-----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, LdyzPbPuPag5jy26hrtcp5/MTa84SoeFEq/5kdCvapMpDvlJyc0HV/8vqEzF8Jzc vnh+ujY3xMRZ9pkLnp776g== /in/edgar/work/0000912057-00-049517/0000912057-00-049517.txt : 20001115 0000912057-00-049517.hdr.sgml : 20001115 ACCESSION NUMBER: 0000912057-00-049517 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LIBERTY FINANCIAL COMPANIES INC /MA/ CENTRAL INDEX KEY: 0000936372 STANDARD INDUSTRIAL CLASSIFICATION: [6311 ] IRS NUMBER: 043260640 STATE OF INCORPORATION: MA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q/A SEC ACT: SEC FILE NUMBER: 001-13654 FILM NUMBER: 763499 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-Q/A 1 a2031029z10-qa.txt FORM 10-Q/A SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A /X/ AMENDMENT TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- ------------------- Commission file number: 1-13654. LIBERTY FINANCIAL COMPANIES, INC. ------------------------------------------------------- (Exact name of registrant as specified in its charter) Massachusetts 04-3260640 ---------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 600 Atlantic Avenue, Boston, Massachusetts 02210-2214 ---------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (617) 722-6000 ---------------------------------------------------------------------- (Registrant's telephone number, including area code) ---------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ X ] Yes [ ] No There were 48,209,421 shares of the registrant's Common Stock, $.01 par value, and 216,322 shares of the registrant's Series A Convertible Preferred Stock, $.01 par value, outstanding as of July 31, 2000. Exhibit Index - Page 25 Page 1 of 27 EXPLANATORY STATEMENT This Form 10-Q/A restates the Company's Form 10-Q originally filed on August 11, 2000 to reflect the after-tax net change in unrealized and undistributed gains in private equity limited partnerships. The net increase in net income and net income per share was $4.9 million and $0.10 per share, respectively, for the quarter ended June 30, 2000 and $14.6 million and $0.30 per share, respectively, for the first six months of 2000, and is described in Note 6 of the Notes to Consolidated Financial Statements. 2 LIBERTY FINANCIAL COMPANIES, INC. QUARTERLY REPORT ON FORM 10-Q/A FOR PERIOD ENDED JUNE 30, 2000 TABLE OF CONTENTS
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999 4 Consolidated Income Statements for the Three Months and Six Months Ended June 30, 2000 and 1999 5 Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2000 and 1999 6 Consolidated Statement of Stockholders' Equity for the Six Months Ended June 30, 2000 7 Notes to Consolidated Financial Statements 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 3. Quantitative and Qualitative Disclosures About Market Risk 23 PART II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 23 Item 6. Exhibits and Reports on Form 8-K 23 Signatures 24 Exhibit Index 25
3 LIBERTY FINANCIAL COMPANIES, INC. CONSOLIDATED BALANCE SHEETS (IN MILLIONS)
JUNE 30 DECEMBER 31 2000 1999 ----------------- ----------------- UNAUDITED (RESTATED) ASSETS Assets: Investments $12,239.5 $12,195.1 Cash and cash equivalents 1,621.2 1,232.6 Accrued investment income 153.4 162.0 Deferred policy acquisition costs 717.3 739.2 Deferred distribution costs 162.3 153.7 Intangible assets 274.4 282.0 Other assets 296.6 244.8 Separate account assets 3,829.2 3,363.1 ----------------- ----------------- $19,293.9 $18,372.5 ================= ================= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Policyholder balances $12,018.4 $12,109.6 Notes payable 567.1 552.0 Payable for investments purchased and loaned 1,229.6 754.9 Other liabilities 471.1 453.1 Separate account liabilities 3,780.3 3,301.0 ----------------- ----------------- Total liabilities 18,066.5 17,170.6 ----------------- ----------------- Series A redeemable convertible preferred stock, par value $.01; authorized, issued and outstanding 216,322 shares in 2000 and 324,759 shares in 1999 10.8 16.0 ----------------- ----------------- Stockholders' Equity: Common stock, par value $.01; authorized 100,000,000 shares, issued and outstanding 48,194,921 shares in 2000 and 47,462,995 shares in 1999 0.5 0.5 Additional paid-in capital 934.3 923.0 Retained earnings 483.4 425.2 Accumulated other comprehensive loss (196.4) (158.1) Unearned compensation (5.2) (4.7) ----------------- ----------------- Total stockholders' equity 1,216.6 1,185.9 ----------------- ----------------- $19,293.9 $18,372.5 ================= =================
See accompanying notes to consolidated financial statements. 4 LIBERTY FINANCIAL COMPANIES, INC. CONSOLIDATED INCOME STATEMENTS (IN MILLIONS, EXCEPT PER SHARE DATA) UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------------- ------------------------ 2000 1999 2000 1999 ------------ ------------ -------------- ------------ (RESTATED) (RESTATED) Investment income, including distributions from private equity limited partnerships of $0.8 million and $2.5 million for the three months and six months ended June 30, 2000, respectively $216.4 $197.1 $422.3 $403.3 Interest credited to policyholders (133.2) (129.4) (260.5) (264.2) ------------ ------------ -------------- ------------ INVESTMENT SPREAD 83.2 67.7 161.8 139.1 -------------- ------------ ------------ ----------- NET REALIZED INVESTMENT LOSSES (12.9) (11.6) (16.8) (14.7) ------------ ------------ -------------- ------------ NET CHANGE IN UNREALIZED AND UNDISTRIBUTED GAINS IN PRIVATE EQUITY LIMITED PARTNERSHIPS 7.5 - 22.5 - ------------ ------------ -------------- ------------ Fee income: Investment advisory and administrative fees 71.3 68.2 143.2 134.4 Distribution and service fees 15.1 15.3 30.5 30.0 Transfer agency fees 12.2 12.8 24.9 25.7 Surrender charges and net commissions 9.3 9.0 20.0 17.4 Separate account fees 11.1 7.7 21.8 14.3 ------------ ------------ -------------- ------------ TOTAL FEE INCOME 119.0 113.0 240.4 221.8 ------------ ------------ -------------- ------------ Expenses: Operating expenses (99.6) (90.5) (201.9) (179.2) Amortization of deferred policy acquisition costs (29.8) (22.5) (56.9) (46.7) Amortization of deferred distribution costs (10.4) (9.7) (20.6) (19.2) Amortization of intangible assets (5.1) (5.1) (10.2) (10.1) Interest expense, net (4.2) (5.3) (8.2) (11.0) ------------ ------------ -------------- ------------ TOTAL EXPENSES (149.1) (133.1) (297.8) (266.2) ------------ ------------ -------------- ------------ PRE-TAX INCOME 47.7 36.0 110.1 80.0 Income tax expense (18.7) (12.7) (41.7) (29.3) -------------- ------------ ------------ ----------- NET INCOME $29.0 $23.3 $68.4 $50.7 ============ ============ ============== ============ Net income per share - basic $0.60 $0.49 $1.43 $1.08 ============ ============ ============== ============ Net income per share - assuming dilution $0.60 $0.49 $1.41 $1.06 ============ ============ ============== ============
