - --------------------------------------------------------------------------------- Investment income $ 810.3 $ 820.9 $ 853.1 Interest credited to policyholders (526.6) (562.2) (594.1) - --------------------------------------------------------------------------------- Investment spread 283.7 258.7 259.0 - --------------------------------------------------------------------------------- Net realized investment gains (losses) (42.2) 2.4 25.9 - --------------------------------------------------------------------------------- Fee income: Investment advisory and administrative fees 268.5 237.7 217.9 Distribution and service fees 60.4 52.7 49.2 Transfer agency fees 51.7 49.0 47.7 Surrender charges and net commissions 36.5 33.7 36.1 Separate account fees 33.5 20.6 17.1 - --------------------------------------------------------------------------------- Total fee income 450.6 393.7 368.0 - --------------------------------------------------------------------------------- Expenses: Operating expenses (360.4) (328.2) (309.7) Amortization of deferred policy acquisition costs (97.4) (77.4) (86.4) Amortization of deferred distribution costs (40.3) (40.1) (34.2) Amortization of intangible assets (20.3) (15.3) (13.5) Interest expense, net (19.3) (14.9) (17.0) - --------------------------------------------------------------------------------- Total expenses (537.7) (475.9) (460.8) - --------------------------------------------------------------------------------- Pretax income 154.4 178.9 192.1 Income tax expense (55.1) (54.4) (62.6) - --------------------------------------------------------------------------------- Income before extraordinary item 99.3 124.5 129.5 Extraordinary loss on extinguishment of debt -- (9.7) -- - --------------------------------------------------------------------------------- Net income $ 99.3 $ 114.8 $ 129.5 ================================================================================= Net income per share - basic: Income before extraordinary item $ 2.11 $ 2.72 $ 2.94 ================================================================================= Net income $ 2.11 $ 2.51 $ 2.94 ================================================================================= Net income per share - assuming dilution: Income before extraordinary item $ 2.07 $ 2.63 $ 2.77 ================================================================================= Net income $ 2.07 $ 2.42 $ 2.77 =================================================================================
See accompanying notes to consolidated financial statements. 41 Consolidated Statements of Stockholders' Equity (in millions)
Accumulated Additional Other Total Common Paid-In Retained Comprehensive Unearned Stockholders' Stock Capital Earnings Income (Loss) Compensation Equity - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1996 $ 0.3 $ 835.3 $ 141.4 $ 74.4 $ -- $ 1,051.4 --------- Comprehensive income: Net income 129.5 129.5 Other comprehensive income, net of taxes: Net unrealized gains on securities 8.6 8.6 --------- Total comprehensive income 138.1 --------- 3 for 2 common stock split effected in the form of a 50 percent stock dividend 0.1 (0.1) -- Common stock issued for acquisition 2.5 2.5 Effect of stock-based compensation plans 14.8 (2.2) 12.6 Accretion to face value of preferred stock (0.8) (0.8) Common stock dividends 13.6 (17.6) (4.0) Preferred stock dividends (0.9) (0.9) - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1997 0.4 866.2 251.5 83.0 (2.2) 1,198.9 --------- Comprehensive income: Net income 114.8 114.8 Other comprehensive income, net of taxes: Net unrealized losses on securities (55.8) (55.8) --------- Total comprehensive income 59.0 --------- Common stock issued for acquisition 8.9 8.9 Effect of stock-based compensation plans 0.1 13.2 (2.1) 11.2 Accretion to face value of preferred stock (0.8) (0.8) Common stock dividends 13.2 (18.2) (5.0) Preferred stock dividends (0.9) (0.9) - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1998 0.5 901.5 346.4 27.2 (4.3) 1271.3 Comprehensive loss: Net income 99.3 99.3 Other comprehensive loss, net of taxes: Net unrealized losses on securities (185.3) (185.3) --------- Total comprehensive loss (86.0) --------- Effect of stock-based compensation plans 8.1 (0.4) 7.7 Accretion to face value of preferred stock (0.8) (0.8) Common stock dividends 13.4 (18.8) (5.4) Preferred stock dividends (0.9) (0.9) - ------------------------------------------------------------------------------------------------------------------------------- Balance, December 31, 1999 $ 0.5 $ 923.0 $ 425.2 $ (158.1) $ (4.7) $1,185.9 ===============================================================================================================================
See accompanying notes to consolidated financial statements. 42 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report Consolidated Statements of Cash Flows (in millions)
Year Ended December 31 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income $ 99.3 $ 114.8 $ 129.5 Adjustments to reconcile net income to net cash provided by operating activities: Extraordinary loss on extinguishment of debt, net of tax -- 9.7 -- Depreciation and amortization 77.4 81.6 74.4 Interest credited to policyholders 526.6 562.2 594.1 Net realized investment (gains) losses 42.2 (2.4) (25.9) Net amortization on investments 79.5 75.4 29.9 Change in deferred policy acquisition costs (17.4) (24.2) 1.4 Change in current and deferred income taxes 62.9 (3.8) 71.9 Net change in other assets and liabilities (114.9) (124.6) (19.9) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 755.6 688.7 855.4 - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Investments purchased available for sale (4,993.3) (6,789.0) (4,548.4) Investments sold available for sale 4,322.7 5,406.0 2,563.5 Investments matured available for sale 823.2 1,273.5 1,531.6 Increase in policy loans, net (20.7) (24.1) (21.9) Decrease in mortgage loans, net 43.0 5.5 6.4 Acquisitions, net of cash acquired -- (98.7) -- Other (37.3) (9.7) (73.9) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) investing activities 137.6 (236.5) (542.7) - ----------------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Withdrawals from policyholder accounts (2,108.9) (1,690.0) (1,320.8) Deposits to policyholder accounts 894.4 1,225.0 950.5 Securities lending 505.0 (510.6) 495.2 Repayment of notes payable to affiliates -- (244.0) -- Change in notes payable 65.6 459.9 (26.0) Exercise of stock options 5.5 7.4 7.6 Dividends paid (6.3) (5.9) (4.9) - ----------------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (644.7) (758.2) 101.6 - ----------------------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash and cash equivalents 248.5 (306.0) 414.3 Cash and cash equivalents at beginning of year 984.1 1,290.1 875.8 - ----------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $1,232.6 $ 984.1 $1,290.1 ===================================================================================================================================
Noncash Financing Activities: Noncash financing activities relate to dividends paid in common stock, primarily to an affiliate of Liberty Mutual, in the amount of $13.4 million, $13.2 million and $13.6 million in 1999, 1998 and 1997, respectively, pursuant to the Company's dividend reinvestment plan. See accompanying notes to consolidated financial statements. 43 - -------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. Accounting Policies Organization Liberty Financial Companies, Inc. (the "Company") is an asset accumulation and management company providing investment management products and retirement-oriented insurance products through multiple distribution channels. The Company is a majority owned indirect subsidiary of Liberty Mutual Insurance Company ("Liberty Mutual"). Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries, including Colonial Management Associates, Inc. ("Colonial"), Independent Holdings, Inc. ("Independent"), Keyport Life Insurance Company ("Keyport"), Liberty Asset Management Company ("LAMCO"), Liberty Funds Group LLC ("LFG"), Newport Pacific Management, Inc. ("Newport"), Stein Roe & Farnham Incorporated ("Stein Roe"), and, from the date of acquisition: Crabbe Huson Group, Inc. ("Crabbe Huson") and Progress Investment Management Company ("Progress"). All significant intercompany balances and transactions have been eliminated. Certain prior year amounts have been reclassified to conform to the current year's presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Investments Investments in debt and equity securities classified as available for sale are carried at fair value, and unrealized gains and losses (net of adjustments to deferred policy acquisition costs and income taxes) are reported as a separate component of stockholders' equity. The cost basis of securities is adjusted for declines in value that are determined to be other than temporary. Realized investment gains and losses are calculated on a first-in, first-out basis, net of adjustment for amortization of deferred policy acquisition costs. For the mortgage-backed bond portion of the fixed maturity investment portfolio, the Company recognizes income using a constant effective yield based on anticipated prepayments over the estimated economic life of the security. When actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments; and any resulting adjustment is included in investment income. Mortgage loans are carried at amortized cost. Policy loans are carried at the unpaid principal balances plus accrued interest. Partnerships are generally accounted for by using the equity method of accounting. Partnership investments totaled $180.7 million and $126.8 million at December 31, 1999 and 1998, respectively. Derivatives The Company uses interest rate swap and cap agreements to manage its interest rate risk and call options and futures on the Standard & Poor's 500 Composite Stock Price Index ("S&P 500 Index") to hedge its obligations to provide returns based upon this index. The Company utilizes interest rate swap agreements ("swap agreements") and interest rate cap agreements ("cap agreements") to match assets more closely to liabilities. Swap agreements are agreements to exchange with a counterparty interest rate payments of differing character (e.g., fixed-rate payments exchanged for variable-rate payments) based on an 44 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report underlying principal balance (notional principal) to hedge against interest rate changes. The Company currently utilizes swap agreements to reduce asset duration and to better match interest rates earned on longer-term fixed rate assets with interest rates credited to policyholders. The Company also utilizes total return swap agreements to hedge its obligations related to certain separate account liabilities. A total return swap agreement is an agreement to exchange payments based upon an underlying notional balance and changes in variable rate and total return indices. Cap agreements are agreements with a counterparty which require the payment of a premium for the right to receive payments for the difference between the cap interest rate and a market interest rate on specified future dates based on an underlying principal balance (notional principal) to hedge against rising interest rates. Hedge accounting is applied after the Company determines that the items to be hedged expose it to interest rate or price risk, designates the instruments as hedges and assesses whether the instruments reduce the indicated risks through the measurement of changes in the value of the instruments and the items being hedged at both inception and throughout the hedge period. From time to time, interest rate swap agreements, cap agreements, call options and futures are terminated. If the terminated position was accounted for as a hedge, realized gains or losses are deferred and amortized over the remaining lives of the hedged assets or liabilities. Conversely, if the terminated position was not accounted for as a hedge, or the assets and liabilities that were hedged no longer exist, the position is "marked to market" and realized gains or losses are immediately recognized in income. The net differential to be paid or received on interest rate swap agreements is recognized as a component of net investment income. The net differential to be paid or received on total return swap agreements is recognized as a component of separate account fees. Premiums paid for interest rate cap agreements are deferred and amortized to net investment income on a straight-line basis over the terms of the agreements. The unamortized premium is included in other invested assets. Amounts earned on interest rate cap agreements are recorded as an adjustment to net investment income. Interest rate swap agreements and cap agreements hedging investments designated as available for sale are adjusted to fair value with the resulting unrealized gains and losses included in stockholders' equity. Total return swap agreements hedging certain separate account liabilities are adjusted to fair value with the resulting unrealized gains and losses included in stockholders' equity. Premiums paid on call options are amortized to net investment income over the terms of the contracts. The call options are included in other invested assets and are carried at amortized cost plus intrinsic value, if any, of the call options as of the valuation date. Changes in intrinsic value of the call options are recorded as an adjustment to interest credited to policyholders. Futures are carried at fair value and require daily cash settlement. Changes in the fair value of futures that qualify as hedges are deferred and recognized as an adjustment to the hedged asset or liability. Call options and futures that do not qualify as hedges are carried at fair value; changes in value are immediately recognized in income. In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for Derivative Instruments and Hedging Activities." This statement standardizes the accounting for derivative instruments and the derivative portion of certain other contracts that have similar characteristics by requiring that an entity recognize those instruments on the balance sheet at fair value. This statement also requires a new method of accounting for hedging transactions, prescribes the type of items and transactions that may be hedged, and specifies detailed criteria to be met to qualify for hedge accounting. In June 1999, the FASB issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 defers the effective date of SFAS No. 133 until fiscal years beginning after June 15, 2000. Upon adoption, the Company will be required to record a cumulative effect adjustment to reflect this 45 accounting change. At this time, the Company has not completed its analysis and evaluation of the requirements and impact of this statement. Fee Income Fees from asset management and investment advisory services and from transfer agent, bookkeeping, 12b-1 distribution and service fees are recognized as revenues when services are provided. Revenues from fixed and variable annuities and single premium whole life policies include mortality charges, surrender charges, policy fees and contract fees and are recognized when earned under the respective contracts. Net commission revenue is recognized on the trade date. Deferred Policy Acquisition Costs Policy acquisition costs are the costs of acquiring new business which vary with, and are primarily related to, the production of new annuity business. Such costs include commissions, costs of policy issuance and underwriting and selling expenses. These costs are deferred and amortized in relation to the present value of estimated gross profits from mortality, investment spread and expense margins. Deferred policy acquisition costs are adjusted for amounts relating to unrealized gains and losses on fixed maturity securities the Company has designated as available for sale. This adjustment, net of tax, is included with the change in net unrealized investment gains or losses that is credited or charged directly to stockholders' equity. Deferred policy acquisition costs were increased by $235.7 million at December 31, 1999 and decreased by $66.3 million at December 31, 1998, relating to this adjustment. Deferred Distribution Costs Sales commissions and other direct distribution costs related to the sale of Company-sponsored intermediary-distributed mutual funds which charge 12b-1 distribution fees and contingent deferred sales commissions are recorded as deferred distribution costs. Amortization is provided on a straight-line basis over periods up to six years to match the estimated period in which the associated fees will be earned. Contingent deferred sales charges (back-end loads) received are applied to deferred distribution costs to the extent of the estimated unamortized portion of such costs, with the remainder recognized as additional distribution fee income. Intangible Assets Intangible assets consist of goodwill and certain identifiable intangible assets arising from business combinations accounted for as a purchase. Amortization is provided on a straight-line basis over estimated lives of the acquired intangibles which range from 5 to 30 years. The Company evaluates the carrying value of goodwill and other intangible assets when