See accompanying notes to consolidated financial statements. 5 LIBERTY FINANCIAL COMPANIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (IN MILLIONS) UNAUDITED
SIX MONTHS ENDED JUNE 30 ------------------------------- 2000 1999 ------------- ------------- (RESTATED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $68.4 $50.7 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 39.7 41.3 Interest credited to policyholders 260.5 264.2 Net realized investment losses 16.8 14.7 Net change in unrealized and undistributed gains in private equity limited partnerships (22.5) - Net amortization on investments 44.3 39.3 Change in deferred policy acquisition costs (22.9) (10.9) Net change in other assets and liabilities (35.7) (50.2) ------------- ------------- Net cash provided by operating activities 348.6 349.1 ------------- ------------- CASH FLOWS FROM INVESTING ACTIVITIES: Investments purchased available for sale (1,821.8) (3,080.4) Investments sold available for sale 1,609.0 2,529.3 Investments matured available for sale 58.6 159.2 Change in policy loans, net (13.9) (8.3) Change in mortgage loans, net 1.5 41.7 Other 23.9 (28.6) ------------- ------------- Net cash used in investing activities (142.7) (387.1) ------------- ------------- CASH FLOWS FROM FINANCING ACTIVITIES: Withdrawals from policyholder accounts (1,106.5) (962.4) Deposits to policyholder accounts 754.8 358.0 Securities lending 526.2 570.3 Change in notes payable 15.1 39.5 Exercise of stock options 1.7 2.8 Dividends paid (3.2) (3.2) Redemption of preferred stock (5.4) - ------------- ------------- Net cash provided by financing activities 182.7 5.0 ------------- ------------- Increase (decrease) in cash and cash equivalents 388.6 (33.0) Cash and cash equivalents at beginning of period 1,232.6 984.1 ------------- ------------- Cash and cash equivalents at end of period $ 1,621.2 $ 951.1 ============= =============
See accompanying notes to consolidated financial statements. 6 LIBERTY FINANCIAL COMPANIES, INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (IN MILLIONS) UNAUDITED
ACCUMULATED ADDITIONAL OTHER TOTAL COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED STOCKHOLDERS' STOCK CAPITAL EARNINGS LOSS COMPENSATION EQUITY ------------- ------------ --------------- ------------------- ----------------- ------------------- BALANCE, DECEMBER 31, 1999 $0.5 $923.0 $425.2 $(158.1) $(4.7) $1,185.9 Common stock issued for acquisition 1.8 1.8 Effect of stock-based compensation plans 2.7 (0.5) 2.2 Accretion to face value of preferred stock (0.2) (0.2) Common stock Dividends 6.8 (9.6) (2.8) Preferred stock Dividends (0.4) (0.4) Net income (Restated) 68.4 68.4 Other comprehensive loss, net of tax (38.3) (38.3) ------------- ------------ --------------- ------------------- ----------------- ------------------- BALANCE, JUNE 30, 2000 $0.5 $934.3 $483.4 $(196.4) $(5.2) $1,216.6 ============= ============ =============== =================== ================= ===================
See accompanying notes to consolidated financial statements. 7 LIBERTY FINANCIAL COMPANIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 UNAUDITED 1. GENERAL The accompanying unaudited consolidated financial statements include all adjustments, consisting of normal recurring accruals, that management considers necessary for a fair presentation of the Company's financial position and results of operations as of and for the interim periods presented. Certain footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Therefore, these consolidated financial statements should be read in conjunction with the audited consolidated financial statements contained in the Company's Form 10-K for the year ended December 31, 1999. The results of operations for the three months and six months ended June 30, 2000 are not necessarily indicative of the results to be expected for the full year. Certain previously reported amounts have been reclassified to conform with the current period presentation. 2. SEGMENT INFORMATION The Company is an asset accumulation and management company with two reportable segments: retirement-oriented insurance (principally annuities) and asset management. The annuity insurance business is conducted at Keyport Life Insurance Company ("Keyport"). Keyport generates investment spread income from the investment portfolio which supports policyholder balances associated with its fixed and indexed annuity business and its closed block of single premium whole life insurance. The annuity insurance business also derives fee income from the administration of fixed, indexed and variable annuity contracts. The asset management business is conducted at Liberty Funds Group, an investment advisor (through its subsidiary Colonial Management Associates), distributor and transfer agent to mutual funds, Stein Roe & Farnham Incorporated, a diversified investment advisor, Newport Pacific Management, Inc., an investment advisor to mutual funds and institutional accounts specializing in Asian equity markets, Crabbe Huson Group, Inc., an investment advisor to mutual funds and institutional accounts, Progress Investment Management Company, an investment advisor to institutional accounts, and Liberty Asset Management Company, an investment advisor to mutual funds. The asset management business derives fee income from investment products and services. 8 The Company's reportable segments offer different products and are each managed separately. Information by reportable segment is shown below (in millions):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------ 2000 1999 2000 1999 ------------ ----------- ------------ ----------- (RESTATED) (RESTATED) Statement of Operations Data REVENUES (EXCLUDING NET REALIZED INVESTMENT LOSSES AND NET CHANGE IN UNREALIZED AND UNDISTRIBUTED GAINS IN PRIVATE EQUITY LIMITED PARTNERSHIPS): Annuity: Unaffiliated $237.5 $213.3 $463.8 $433.1 Intersegment (4.3) (3.9) (8.1) (6.8) ------------ ----------- ------------ ----------- Total annuity 233.2 209.4 455.7 426.3 ------------ ----------- ------------ ----------- Asset management: Unaffiliated 97.9 96.8 198.9 192.0 Intersegment 4.3 3.9 8.1 6.8 ------------ ------------ ----------- ----------- Total asset management 102.2 100.7 207.0 198.8 ------------ ------------ ----------- ----------- Total revenues (excluding net realized investment losses and net change in unrealized and undistributed gains in private equity limited partnerships) $335.4 $310.1 $662.7 $625.1 ============ ============ =========== ===========