events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Any impairments would be recognized when the expected future cash flows derived from such goodwill and other intangible assets are less than their carrying value. Separate Account Assets and Liabilities The assets and liabilities resulting from variable annuities, variable life policies and certain separate institutional accounts are segregated in separate accounts. Separate account assets consist principally of investments in mutual funds and fixed maturities and are carried at fair value. Investment income and changes in mutual fund asset values are allocated to the policyholders, and therefore, do not affect the operating results of the Company. The Company earns separate account fees for providing administrative services and bearing the mortality risk related to these contracts. The difference between investment income and interest credited on the institutional accounts is reported as separate account fee income. Keyport 46 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report also classified as separate account assets investments in Company-sponsored mutual funds and other investments of $62.2 million and $42.3 million at December 31, 1999 and 1998, respectively. Policyholder Balances Policyholder balances consist of deposits received plus interest credited, less accumulated policyholder charges, assessments, and withdrawals related to deferred annuities and single premium whole life policies. Policy benefits that are charged to expense include benefit claims incurred in the period in excess of related policy account balances. Stock Options 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 employee stock options. 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 grant, no compensation expense is recognized. Income Taxes Effective July 18, 1997, the Company and its non-life insurance subsidiaries file a consolidated federal income tax return and the Company's life insurance subsidiaries file separate life company returns. Prior to July 18, 1997, the Company was included in the consolidated federal income tax return filed by Liberty Mutual. Income taxes have been provided using the liability method in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes," and, for periods prior to July 18, 1997, were calculated as if the Company filed its own consolidated income tax return. Earnings Per Share Basic earnings per share is calculated using income available to common shareholders divided by the weighted average of common shares outstanding during the year. Diluted earnings per share is similar to basic earnings per share except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Cash Equivalents Short-term investments having an original maturity of three months or less are classified as cash equivalents. 2. ACQUISITIONS On August 31, 1998, the Company acquired certain assets and assumed certain liabilities of Progress Investment Management Company, a registered investment adviser to institutional accounts with approximately $2.1 billion in assets under management as of that date. On September 30, 1998, the Company acquired certain assets and assumed certain liabilities of The Crabbe Huson Group, Inc., a registered investment adviser with approximately $3.3 billion in assets under management as of that date. The combined purchase price for these transactions totaled approximately $104.0 million, $95.1 million in cash and $8.9 million in the Company's common stock. In addition, the Company has agreed to pay additional cash and common stock over four years, contingent upon the attainment of certain earnings objectives. In 1999, the Company paid $4.0 million of such contingent payments. An additional $67.5 million can be paid as contingent payments if earnings objectives are attained. These transactions were accounted for as purchases and resulted in the recording of goodwill and other intangible assets of approximately $105.6 million. 47 3. INVESTMENTS Investments, which largely pertain to the Company's annuity insurance operations, were comprised of the following (in millions): December 31 1999 1998 - -------------------------------------------------------------------------------- Fixed maturities $10,516.1 $11,277.2 Equity securities 37.9 24.6 Policy loans 599.5 578.9 Other invested assets 1,041.6 717.6 - -------------------------------------------------------------------------------- $12,195.1 $12,598.3 ================================================================================ As of December 31, 1999, the Company did not have a material concentration of financial instruments in a single investee, industry or geographic location and no investment in any person or its affiliates (other than bonds issued by agencies of the United States government) exceeded ten percent of stockholders' equity. As of December 31, 1999, $1.2 billion of fixed maturities were below investment grade. These securities represented 8.9% of general account investments, including cash and cash equivalents in the Company's annuity operations, and certain separate account assets. Fixed Maturities The amortized cost, gross unrealized gains and losses and fair value of fixed maturity securities are as follows (in millions):
Gross Gross Amortized Unrealized Unrealized Fair December 31, 1999 Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- U.S. Treasury securities $ 70.0 $ 4.2 $ (5.0) $ 69.2 Mortgage backed securities of U.S. government corporations and agencies 1,166.5 15.6 (29.5) 1,152.6 Debt securities issued by foreign governments 169.4 17.8 (9.0) 178.2 Corporate securities 5,274.4 96.9 (283.3) 5,088.0 Other mortgage backed securities 2,325.7 21.8 (94.8) 2,252.7 Asset backed securities 1,794.8 5.9 (67.9) 1,732.8 Senior secured loans 45.6 -- (3.0) 42.6 - ----------------------------------------------------------------------------------------------- Total fixed maturities $10,846.4 $162.2 $(492.5) $10,516.1 =============================================================================================== Gross Gross Amortized Unrealized Unrealized Fair December 31, 1998 Cost Gains Losses Value - ----------------------------------------------------------------------------------------------- U.S. Treasury securities $ 90.8 $ 3.1 $ (0.2) $ 93.7 Mortgage backed securities of U.S. government corporations and agencies 940.1 28.4 (2.9) 965.6 Debt securities issued by foreign governments 251.1 9.4 (16.2) 244.3 Corporate securities 5,396.3 185.1 (156.3) 5,425.1 Other mortgage backed securities 2,286.6 65.1 (19.5) 2,332.2 Asset backed securities 1,942.0 25.9 (16.5) 1,951.4 Senior secured loans 267.8 1.2 (4.1) 264.9 - ----------------------------------------------------------------------------------------------- Total fixed maturities $11,174.7 $318.2 $(215.7) $11,277.2 ===============================================================================================
48 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report At December 31, 1999 and 1998, gross unrealized gains on equity securities, interest rate cap agreements, investments in separate accounts and other invested assets aggregated $32.4 million and $7.8 million, and gross unrealized losses aggregated $11.1 million and $3.6 million, respectively. Deferred tax liabilities for the Company's unrealized investment gains and losses included in stockholders' equity, net of adjustments to deferred policy acquisition costs, were $84.8 million and $14.1 million at December 31, 1999 and 1998, respectively. The change in net unrealized gains (losses) on securities included in other comprehensive income in 1999, 1998 and 1997 include: gross unrealized gains (losses) on securities of $(470.2) million, $(182.1) million and $73.7 million, respectively; reclassification adjustments for realized (gains) losses in net income of $53.5 million, $3.6 million and $(31.3) million, respectively; and adjustments to deferred policy acquisition costs of $302.2 million, $92.5 million and $(29.1) million, respectively. The above amounts are shown before income tax expense (benefit) of $70.7 million, $(30.2) million and $4.7 million, respectively. The 1999 income tax expense of $70.7 million includes a valuation allowance of $109.9 million related to the Company's unrealized capital losses on available for sale securities. Contractual Maturities The amortized cost and estimated fair value of fixed maturities by contractual maturity as of December 31, 1999 are as follows (in millions): Amortized Fair December 31, 1999 Cost Value - -------------------------------------------------------------------------------- Due in one year or less $ 164.9 $ 162.6 Due after one year through five years 1,836.7 