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------ ------------------------- 2000 1999 2000 1999 ------------ ----------- ------------- ----------- (RESTATED) (RESTATED) INCOME BEFORE INCOME TAXES: Annuity: Income before amortization of intangible assets $50.5 $42.7 $100.7 $84.9 Amortization of intangible assets (0.3) (0.3) (0.6) (0.6) ------------ ----------- ------------- ----------- Subtotal annuity 50.2 42.4 100.1 84.3 ------------ ----------- ------------- ----------- Asset management: Income before amortization of intangible assets 16.9 21.2 33.9 43.2 Amortization of intangible assets (4.8) (4.8) (9.6) (9.4) ------------ ----------- ------------- ----------- Subtotal asset management 12.1 16.4 24.3 33.8 ------------ ----------- ------------- ----------- Other: Loss before amortization of intangible assets (9.2) (11.2) (20.0) (23.3) Amortization of intangible assets - - - (0.1) ------------ ----------- ------------- ----------- Subtotal other (9.2) (11.2) (20.0) (23.4) ------------ ----------- ------------- ----------- Income before net realized investment losses, net change in unrealized and undistributed gains in private equity limited partnerships, and income taxes 53.1 47.6 104.4 94.7 Net realized investment losses (12.9) (11.6) (16.8) (14.7) Net change in unrealized and undistributed gains in private equity limited partnerships 7.5 - 22.5 - ------------ ----------- ------------- ----------- Total income before income taxes $47.7 $36.0 $110.1 $80.0 ============ =========== ============= ===========
3. INVESTMENTS Investments were comprised of the following (in millions): 9
JUNE 30 DECEMBER 31 2000 1999 ---------------- ---------------- (RESTATED) Fixed maturities $10,534.5 $10,516.1 Equity securities 63.5 37.9 Policy loans 613.4 599.5 Other invested assets 1,028.1 1,041.6 ---------------- ---------------- Total $12,239.5 $12,195.1 ================ ================
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. 4. NET INCOME PER SHARE The following table sets forth the computation of net income per share-basic and net income per share-assuming dilution:
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------------- ------------ ------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (RESTATED) (RESTATED) Numerator (in millions) Net income $29.0 $23.3 $68.4 $50.7 Less: preferred stock dividends (0.2) (0.3) (0.4) (0.5) ------------ ------------ ------------ ------------ Numerator for net income per share - basic - income available to common stockholders 28.8 23.0 68.0 50.2 Plus: income impact of assumed conversions Preferred stock dividends 0.2 0.3 0.4 0.5 ------------ ------------ ------------ ------------ Numerator for net income per share - assuming dilution - income available to common stockholders after assumed conversions $29.0 $23.3 $68.4 $50.7 Denominator Denominator for net income per share - basic - weighted-average shares 47,741,444 46,591,115 47,556,268 46,464,123 Effect of dilutive securities: Employee stock options 339,333 673,304 347,816 676,460 Convertible preferred stock 468,824 514,370 491,597 514,370 Common stock issuable as contingent purchase price - 35,883 - 25,090 ------------ ------------ ------------ ------------ Dilutive potential common shares 808,157 1,223,557 839,413 1,215,920 ------------ ------------ ------------ ------------ Denominator for net income per share - assuming dilution 48,549,601 47,814,672 48,395,681 47,680,043 ============ ============ ============ ============ Net income per share - basic $0.60 $0.49 $1.43 $1.08 ============ ============ ============ ============ Net income per share - assuming dilution $0.60 $0.49 $1.41 $1.06 ============ ============ ============ ============
5. COMPREHENSIVE INCOME Comprehensive income (loss) was comprised of the following (in millions): 10
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 --------------------------- ---------------------------- 2000 1999 2000 1999 ------------- ------------- -------------- ------------- (RESTATED) (RESTATED) Net income $29.0 23.3 $68.4 $50.7 Other comprehensive loss, net of taxes: Net unrealized losses on securities (33.8) (38.0) (38.3) (46.5) Comprehensive income (loss) $(4.8) $(14.7) $30.1 $4.2
6. NET CHANGE IN UNREALIZED AND UNDISTRIBUTED GAINS IN PRIVATE EQUITY LIMITED PARTNERSHIPS The Company is restating its results of operations and related financial statements by filing this Form 10-Q/A to reflect the net change in unrealized and undistributed gains in private equity limited partnerships. The net change in unrealized and undistributed gains in private equity limited partnerships is accounted for on the equity method and represents primarily increases in the fair value of the underlying investments of the private equity limited partnerships for which the Company has ownership interests in excess of 3%. This change in unrealized and undistributed gains is recorded net of the related amortization of deferred policy acquisition costs of $13.8 million and $41.6 million for the three months and six months ended June 30, 2000, respectively, and net of amounts realized, which are recognized in investment income, of $0.8 million and $2.5 million for the three months and six months ended June 30, 2000, respectively. The financial information for these investments is obtained directly from the private equity limited partnerships on a periodic basis. The corresponding amounts in 1999 were insignificant. The net increase in net income and net income per share resulting from such change was $4.9 million and $0.10 per share, respectively, for the quarter ended June 30, 2000 and $14.6 million and $0.30 per share, respectively, for the first six months of 2000. 7. RECENT ACCOUNTING PRONOUNCEMENT 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 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. 8. ACQUISITION On June 12, 2000, the Company announced an agreement to acquire Wanger Asset Management, L.P. ("Wanger"), a registered investment advisor. This acquisition is expected to close during the fourth quarter of 2000. Total assets under management of Wanger as of June 30, 2000 were approximately $9.0 billion. The purchase price for this transaction is $280.0 million in cash. In addition, the Company has agreed to make additional payments over the next five years of up to $170.0 million in cash, contingent upon the attainment of certain earnings objectives. The purchase price and contingent payments are subject to adjustment in certain circumstances. This transaction will be accounted for as a purchase. The Company expects to fund the acquisition 11 of Wanger with $80.0 million of cash and investments and $200.0 million of debt issued to Liberty Mutual Insurance Company. 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The discussion below is based on the Company's restated results of operations and related financial statements contained in this Form 10-Q/A which reflect the after-tax net change in unrealized and undistributed gains in private equity limited partnerships. See Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS NET INCOME was $29.0 million or $0.60 per share for the quarter ended June 30, 2000 compared to $23.3 million or $0.49 per share for the quarter ended June 30, 1999. For the first six months of 2000, net income was $68.4 million or $1.41 per share compared to $50.7 million or $1.06 per share for the first six months of 1999. These increases resulted largely from higher investment spread, net change in unrealized and undistributed gains in private equity limited partnerships and fee income. In addition, interest expense, net decreased. Partially offsetting these items were higher operating expenses, amortization expense, income tax expense and net realized investment losses. PRE-TAX INCOME was $47.7 million for the quarter ended June 30, 2000 compared to $36.0 million for the quarter ended June 30, 1999. For the first six months of 2000, pre-tax income was $110.1 million compared to $80.0 million for the first six months of 1999. These increases resulted largely from higher investment spread, net change in unrealized and undistributed gains in private equity limited partnerships and fee income. In addition, interest expense, net decreased. Partially offsetting these items were higher operating expenses, amortization expense and net realized investment losses. INVESTMENT SPREAD is the amount by which investment income earned on the Company's investments exceeds interest credited on policyholder balances. Investment spread was $83.2 million for the quarter ended June 30, 2000 compared to $67.7 million for the quarter ended June 30, 1999. 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 for the quarter ended June 30, 2000 was 2.40% compared to 1.90% for the quarter ended June 30, 1999. For the first six months of 2000, investment spread was $161.8 million compared to $139.1 million for the first six months of 1999. The investment spread percentage was 2.34% for the first six months of 2000 compared to 1.95% for the first six months of 1999. These increases in investment spread percentage resulted primarily from increased yields on average invested assets, largely relating to distributed realized gains in private equity limited partnerships, including those accounted for under the cost method. Investment income was $216.4 million for the quarter ended June 30, 2000 compared to $197.1 million for the quarter ended June 30, 1999. The increase of $19.3 million in 2000 compared to 1999 includes a $24.1 million increase as a result of a higher average investment yield, partially offset by a $4.8 million decrease resulting from a lower level of average invested assets. The 2000 investment income was net of $23.5 million of S&P 500 Index call option amortization expense related to the Company's equity-indexed annuities compared to $19.4 million in 1999. The average investment yield was 6.83% for the quarter ended June 30, 2000 compared to 6.08% for the quarter ended June 30, 1999. For the first six months of 2000, investment income was $422.3 million compared to $403.3 million for the first six months of 1999. The increase of $19.0 million in 2000 compared to 1999 includes a $30.6 million increase as a result of a higher average investment yield, partially offset by an $11.6 million decrease resulting from a lower level of average invested assets. The 2000 investment income was net of $44.6 million of S&P 500 Index call option amortization expense related to the Company's equity-indexed annuities compared to $38.8 million in 1999. The average investment yield was 6.67% for the first six months of 2000 compared to 6.20% for the first six months of 1999. Interest credited to policyholders totaled $133.2 million for the quarter ended June 30, 2000 compared to $129.4 million for the quarter ended June 30, 1999. The increase of $3.8 million in 2000 compared to 1999 primarily relates to a $7.8 million increase as a result of a higher average interest credited rate, partially offset by a $4.0 million decrease as a result of a lower level of average policyholder balances. Policyholder balances averaged $12.0 billion (including $9.6 13 billion of fixed products, consisting of fixed annuities and a closed block of single premium whole life insurance, and $2.4 billion of equity-indexed annuities) for the quarter ended June 30, 2000 compared to $12.4 billion (including $10.2 billion of fixed products and $2.2 billion of equity-indexed annuities) for the quarter ended June 30, 1999. The average interest credited rate was 4.43% (5.26% on fixed products and 0.85% on equity-indexed annuities) for the quarter ended June 30, 2000 compared to 4.18% (4.98% on fixed products and 0.85% on equity-indexed annuities) for the quarter ended June 30, 1999. 