1,823.2 Due after five years through ten years 2,164.2 2,094.6 Due after ten years 1,393.6 1,297.6 - -------------------------------------------------------------------------------- 5,559.4 5,378.0 Mortgage and asset backed securities 5,287.0 5,138.1 - -------------------------------------------------------------------------------- $10,846.4 $10,516.1 ================================================================================ Actual maturities may differ from those shown above because borrowers may have the right to call or prepay obligations. Net Investment Income Net investment income is summarized as follows (in millions): Year Ended December 31 1999 1998 1997 - ------------------------------------------------------------------------------- Fixed maturities $ 814.7 $ 810.5 $ 811.7 Equity securities 1.5 4.4 5.4 Policy loans 36.3 33.2 32.2 Other invested assets 28.4 18.2 27.8 Cash and cash equivalents 20.8 38.3 34.5 - ------------------------------------------------------------------------------- Gross investment income 901.7 904.6 911.6 Investment expenses (14.2) (11.6) (9.2) Amortization of call options and interest rate caps (77.2) (72.1) (49.3) - ------------------------------------------------------------------------------- Net investment income $ 810.3 $ 820.9 $ 853.1 =============================================================================== 49 As of December 31, 1999 and 1998, the carrying value of fixed maturity investments that were non-income producing was $22.6 million and $30.0 million, respectively. Net Realized Investment Gains (Losses) Net realized investment gains (losses) primarily relate to the Company's fixed maturity investments. Gross realized gains were $48.1 million, $88.5 million and $51.6 million for 1999, 1998 and 1997, respectively. Gross realized losses were $102.3 million, $90.4 million and $19.2 million for 1999, 1998 and 1997, respectively. Gross realized losses in 1999 and gross realized gains in 1998 included $18.3 million and $28.3 million, respectively, for certain fixed maturity investments where the decline in value was determined to be other than temporary. Net realized investment gains (losses) are net of adjustments to the amortization of deferred policy acquisition costs. 4. DERIVATIVES Outstanding derivatives are as follows (in millions):
Assets (Liabilities) -------------------------------------- 1999 1998 -------------------------------------- Notional Amounts ------------------ Carrying Fair Carrying Fair December 31 1999 1998 Value Value Value Value - ------------------------------------------------------------------------------------------------ Interest rate swap agreements $2,917.3 $2,369.0 $ 41.4 $ 41.4 $(71.2) $(71.2) Total return swap agreements 500.0 -- 37.8 36.3 -- -- Interest rate cap agreements 50.0 250.0 -- -- -- -- S&P 500 Index call options -- -- 701.1 803.1 535.7 607.0 S&P 500 Index futures -- -- -- -- (0.6) (0.6) ================================================================================================
The interest rate and total return swap agreements expire in 2000 through 2029. The interest rate cap agreement expires in 2000. The S&P 500 call options and futures maturities range from 2000 to 2006. The Company currently utilizes interest rate swap agreements to reduce asset duration and to better match interest rates earned on longer-term fixed rate assets with interest credited to policyholders. The Company utilizes total return swap agreements to hedge its obligations related to certain separate account liabilities. Cap agreements are used to hedge against rising interest rates. With respect to the Company's equity-indexed annuities and certain separate account liabilities, the Company buys call options, futures and certain total return swap agreements on the S&P 500 Index to hedge its obligations to provide returns based upon this index. At December 31, 1999 and 1998, the Company had approximately $128.7 million and $156.4 million, respectively, of unamortized premium in call option contracts. Fair values for swap and cap agreements are based on current settlement values. The current settlement values are based on quoted market prices and brokerage quotes, which utilize pricing models or formulas using current assumptions. Fair values for call options and futures are based upon quoted market prices. There are risks associated with some of the techniques the Company uses to match its assets and liabilities. The primary risk associated with swap, cap and call option agreements is the risk associated with counterparty nonperformance. The Company believes that the counterparties to its swap, cap and call option agreements are financially responsible and that the counterparty risk associated with these transactions is minimal. Futures trade on organized exchanges and, therefore, have minimal credit risk. 50 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report 5. NOTES PAYABLE Notes payable include the following (in millions):
December 31 1999 1998 - -------------------------------------------------------------------------------------------------------- 6 3/4% notes due 2008, net of unamortized discount of $2.2 million and $2.3 million in 1999 and 1998, respectively, effective rate 6.86% $ 297.8 $ 297.7 7 5/8% debentures due 2028, net of unamortized discount of $0.8 million in 1999 and 1998, effective rate 7.67% 149.2 149.2 Revolving credit facility 105.0 39.5 - -------------------------------------------------------------------------------------------------------- $ 552.0 $ 486.4 ========================================================================================================
In connection with the Crabbe Huson acquisition, the Company entered into a $100.0 million revolving credit facility with a commercial bank (the "Bridge Facility"). The Bridge Facility matured on March 30, 1999 and bore interest at a per annum rate equal to LIBOR plus twenty-five basis points. The Company borrowed $90.0 million under the Bridge Facility to finance the acquisition of Crabbe Huson. In November 1998, the Company issued $450.0 million of senior debt securities. The offering consisted of $300.0 million of 6 3/4% 10-year notes due November 15, 2008 and $150.0 million of 7 5/8% 30-year debentures due November 15, 2028. The proceeds were utilized to repay the $90.0 million borrowed under the Bridge Facility and to discharge the Company's existing $229.0 million notes payable to affiliates. The early extinguishment of the notes payable to affiliates resulted in an extraordinary charge of $9.7 million, net of a tax benefit of $5.3 million. The indenture under which the senior notes and debentures were issued contains covenants which prohibit the Company from granting a lien on or disposing of the stock of any subsidiary which accounts for more than 10% of the consolidated revenues or assets of the Company. The Company also has a $150.0 million revolving credit facility (the "Facility") which is utilized to finance sales commissions paid in connection with the distribution of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. The Facility was established in April 1999 and replaced a $60.0 million revolving credit facility which was used for the same purpose. This five year Facility is secured by such 12b-1 distribution fees and contingent deferred sales charges. Interest accrues on the outstanding borrowings under the Facility at a rate determined by sales of highly rated commercial paper backed in part by the security interest in such fees and charges. At December 31, 1999, the interest paid on borrowings under the Facility was at the rate of 6.13% per annum. Interest paid was $36.6 million, $25.5 million and $21.7 million in 1999, 1998 and 1997, respectively. 