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 resulting in a 0.85% net credited rate. For the first six months of 2000, interest credited to policyholders totaled $260.5 million compared to $264.2 million for the first six months of 1999. The decrease of $3.7 million in 2000 compared to 1999 primarily relates to an $8.6 million decrease resulting from a lower level of average policyholder balances, partially offset by a $4.9 million increase as a result of a higher average interest credited rate. Policyholder balances averaged $12.0 billion (including $9.7 billion of fixed products and $2.3 billion of equity-indexed annuities) for the first six months of 2000 compared to $12.4 billion (including $10.3 billion of fixed products and $2.1 billion of equity-indexed annuities) for the first six months of 1999. The average interest credited rate was 4.33% (5.13% on fixed products and 0.85% on equity-indexed annuities) for the first six months of 2000 compared to 4.25% (5.00% on fixed products and 0.85% on equity-indexed annuities) for the first six months of 1999. Average investments in the Company's general account (computed without giving effect to Statement of Financial Accounting Standards No. 115), including a portion of the Company's cash and cash equivalents, were $12.7 billion for the quarter ended June 30, 2000 compared to $13.0 billion for the quarter ended June 30, 1999. For the first six months of 2000, such average investments were $12.7 billion compared to $13.0 billion for the first six months of 1999. These decreases were primarily due to net redemptions and transfers to separate accounts, partially offset by the reinvestment of portfolio earnings for the twelve months ended June 30, 2000. NET REALIZED INVESTMENT LOSSES were $12.9 million for the quarter ended June 30, 2000 compared to $11.6 million for the quarter ended June 30, 1999. For the first six months of 2000, net realized investment losses were $16.8 million compared to $14.7 million for the first six months of 1999. The net realized investment losses in 2000 included losses of $5.4 million for the quarter and $8.7 million for the six months for certain fixed maturity investments where the decline in value was determined to be other than temporary. NET CHANGE IN UNREALIZED AND UNDISTRIBUTED GAINS IN PRIVATE EQUITY LIMITED PARTNERSHIPS is accounted for on the equity method and represents primarily increases in the fair value of the underlying investments of the private equity limited partnerships for which the Company has ownership interests in excess of 3%. This change in unrealized and undistributed gains is recorded net of the related amortization of deferred policy acquisition costs of $13.8 million and $41.6 million for the three months and six months ended June 30, 2000, respectively, and net of amounts realized, which are recognized in investment income of $0.8 million and $2.5 million for the three months and six months ended June 30, 2000, respectively. The financial information for these investments is obtained directly from the private equity limited partnerships on a periodic basis. The increase for the three months and six months ended June 30, 2000 was due primarily to the increase in the valuation of the underlying investments of certain private equity limited partnerships. The corresponding amounts in 1999 were insignificant. There can be no assurance that any unrealized and undistributed gains will ultimately be realized or that the Company will not incur losses in the future on such investments. The net increase in net income and net income per share resulting from such change was $4.9 million and $0.10 per share, respectively, for the quarter ended June 30, 2000 and $14.6 million and $0.30 per share, respectively, for the first six months of 2000. 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 $71.3 million for the quarter ended June 30, 2000 compared to $68.2 million for the quarter ended June 30, 1999. For the first six months of 2000, investment advisory and administrative fees were $143.2 million compared to $134.4 million for 14 the first six months of 1999. These increases during 2000 compared to 1999 primarily reflect a higher level of average fee-based assets under management. Average fee-based assets under management were $52.2 billion for the quarter ended June 30, 2000 compared to $48.1 billion for the quarter ended June 30, 1999. For the first six months of 2000, average fee-based assets under management were $51.8 billion compared to $47.8 billion for the first six months of 1999. These increases during 2000 compared to 1999 resulted from net sales and market appreciation for the twelve months ended June 30, 2000. Investment advisory and administrative fees were 0.55% and 0.57% of average fee-based assets under management for the quarters ended June 30, 2000 and 1999, respectively. For the first six months of 2000 and 1999, such percentages were 0.55% and 0.56%, respectively. The amount of fee-based assets under management is affected by product sales and redemptions 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). FEE-BASED ASSETS UNDER MANAGEMENT
AS OF JUNE 30 ------------------------------- 2000 1999 ------------- ------------- Mutual Funds: Intermediary-distributed $17.6 $18.3 Direct-marketed 6.5 6.6 Closed-end 2.8 2.4 Variable annuity 2.1 1.8 ------------- ------------- 29.0 29.1 Private Capital Management 9.5 8.5 Institutional 14.0 11.5 ------------- ------------- Total Fee-Based Assets Under Management* $52.5 $49.1 ============= =============
- -------------- * As of June 30, 2000 and 1999, Keyport's insurance assets of $14.0 billion and $13.6 billion, respectively, bring total assets under management to $66.5 billion and $62.7 billion, respectively. CHANGES IN FEE-BASED ASSETS UNDER MANAGEMENT
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 -------------------------- ---------------------------- 2000 1999 2000 1999 ------------- ------------ -------------- ------------ Fee-based assets under management - beginning $53.1 $47.4 $51.4 $47.9 Sales and reinvestments: Mutual funds 1.6 1.9 3.2 3.7 Private Capital Management 0.5 0.4 0.9 0.6 Institutional 1.3 0.9 2.2 1.5 ------------- ------------ -------------- ------------ 3.4 3.2 6.3 5.8 ------------- ------------ -------------- ------------ Redemptions and withdrawals: Mutual funds (1.6) (2.0) (3.8) (3.9) Private Capital Management (0.3) (0.2) (0.5) (0.3) Institutional (0.6) (0.7) (1.0) (1.6) ------------- ------------ -------------- ------------ (2.5) (2.9) (5.3) (5.8) ------------- ------------ -------------- ------------ Market appreciation (depreciation) (1.5) 1.4 0.1 1.2 ------------- ------------ -------------- ------------ Fee-based assets under management - ending $52.5 $49.1 $52.5 $49.1 ============= ============ ============== ============
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 15 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 $15.1 million for the quarter ended June 30, 2000 compared to $15.3 million for the quarter ended June 30, 1999. For the first six months of 2000, distribution and service fees were $30.5 million compared to $30.0 million for the first six months of 1999. As a percentage of intermediary-distributed average mutual fund assets, distribution and service fees were approximately 0.35% for the quarters ended June 30, 2000 and 1999. For the first six months of 2000 and 1999, such percentages were 0.35% and 0.34%, respectively. TRANSFER AGENCY FEES are based on the market value of assets managed in the Company's intermediary-distributed, direct-marketed and variable annuity mutual funds. Such fees were $12.2 million on average assets of $26.3 billion for the quarter ended June 30, 2000 and $12.8 million on average assets of $26.3 billion for the quarter ended June 30, 1999. For the first six months of 2000, transfer agency fees were $24.9 million on average assets of $26.5 billion and $25.7 million on average assets of $26.2 billion for the first six months of 1999. As a percentage of total average assets under management, transfer agency fees were approximately 0.19% for the quarters ended June 30, 2000 and 1999. For the first six months of 2000 and 1999, such percentages were 0.19% and 0.20%, respectively. 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 such commissions that is passed on to the selling brokers); and c) the sales of non-proprietary 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 $9.3 million for the quarter ended June 30, 2000 compared to $9.0 million for the quarter ended June 30, 1999. For the first six months of 2000, total surrender charges and net commissions were $20.0 million compared to $17.4 million for the first six months of 1999. 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 $7.3 million for the quarter ended June 30, 2000 and $6.0 million for the quarter ended June 30, 1999. For the first six months of 2000, surrender charges were $14.7 million compared to $11.5 million for the first six months of 1999. Total annuity withdrawals represented 16.9% and 15.0% of the total average annuity policyholder and separate account balances for the quarters ended June 30, 2000 and 1999, respectively. For the first six months of 2000 and 1999, the corresponding percentages were 15.9% and 14.0%, respectively. Net commissions were $2.0 million for the quarter ended June 30, 2000 and $3.0 million for the quarter ended June 30, 1999. For the first six months of 2000, net commissions were $5.3 million compared to $5.9 million for the first six months of 1999. SEPARATE ACCOUNT FEES are primarily 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 $11.1 million for the quarter ended June 30, 2000 compared to $7.7 million for the quarter ended June 30, 1999. For the first six months of 2000, separate account fees were $21.8 million compared to $14.3 million for the first six months of 1999. The increase in separate account fees was due to the increase in separate account assets in 2000. Such fees represented 1.23% and 1.26% of average variable annuity, variable life and institutional separate account balances for the quarters ended June 30, 2000 and 1999, respectively. For the first six months of 2000 and 1999, such percentages were 1.25% and 1.27%, respectively. OPERATING EXPENSES primarily represent compensation, marketing, and other general and administrative expenses. These expenses were $99.6 million for the quarter ended June 30, 2000 compared to $90.5 million for the quarter ended June 30, 1999. For the first six months of 2000, operating expenses were $201.9 million compared to $179.2 million for the first six months of 1999. These increases during 2000 compared to 1999 were primarily related to the expansion of investment management capabilities, mutual fund product lines, distribution and electronic commerce activities. 16 Operating expenses expressed as a percent of average total assets under management were 0.60% for the quarter ended June 30, 2000 compared to 0.59% for the quarter ended June 30, 1999. For the first six months of 2000 and 1999, such percentages were 0.62% and 0.59%, 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 $29.8 million for the quarter ended June 30, 2000 compared to $22.5 million for the quarter ended June 30, 1999. For the first six months of 2000, amortization of deferred policy acquisition costs was $56.9 million compared to $46.7 million for the first six months of 1999. The increase during 2000 compared to 1999 was due to the increased profit realized on the in-force business. Amortization expense represented 31.6% and 29.8% of investment spread and separate account fees for the quarters ended June 30, 2000 and 1999, respectively. For the first six months of 2000 and 1999, the corresponding percentages were 31.0% and 30.4%, 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 $10.4 million for the quarter ended June 30, 2000 compared to $9.7 million for the quarter ended June 30, 1999. For the first six months of 2000, amortization of deferred distribution costs was $20.6 million compared to $19.2 million for the first six months of 1999. AMORTIZATION OF INTANGIBLE ASSETS relates to goodwill and certain identifiable intangible assets arising from business combinations accounted for as purchases. Amortization was $5.1 million for the quarters ended June 30, 2000 and 1999. For the first six months of 2000, amortization of intangible assets was $10.2 million compared to $10.1 million for the first six months of 1999. The Company has experienced higher than anticipated redemptions of assets under management at an acquired company, which at June 30, 2000 