6. INCOME TAXES Income tax expense is summarized as follows (in millions): Year Ended December 31 1999 1998 1997 - ------------------------------------------------------------------------------- Current $ (9.9) $ 10.1 $ (42.0) Deferred 65.0 44.3 104.6 - ------------------------------------------------------------------------------- $ 55.1 $ 54.4 $ 62.6 =============================================================================== 51 A reconciliation of income tax expense with expected federal income tax expense computed at the applicable federal income tax rate of 35% is as follows (in millions): Year Ended December 31 1999 1998 1997 - ------------------------------------------------------------------------------- Expected income tax expense $ 54.3 $ 62.6 $ 67.3 Increase (decrease) in income taxes resulting from: Nontaxable investment income (2.2) (2.1) (1.4) Reduction in deferred tax asset valuation allowance (2.3) (10.6) (10.0) Amortization of goodwill and other intangible assets 4.2 3.8 3.1 State taxes, net of federal tax benefit 0.4 0.7 1.2 Other, net 0.7 -- 2.4 - ------------------------------------------------------------------------------- Income tax expense $ 55.1 $ 54.4 $ 62.6 =============================================================================== The components of deferred federal income taxes are as follows (in millions): December 31 1999 1998 - ------------------------------------------------------------------------------- Deferred tax assets: Policyholder balances $ 85.2 $ 107.4 Guaranty fund expense 2.1 2.1 Deferred compensation and other benefit plans 18.8 16.2 Net operating loss carryforwards 24.1 25.3 Distribution fees 25.9 18.4 Net unrealized capital losses 111.2 -- Other 7.9 7.4 - ------------------------------------------------------------------------------- Total deferred tax assets 275.2 176.8 Less: valuation allowance (109.9) (2.3) - ------------------------------------------------------------------------------- Net deferred tax assets 165.3 174.5 - ------------------------------------------------------------------------------- Deferred tax liabilities: Deferred policy acquisition costs (231.3) (115.8) Excess of book over tax basis of investments (120.0) (141.0) Deferred revenue (33.7) (24.0) Separate account assets (5.8) (0.5) Amortization of deferred distribution costs (49.0) (35.8) Other (9.6) (8.6) - ------------------------------------------------------------------------------- Total deferred tax liabilities (449.4) (325.7) - ------------------------------------------------------------------------------- Net deferred tax liability $(284.1) $(151.2) =============================================================================== As of December 31, 1999, the Company had Federal net operating loss carryforwards related to certain of the Company's non-insurance operations of $65.3 million. Of this amount, $10.1 million, which expires through 2003, is limited to use against future profits in a component of the Company's non-insurance operations. The remaining Federal non-insurance loss carryforwards of $55.2 million expire through 2019. As of December 31, 1999, the Company also had $3.2 million of purchased Federal net operating loss carryforwards, which expire through 2006, relating to an acquisition in its insurance operations. Utilization of these loss carryforwards is limited to use against future profits in a 52 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report component of the Company's insurance operations. The Company believes that it is more likely than not that it will realize the benefit of the deferred tax asset related to its Federal net operating loss carryforwards. Additionally, as of December 31, 1999, the Company had state net operating loss carryforwards related to certain of the Company's non-insurance operations of $5.5 million. Utilization of these loss carryforwards, which expire through 2008, is limited to use against future profits of a component of the Company's non-insurance operations. As a result of certain events occurring in 1999, the Company now believes that it is more likely than not that it will realize the tax benefit of the deferred tax asset related to these state net operating loss carryforwards. As of December 31, 1999, the Company had $313.8 million of unrealized capital losses related to its insurance operations in its available for sale portfolio. Under the tax law, utilization of these capital losses, when realized, is limited to use against future capital gains. The Company believes that it is not more likely than not that it will realize the benefit of the deferred tax asset related to these losses and has established a valuation allowance against the full amount of the tax benefit ($109.9 million) in stockholders' equity. Income taxes paid (refunded) were $(6.2) million, $27.6 million and ($4.2) million in 1999, 1998 and 1997, respectively. 7. REDEEMABLE CONVERTIBLE PREFERRED STOCK The Series A Redeemable Convertible Preferred Stock, which has a $50 face value, has an annual cumulative cash dividend rate of $2.875 per share and is convertible into shares of Company common stock at a rate of 1.58385 for each share of such preferred stock. The preferred stock is redeemable at the option of the Company anytime after March 24, 2000 at a declining premium over face value through March 24, 2005, when the Company must redeem the preferred stock. The preferred stock may also be put to the Company by the holders of such preferred stock after March 24, 2000, for a period of sixty days, at face value plus cumulative unpaid dividends. Each share of preferred stock is entitled to that number of votes equal to the number of common shares into which it is convertible. The difference between the face value of the preferred stock and its fair value at the time of its issuance is added to the carrying value of the preferred stock ratably over a five year period by a direct charge to retained earnings. 8. RETIREMENT PLANS The Company maintains a noncontributory defined benefit pension plan (the "Plan") covering its employees (except employees of LFG and Stein Roe, who participate in separate profit sharing plans, and except employees of Crabbe Huson, Independent, and Progress). It is the Company's practice to fund amounts for the Plan sufficient to meet the minimum requirements of the Employee Retirement Income Security Act of 1974. Additional amounts are contributed from time to time when deemed appropriate by the Company. Under the Plan, all employees are vested after five years of service. Benefits are based on years of service, the employee's average pay for the highest five consecutive years during the last ten years of employment and the employee's estimated social security retirement benefit. The Company also has an unfunded nonqualified Supplemental Pension Plan (collectively with the Plan, the "Plans") to replace benefits lost due to limits imposed on Plan benefits under the Internal Revenue Code. Plan assets consist of investments in certain Company-sponsored mutual funds. 53 The following table sets forth the Plans' funded status (in millions) as of December 31, 1999 and 1998.
December 31 1999 1998 - ----------------------------------------------------------------------------------- Change in benefit obligation Benefit obligation at beginning of year $ 32.8 $ 27.1 Service cost 2.1 1.8 Interest cost 2.4 2.1 Actuarial (gain) loss (4.9) 2.4 Benefits paid (0.9) (0.6) - ----------------------------------------------------------------------------------- Benefit obligation at end of year $ 31.5 $ 32.8 =================================================================================== Change in plan assets Fair value of plan assets at beginning of year $ 16.1 $ 14.7 Actual return on plan assets 2.7 1.1 Employer contribution 1.3 0.9 Benefits paid (0.9) (0.6) - ----------------------------------------------------------------------------------- Fair value of plan assets at end of year $ 19.2 $ 16.1 =================================================================================== Projected benefit obligation in excess of the plans' assets $ 12.3 $ 16.7 Unrecognized net actuarial gain (loss) 2.1 (4.4) Prior service cost not yet recognized in net periodic pension cost (1.4) (1.8) - ----------------------------------------------------------------------------------- Accrued pension cost $ 13.0 $ 10.5 ===================================================================================
Pension cost includes the following components (in millions): Year Ended December 31 1999 1998 1997 - ------------------------------------------------------------------------------ Service cost benefits earned during the period $ 2.1 $ 1.8 $ 1.6 Interest cost on projected benefit obligation 2.4 2.1 1.8 Expected return on plan assets (1.4) (1.2) (1.7) Net amortization and deferred amounts 0.7 0.4 1.2 - ------------------------------------------------------------------------------ Total net periodic pension cost $ 3.8 $ 3.1 $ 2.9 ============================================================================== The assumptions used to develop the actuarial present value of the projected benefit obligation, and the expected long-term rate of return on plan assets are as follows: Year Ended December 31 1999 1998 1997 - -------------------------------------------------------------------------------- Discount rate 7.75% 6.75% 7.25% Rate of increase in compensation level 4.50% 4.75% 5.00% Expected long-term rate of return on assets 9.00% 9.00% 8.50% The Company provides various other funded and unfunded defined contribution plans, which include savings and investment plans and supplemental savings plans. Expenses related to these defined contribution plans totaled $9.3 million, $9.5 million and $8.5 million in 1999, 1998 and 1997, respectively. 54 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report 9. STOCKHOLDERS' EQUITY The Company has two stock-based compensation plans, the 1990 Stock Option Plan (the "1990 Plan") and the 1995 Stock Incentive Plan (the "1995 Plan"). The 1990 Plan provided for grants of incentive and nonqualified stock options, which were issued from 1990 through 1994. The 1995 Plan provides for grants of incentive and nonqualified stock options, stock appreciation rights, nonvested stock, unrestricted stock and performance shares, as well as cash and other awards. To date, only stock options and nonvested stock have been granted under the 1995 Plan. For any year, the Company may issue awards under the 1995 Plan providing for the issuance of not more than two percent of the total number of shares outstanding as of December 31 of the preceding year, subject to certain adjustments and to certain carryovers for expired and forfeited awards. This amount does not include 124,500 nonqualified options at prices ranging from $5.92 to $21.00 that were assumed by the Company in connection with the LFG acquisition. All options granted under the 1990 Plan were granted at a price not less than the fair market value of the Company's Common Stock (determined by the valuation provisions of the 1990 Plan). All options granted under the 1995 Plan have been granted at the market price of the Company's Common Stock on the grant date. All granted options provide for vesting in four equal annual installments, beginning one year after the date of grant, and expire 10 years after the grant date. In April 1997, the Company began to award nonvested stock under the 1995 Plan. The nonvested shares issued to employees vest generally after the end of six years. Such vesting date may accelerate if the Company achieves certain performance targets. Upon termination of employment, any nonvested shares would generally be forfeited. The Company recorded $1.4 million, $1.0 million and $0.4 million in compensation expense related to nonvested stock in 1999, 1998 and 1997 respectively. Pro forma information regarding net income and earnings per share is required by SFAS 123, which also requires that the information be determined as if the Company accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. As provided for under SFAS 123, the fair value for these options was estimated using a Black-Scholes option pricing model with the following assumptions: risk free interest rate: 6.46% for 1999, 4.68% for 1998 and 5.73% for 1997; dividend yield: 1.64% for 1999, 1.22% for 1998 and 1.25% for 1997; expected volatility of the market price of the Company's Common Stock: 26.0% for 1999, 23.2% for 1998 and 19.1% for 1997; and the weighted average life of the options: 6 years for all three periods. For pro forma disclosure purposes, the estimated fair value of the options is amortized to expense over the options' vesting period. Pro forma information follows (in millions, except for earnings per share information): 55 Year Ended December 31 1999 1998 1997 - -------------------------------------------------------------------------------- Income before extraordinary item $96.0 $120.6 $127.1 Extraordinary loss on extinguishment of debt, net of tax -- (9.7) -- - -------------------------------------------------------------------------------- Net income $96.0 $110.9 $127.1 ================================================================================ Net income per share - basic: Income before extraordinary item $2.04 $ 2.64 $ 2.88 Extraordinary loss on extinguishment of debt, net of tax -- (0.21) -- - -------------------------------------------------------------------------------- Net income $2.04 $ 2.43 $ 2.88 ================================================================================ Net income per share - assuming dilution: Income before extraordinary item $2.00 $ 2.55 $ 2.73 Extraordinary loss on extinguishment of debt, net of tax -- (0.21) -- - -------------------------------------------------------------------------------- Net income $2.00 $ 2.34 $ 2.73 ================================================================================ Because SFAS 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect was not fully reflected until 1998. A summary of the stock option activity, and related information for the years ended December 31 follows (in thousands, except price data):
1999 1998 1997 - --------------------------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Exercise Average Exercise Average Exercise Options Price Options Price Options Price - --------------------------------------------------------------------------------------------------------------- Outstanding - beginning of year 3,729 $21.72 4,038 $16.31 4,484 $12.49 Granted 788 24.52 627 36.92 699 28.67 Exercised (459) 12.65 (936) 8.58 (1,027) 7.56 Forfeited (332) 27.34 -- -- (118) 20.74 - --------------------------------------------------------------------------------------------------------------- Outstanding - end of year 3,726 $22.93 3,729 $21.72 4,038 $16.31 =============================================================================================================== Exercisable - end of year 2,132 $19.09 2,051 $15.72 2,346 $11.11 =============================================================================================================== Weighted-average fair value of options granted during year $ 8.12 $10.62 $ 8.15 ===============================================================================================================
Exercise prices for options outstanding as of December 31, 1999 ranged from $5.92 to $38.94. The weighted-average remaining contractual life of these options is 6.73 years. 56 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report 10. NET INCOME PER SHARE The following table sets forth the computation of net income per share -- basic and net income per share -- assuming dilution:
Year Ended December 31 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------------- Numerator (in millions) Income before extraordinary item $ 99.3 $ 124.5 $ 129.5 Less: preferred stock dividends (0.9) (0.9) (0.9) - ---------------------------------------------------------------------------------------------------------------- Numerator for income per share - basic - income before extraordinary item available to common stockholders 98.4 123.6 128.6 Extraordinary loss on extinguishment of debt, net of tax -- (9.7) -- - ---------------------------------------------------------------------------------------------------------------- Numerator for net income per share - basic - net income available to common stockholders $ 98.4 $ 113.9 $ 128.6 ================================================================================================================ Income available to common stockholders $ 98.4 $ 123.6 $ 128.6 Plus: income impact of assumed conversions Preferred stock dividends 0.9 0.9 0.9 - ---------------------------------------------------------------------------------------------------------------- Numerator for income per share - assuming dilution - income before extraordinary item available to common stockholders after assumed conversions 99.3 124.5 129.5 Extraordinary loss on extinguishment of debt, net of tax -- (9.7) -- - ---------------------------------------------------------------------------------------------------------------- Numerator for net income per share - assuming dilution - net income available to common stockholders after assumed conversions $ 99.3 $ 114.8 $ 129.5 ================================================================================================================ Denominator Denominator for basic - weighted average shares 46,719,223 45,330,561 43,808,904 - ---------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Employee stock options 679,210 1,521,333 2,403,729 Convertible preferred stock 514,370 515,657 518,081 - ---------------------------------------------------------------------------------------------------------------- Dilutive potential common shares 1,193,580 2,036,990 2,921,810 - ---------------------------------------------------------------------------------------------------------------- Denominator for assuming dilution 47,912,803 47,367,551 46,730,714 - ---------------------------------------------------------------------------------------------------------------- Net income per share - basic: Income before extraordinary item $ 2.11 $ 2.72 $ 2.94 Extraordinary loss on extinguishment of debt, net of tax -- (0.21) -- - ---------------------------------------------------------------------------------------------------------------- Net income $ 2.11 $ 2.51 $ 2.94 ================================================================================================================ Net income per share - assuming dilution: Income before extraordinary item $ 2.07 $ 2.63 $ 2.77 Extraordinary loss on extinguishment of debt, net of tax -- (0.21) -- - ---------------------------------------------------------------------------------------------------------------- Net income $ 2.07 $ 2.42 $ 2.77 ================================================================================================================