had goodwill and other intangible assets of $82.1 million. Although the Company has determined that there is no impairment of goodwill and other intangible assets at this time, if the higher level of redemptions were to continue and sales were not to increase, the Company's estimate of related future cash flows may change, resulting in the need to record an impairment loss. INTEREST EXPENSE, NET was $4.2 million for the quarter ended June 30, 2000 compared to $5.3 million for the quarter ended June 30, 1999. For the first six months of 2000, interest expense, net was $8.2 million compared to $11.0 million for the first six months of 1999. Interest expense primarily consists of interest on notes payable and interest on the Liberty Funds Group revolving credit facility which is utilized to finance deferred sales commissions paid in connection with the distribution of mutual fund shares sold with 12b-1 distribution fees and contingent deferred sales charges. Interest expense was net of interest income of $5.9 million and $3.8 million for the quarters ended June 30, 2000 and 1999, respectively. For the first six months of 2000 and 1999, interest expense was net of interest income of $11.7 million and $6.9 million, respectively. INCOME TAX EXPENSE was $18.7 million or 39.2% of pre-tax income for the quarter ended June 30, 2000 compared to $12.7 million, or 35.3% of pre-tax income for the quarter ended June 30, 1999. For the first six months of 2000, income tax expense was $41.7 million or 37.9% of pre-tax income compared to $29.3 million or 36.6% of pre-tax income for the first six months of 1999. FINANCIAL CONDITION STOCKHOLDERS' EQUITY was $1.22 billion as of June 30, 2000 compared to $1.19 billion as of December 31, 1999. Net income for the first six months of 2000 was $68.4 million and cash dividends on the Company's preferred and common stock totaled $3.2 million. Common stock totaling $1.7 million was issued in connection with the exercise of stock options. An increase in accumulated other comprehensive loss, 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 $38.3 million. BOOK VALUE PER SHARE amounted to $25.24 at June 30, 2000 compared to $24.99 at December 31, 1999. Excluding net unrealized losses on investments, book value per share amounted to $29.32 at June 30, 2000 and $28.32 17 at December 31, 1999. As of June 30, 2000, there were 48.2 million common shares outstanding compared to 47.5 million shares as of December 31, 1999. INVESTMENTS not including cash and cash equivalents, totaled $12.2 billion at June 30, 2000 and December 31, 1999. 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 June 30, 2000 and December 31, 1999 reflected net unrealized losses of $343.7 million and $318.6 million, respectively. Approximately $11.2 billion, or 80.2%, of the Company's general account and certain separate account investments at June 30, 2000, 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 June 30, 2000, the carrying value of investments in below investment grade securities represented $1.2 billion or 8.5% of general account investments, including cash and cash equivalents in the Company's annuity operations, and certain separate account investments. 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 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 June 30, 2000 and December 31, 1999, the carrying value of fixed maturity securities that were non-income producing was $28.3 million and $22.6 million, respectively. 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 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 61 and 67 outstanding swap agreements with an aggregate notional principal amount of $2.9 billion and $3.4 billion as of June 30, 2000 and December 31, 1999, 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 returns based upon this index. The Company had call options with a carrying value of $489.0 million and $701.1 million as of June 30, 2000 and December 31, 1999, respectively. The Company had total return swap agreements with a carrying value of $29.9 million and $37.8 million as of June 30, 2000 and December 31, 1999, respectively. 18 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 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 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 the impact of this statement. ACQUISITION On June 12, 2000, the Company announced an agreement to acquire Wanger Asset Management, L.P. ("Wanger"), a registered investment advisor. This acquisition is expected to close during the fourth quarter of 2000. Total assets under management of Wanger as of June 30, 2000 were approximately $9.0 billion. The purchase price for this transaction is $280.0 million in cash. In addition, the Company has agreed to make additional payments over the next five years of up to $170.0 million in cash, contingent upon the attainment of certain earnings objectives. The purchase price and contingent payments are subject to adjustment in certain circumstances. This transaction will be accounted for as a purchase. 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. The Company has a $150.0 million revolving credit facility (the "Facility"), established in April 1999 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. This five year Facility is secured by such 12b-1 distribution fees and 19 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 June 30, 2000, the interest paid on borrowings under the Facility was at the rate of 6.66% 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 June 30, 2000, the amount of dividends that Keyport could pay without such approval was $47.8 million. 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. The Company expects to fund the acquisition of Wanger with $80.0 million of cash and investments and $200.0 million of debt issued to Liberty Mutual Insurance Company. 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 Liberty Funds Group, 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 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 June 30, 2000, $11.2 billion, or 78.2%, of Keyport's general account and certain separate 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 investments, 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 75.0% of the Company's fixed annuity policyholder balances were subject to surrender charges or restrictions as of June 30, 2000. 