57 11. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in determining fair values of financial instruments: Fixed maturities and equity securities: Fair values for fixed maturity securities are based on quoted market prices, where available. For fixed maturities not actively traded, the fair values are determined using values from independent pricing services, or, in the case of private placements, are determined by discounting expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the securities. The fair values for equity securities are based on quoted market prices. Policy loans: The carrying value of policy loans approximates fair value. Other invested assets: The fair values for other invested assets are generally based on quoted market prices. Cash and cash equivalents: The carrying value of cash and cash equivalents approximates fair value. Policyholder balances: Deferred annuity contracts are assigned fair value equal to current net surrender value. Annuitized contracts are valued based on the present value of the future cash flows at current pricing rates. Notes payable: The fair value of the Company's notes payable is estimated based on quoted market prices. The fair values and carrying values of the Company's financial instruments are as follows (in millions): 1999 1998 --------------------------------------------- Carrying Fair Carrying Fair December 31 Value Value Value Value - -------------------------------------------------------------------------------- Assets: Fixed maturity securities $10,516.1 $10,516.1 $11,277.2 $11,277.2 Equity securities 37.9 37.9 24.6 24.6 Policy loans 599.5 599.5 578.9 578.9 Other invested assets 1,041.6 1,145.1 717.6 787.0 Cash and cash equivalents 1,232.6 1,232.6 984.1 984.1 Liabilities: Policyholder balances 10,015.1 9,306.8 10,392.2 9,617.1 Notes payable 552.0 531.7 486.4 511.7 58 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report 12. SEGMENT INFORMATION The Company has two reportable segments: annuity and asset management. Annuity operations relate principally to the issuance of fixed, indexed and variable annuity products and a closed block of investment-oriented life insurance products. Asset management includes mutual funds, private capital management and institutional asset management. The Company evaluates performance based on earnings before income taxes, not including net realized gains and losses. The Company's reportable segments offer different products and are each managed separately. Information by reported segment for 1999, 1998 and 1997 is shown below (in millions):
Year Ended December 31 1999 1998 1997 - ---------------------------------------------------------------------------------------------------------- Statement of Operations Data Revenues (excluding net realized investment gains and losses): Annuity: Unaffiliated $ 877.0 $ 870.1 $ 897.7 Intersegment (14.0) (10.5) (9.3) - ---------------------------------------------------------------------------------------------------------- Total annuity 863.0 859.6 888.4 - ---------------------------------------------------------------------------------------------------------- Asset management: Unaffiliated 383.9 344.5 323.4 Intersegment 14.0 10.5 9.3 - ---------------------------------------------------------------------------------------------------------- Total asset management 397.9 355.0 332.7 - ---------------------------------------------------------------------------------------------------------- Total revenues (excluding net realized investment gains and losses) $1,260.9 $1,214.6 $1,221.1 ========================================================================================================== Income before income taxes and extraordinary item: Annuity: Income before amortization of intangible assets $ 179.0 $ 155.2 $ 143.1 Amortization of intangible assets (1.2) (1.3) (1.1) - ---------------------------------------------------------------------------------------------------------- Subtotal annuity 177.8 153.9 142.0 - ---------------------------------------------------------------------------------------------------------- Asset management: Income before amortization of intangible assets 85.8 77.0 79.9 Amortization of intangible assets (18.9) (13.8) (12.1) - ---------------------------------------------------------------------------------------------------------- Subtotal asset management 66.9 63.2 67.8 - ---------------------------------------------------------------------------------------------------------- Other: Loss before amortization of intangible assets (47.9) (40.4) (43.3) Amortization of intangible assets (0.2) (0.2) (0.3) - ---------------------------------------------------------------------------------------------------------- Subtotal other (48.1) (40.6) (43.6) - ---------------------------------------------------------------------------------------------------------- Income before net realized investment gains (losses), income taxes and extraordinary item 196.6 176.5 166.2 Net realized investment gains (losses) (42.2) 2.4 25.9 - ---------------------------------------------------------------------------------------------------------- Total income before income taxes and extraordinary item $ 154.4 $ 178.9 $ 192.1 ==========================================================================================================
59 December 31 1999 1998 - -------------------------------------------------------------------------------- Balance Sheet Data Identifiable Assets: Annuity $17,460.6 $15,742.9 Asset management 643.4 575.3 Other 268.5 200.9 - -------------------------------------------------------------------------------- Total consolidated assets $18,372.5 $16,519.1 ================================================================================ All revenues are attributed to the United States. All long-lived assets are located in the United States. 13. QUARTERLY FINANCIAL DATA, IN MILLIONS, EXCEPT PER SHARE AMOUNTS (UNAUDITED)
Quarter Ended 1999 March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------------------ Investment income $ 206.2 $ 197.1 $ 197.9 $ 209.1 Interest credited to policyholders (134.8) (129.4) (131.3) (131.1) - ------------------------------------------------------------------------------------------------------------ Investment spread 71.4 67.7 66.6 78.0 Net realized investment losses (3.1) (11.6) (12.7) (14.8) Fee income 108.8 113.0 114.9 113.9 Pretax income 44.0 36.0 37.1 37.3 Net income 27.4 23.3 24.6 24.0 Net income per share - basic 0.59 0.49 0.52 0.51 Net income per share - assuming dilution 0.58 0.49 0.51 0.50 Quarter Ended 1998 March 31 June 30 September 30 December 31 - ------------------------------------------------------------------------------------------------------------ Investment income $ 207.4 $ 202.3 $ 202.7 $ 208.5 Interest credited to policyholders (142.1) (140.2) (143.3) (136.6) - ------------------------------------------------------------------------------------------------------------ Investment spread 65.3 62.1 59.4 71.9 Net realized investment gains (losses) 2.2 (2.4) 4.2 (1.6) Fee income 94.7 100.0 97.1 101.9 Pretax income 45.4 43.5 49.4 40.6 Income before extraordinary item 31.5 29.7 33.5 29.8 Extraordinary loss on extinguishment of debt, net of tax -- -- -- (9.7) Net income 31.5 29.7 33.5 20.1 Net income per share - basic: Income before extraordinary item $ 0.70 $ 0.65 $ 0.73 $ 0.64 Extraordinary loss on extinguishment of debt, net of tax -- -- -- (0.21) - ------------------------------------------------------------------------------------------------------------ Net income per share - basic $ 0.70 $ 0.65 $ 0.73 $ 0.43 ============================================================================================================ Net income per share - assuming dilution: Income before extraordinary item $ 0.67 $ 0.63 $ 0.71 $ 0.63 Extraordinary loss on extinguishment of debt, net of tax -- -- -- (0.21) - ------------------------------------------------------------------------------------------------------------ Net income per share - assuming dilution $ 0.67 $ 0.63 $ 0.71 $ 0.42 ============================================================================================================
60 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report 14. STATUTORY INFORMATION Keyport is domiciled in Rhode Island and prepares its statutory financial statements in accordance with accounting principles and practices prescribed or permitted by the State of Rhode Island Insurance Department. Statutory surplus and statutory net income differ from shareholder's equity and net income reported in accordance with GAAP primarily because policy acquisition costs are expensed when incurred, policy liabilities are based on different assumptions, and income tax expense reflects only taxes paid or currently payable. Keyport's statutory surplus and net income are as follows (in millions): Year Ended December 31 1999 1998 1997 - -------------------------------------------------------------------------------- Statutory surplus $ 877.8 $ 790.9 $ 702.6 Statutory net income 116.3 98.9 107.1 15. TRANSACTIONS WITH AFFILIATED COMPANIES Liberty Mutual from time to time provides management, legal, audit and financial services to the Company. Reimbursements to Liberty Mutual for these services totaled $0.6 million, $0.6 million and $0.7 million in 1999, 1998 and 1997, respectively. These reimbursements are based on direct and indirect costs incurred by Liberty Mutual and are allocated to the Company primarily based upon the amount of time spent by Liberty Mutual's employees on the Company's behalf. The Company believes that this allocation methodology is reasonable. Regulatory authorities permit dividend payments from Keyport to the Company up to the lesser of (i) 10% of statutory surplus as of the preceding December 31 or (ii) the net gain from operations for the preceding fiscal year. As of December 31, 1999, Keyport could pay dividends of up to $57.8 million without the approval of the Commissioner of Insurance of the State of Rhode Island. Keyport paid dividends of $30.0 million during 1999. 16. COMMITMENTS AND CONTINGENCIES Leases: The Company leases data processing equipment, furniture and certain office facilities from others under operating leases expiring in various years through 2009. Rental expense amounted to $19.7 million, $16.5 million and $15.0 million for the years ended December 31, 1999, 1998 and 1997, respectively. For each of the next five years, and in the aggregate, as of December 31, 1999, the following are the minimum future rental payments under noncancelable operating leases having remaining terms in excess of one year (in millions): Year Payments - -------------------------------------------------------------------------------- 2000 $19.9 2001 19.3 2002 18.8 2003 18.3 2004 17.5 Thereafter 42.2 61 Legal Matters: The Company is involved at various times in litigation common to its business. In the opinion of management, the resolution of any such litigation is not expected to have a material adverse effect on the Company's financial condition, results of operations or cash flows. Regulatory Matters: Under existing guaranty fund laws in all states, insurers licensed to do business in those states can be assessed for certain obligations of insolvent insurance companies to policyholders and claimants. The actual amount of such assessments will depend upon the final outcome of rehabilitation proceedings and will be paid over several years. In 1999, 1998 and 1997, Keyport was assessed $0.1 million, $3.2 million and $5.9 million, respectively. During 1999, Keyport did not record any provisions for guaranty fund association expenses and recorded $1.2 million and $1.0 million for the years ended December 31, 1998 and 1997, respectively. At December 31, 1999 and 1998, the reserve for such assessments was $5.9 million and $6.0 million, respectively. 62 LIBERTY FINANCIAL COMPANIES, INC. 1999 Annual Report - -------------------------------------------------------------------------------- REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- [LOGO:ERNST & YOUNG LLP] Shareholders and Board of Directors Liberty Financial Companies, Inc. We have audited the accompanying consolidated balance sheets of Liberty Financial Companies, Inc. as of December 31, 1999 and 1998, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. 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 auditing standards generally accepted in the United States. 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 the 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 Liberty Financial Companies, Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP Boston, Massachusetts January 27, 2000 63 EX-21 6 EXHIBIT 21 LIBERTY FINANCIAL COMPANIES, INC. SUBSIDIARIES OF THE COMPANY
Jurisdiction of Immediate Incorporation or Subsidiary Parent Organization - ---------- ------ ------------ AlphaTrade, Inc. CMA Massachusetts Colonial Advisory Services, Inc. LFG Massachusetts Colonial Management Associates, Inc. ("CMA") LFG Massachusetts Copley Venture Capital, Inc. LFS Massachusetts Crabbe Huson Group, Inc. The Company Massachusetts Financial Centre Insurance Agency, Inc. LIS Massachusetts IFS Agencies, Inc. IFMG New York IFS Agencies of Alabama, Inc. IFMG Alabama IFS Agencies of New Mexico, Inc. IFMG New Mexico Independence Life & Annuity Company Keyport Rhode Island Independent Holdings, Inc. ("IHI") The Company Massachusetts Independent Financial Marketing Group, Inc. ("IFMG") IHI Delaware Keyport Benefit Life Insurance Company Keyport New York Keyport Financial Services Corp. LASC dfcx Massachusetts Keyport Life Insurance Company ("Keyport") SSI Rhode Island Liberty Advisory Services Corp. Keyport Massachusetts Liberty Asset Management Company LFS Delaware Liberty Financial Asset Management, Ltd. NPMI Japan Liberty Financial Services, Inc. ("LFS") The Company Massachusetts Liberty Funds Distributor, Inc. CMA Massachusetts Liberty Funds Group LLC ("LFG") LFS Delaware Liberty Funds Services, Inc. LFG Massachusetts Liberty Investment Services, Inc. LFS Massachusetts Liberty Newport Holdings, Limited ("LNHL") The Company Delaware
Jurisdiction of Immediate Incorporation or SUBSIDIARY PARENT ORGANIZATION - ---------- ------ ------------ Liberty New World China Enterprises Investments L.P. ("LNWC") NPEA California Liberty Securities Corporation LIS Delaware LREG, Inc. The Company Delaware LSC Insurance Agency of Arizona, Inc. LIS Arizona LSC Insurance Agency of Nevada, Inc. LIS Nevada Newport Fund Management, Inc. NPMI (75.1%) Virginia LFC (24.9%) Newport Pacific Management, Inc. ("NPMI") LNHL California Newport Private Equity Asia, Inc. ("NPEA") NPMI California New World Liberty China Ventures Fund, Ltd. LNWC (50%) British V.I. Progress Investment Management Company The Company California SteinRoe Futures, Inc. Stein Roe Illinois Stein Roe Management Associates, LLC Stein Roe Delaware SteinRoe Services, Inc. ("SSI") The Company Massachusetts Stein Roe & Farnham Incorporated ("Stein Roe") SSI Delaware
EX-23 7 EX 23 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in this Annual Report (Form 10-K) of Liberty Financial Companies, Inc. of our report dated January 27, 2000, included in the 1999 Annual Report to Shareholders of Liberty Financial Companies, Inc. Our audits also included the financial statement schedules of Liberty Financial Companies, Inc. 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. 333-61511) pertaining to the Liberty Financial Companies, Inc. Savings and Investment Plan, in the Registration Statements (Form S-8 No. 333-61509 and Form S-8 No. 333-28073) pertaining to the Liberty Financial Companies Inc. 1995 Stock Incentive Plan, in the Registration Statement (Form S-8 No. 33-90626) pertaining to the Liberty Financial Companies, Inc. 1990 Stock Option Plan, 1995 Stock Incentive Plan and 1995 Employee Stock Purchase Plan, and in the Registration Statement (Form S-3 No. 333-20067) pertaining to the Liberty Financial Companies Inc. Dividend Reinvestment Plan of our report dated January 27, 2000, with respect to the consolidated financial statements incorporated herein by reference, and our report included in the preceding paragraph with respect to the financial statement schedules included in this Annual Report (Form 10-K) of Liberty Financial Companies, Inc. /s/ ERNST & YOUNG LLP Boston, Massachusetts March 27, 2000 EX-27 8 EXHIBIT 27
7 1,000,000 USD YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 1 10,516 0 0 38 0 0 12,195 1,233 0 739 18,373 0 0 12,110 0 552 0 16 1 1,185 18,373 0 810 (42) 451 0 97 360 154 65 0 0 0 0 99 2.11 2.07 0 0 0 0 0 0 0
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