20 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 not based on historical fact, trend analyses and other information contained 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 made based on current expectations and assumptions and 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 expressed or implied 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) that the net change in unrealized and undistributed gains in private equity limited partnerships will not be realized or that future losses on such investment will not occur; (4) levels of surrenders, withdrawals and net redemptions of the Company's retirement-oriented insurance products and investment management products; (5) relationships with investment management clients, including levels of assets under management; (6) 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; (7) 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; (8) changes in financial ratings of Keyport or those of its competitors; (9) the Company's ability to attract and retain key employees, including senior officers, portfolio managers and sales executives; (10) 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; (11) changes in applicable tax laws which may affect the relative tax advantages and attractiveness of some of the Company's products; (12) the result of any litigation or legal proceedings involving the Company; (13) changes in generally accepted accounting principles and the impact of accounting principles and pronouncements on the Company's financial condition and results of operations; (14) changes in the Company's senior debt ratings; (15) changes in operating expense levels; (16) acquisition risks, including risks that the acquisition of Wanger Asset Management, L.P. will not close or that, if it closes, the acquisition and integration of Wanger will not be as successful as anticipated; and (17) 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, 21 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. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There have been no material changes during the first six months of 2000 in the Company's market risks or in the methods which the Company uses to manage such risks, which are described in the Company's Form 10-K for the year ended December 31, 1999. PART II ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Annual Meeting of Stockholders was held on May 8, 2000. The following matters were submitted to a vote of the shareholders at the Annual Meeting with the following results: 1. Election of the following individuals as directors of the Company for a term of three years:
COMMON STOCK SERIES A PREFERRED STOCK ------------ ------------------------ FOR WITHHELD FOR WITHHELD --- -------- --- -------- Michael J. Babcock 46,526,145 97,913 444,454 14,061 Gary L. Countryman 44,715,971 1,908,087 444,454 14,061 John P. Hamill 46,525,445 98,613 444,454 14,061 Marian L. Heard 46,504,116 119,942 444,454 14,061
No other matters were submitted to the shareholders for a vote. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 12 Statement re Computation of Ratios 27 Financial Data Schedule (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the quarter ended June 30, 2000. 23 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LIBERTY FINANCIAL COMPANIES, INC. /s/ J. Andy Hilbert -------------------------------------------- J. Andy Hilbert (Duly Authorized Officer and Chief Financial Officer) Date: November 14, 2000 24 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE - ----------- ------------- ---- 12 Statement re Computation of Ratios 26 27 Financial Data Schedule 27
25 EX-12 2 a2031029zex-12.txt EXHIBIT 12 LIBERTY FINANCIAL COMPANIES, INC. EXHIBIT 12 - STATEMENT RE COMPUTATION OF RATIOS ($ in millions)
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ------------------------- -------------------------- 2000 1999 2000 1999 ------------ ------------ ------------- ------------ (RESTATED) (RESTATED) Earnings: Pretax income $47.7 $36.0 $110.1 $80.0 Add fixed charges: Interest on indebtedness 10.1 9.1 19.9 17.9 Portion of rent representing the interest factor 1.3 1.2 2.5 2.4 Accretion to face value of redeemable convertible preferred stock - 0.2 0.2 0.4 ------------ ------------ ------------- ------------ Sub-total of income as adjusted 59.1 46.5 132.7 100.7 Interest on fixed annuities and financial products 133.2 129.4 260.5 264.2 ------------ ------------ ------------- ------------ Total income as adjusted $192.3 $175.9 $393.2 $364.9 ============ ============ ============= ============ Fixed charges: Interest on indebtedness $10.1 $9.1 $19.9 $17.9 Portion of rent representing the interest factor 1.3 1.2 2.5 2.4 Accretion to face value of redeemable convertible preferred stock - 0.2 0.2 0.4 ------------ ------------ ------------- ------------ Sub-total of fixed charges 11.4 10.5 22.6 20.7 Interest on fixed annuities and financial products 133.2 129.4 260.5 264.2 ------------ ------------ ------------- ------------ Combined fixed charges 144.6 139.9 283.1 284.9 Preferred stock dividends 0.4 0.4 0.7 0.7 ------------ ------------ ------------- ------------ Fixed charges and preferred stock dividends $145.0 $140.3 $283.8 $285.6 ============ ============ ============= ============ Ratio of earnings to fixed charges: Excluding interest on fixed annuities and financial products 5.18 x 4.43 x 5.87 x 4.86 x ============ ============ ============= ============ Including interest on fixed annuities and financial products 1.33 x 1.26 x 1.39 x 1.28 x ============ ============ ============= ============ Ratio of earnings to combined fixed charges and preferred stock dividends: Excluding interest on fixed annuities and financial products 5.01 x 4.27 x 5.70 x 4.71 x ============ ============ ============= ============ Including interest on fixed annuities and financial products 1.33 x 1.25 x 1.39 x 1.28 x ============ ============ ============= ============
26 EX-27 3 a2031029zex-27.txt EX-27
7 1,000,000 USD 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 1 10,535 0 0 64 0 0 12,240 1,621 0 759 19,294 0 0 12,018 0 567 0 11 1 1,216 19,294 0 422 (17) 240 0 57 202 110 42 0 0 0 0 68 1.43 1.41 0 0 0 0 0 0 0
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