- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K/A
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
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 New York Stock Exchange
share 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 April 19, 2001 (based on the closing sale price of the Common
Stock on the New York Stock Exchange on such date) was approximately
$624.1 million.
There were 48,904,744 shares of the registrant's Common Stock, $.01 par
value, and 213,242 shares of the registrant's Series A Convertible Preferred
Stock, $.01 par value, outstanding as of April 19, 2001.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXPLANATORY NOTE
Liberty Financial Companies, Inc. ("Liberty Financial" or the "Company") is
filing this Annual Report on Form 10-K/A as Amendment No. 1 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 2000, filed
with the Securities and Exchange Commission on April 2, 2001 ("Form 10-K") for
the purpose of (i) amending Part III of the Form 10-K by supplying the
information required by Items 11 and 12, which Items had previously been
incorporated by reference to the Company's Definitive Proxy Statement,
(ii) amending Item 13 of Part III and Item 14 of Part IV Note 15 of the Notes to
Consolidated Financial Statements of the Form 10-K to add disclosure regarding a
contingent liability in connection with an affiliate relationship, and
(iii) making conforming changes elsewhere in this Report.
LIBERTY FINANCIAL COMPANIES, INC.
ANNUAL REPORT ON FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 2000
TABLE OF CONTENTS
PAGE
--------
Part I
Item 1. Business.................................................... 2
Item 2. Properties.................................................. 20
Item 3. Legal Proceedings........................................... 20
Item 4. Submission of Matters to a Vote of Security Holders......... 20
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................................... 24
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 37
Item 8. Financial Statements and Supplementary Data................. 37
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 37
Part III
Item 10. Directors and Executive Officers of the Registrant.......... 38
Item 11. Executive Compensation...................................... 40
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 46
Item 13. Certain Relationships and Related Transactions.............. 48
Part IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.................................................... 52
PART I
ITEM 1. BUSINESS
OVERVIEW
Liberty Financial Companies, Inc. ("Liberty Financial" or the "Company") is
an asset accumulation and management company. On November 1, 2000, the Company
announced that it has retained the investment banking firm of Credit Suisse
First Boston Corporation to review its strategic alternatives, including a
possible sale of the 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 in
2000 consisted of mutual funds, private capital management and institutional
asset management. On September 29, 2000 the Company completed its purchase of
Wanger Asset Management, L.P. On December 29, 2000, the Company completed the
sale of its Private Capital Management ("PCM") division of Stein Roe & Farnham
Incorporated to the PCM management team and an outside investor group. 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,
restructuring charges, special compensation plan charges, net change in
unrealized and undistributed gains in private equity limited partnerships, gain
on the sale of PCM and extraordinary items, net of related income taxes) was
$144.0 million in 2000, $126.7 million in 1999 and $122.6 million in 1998. The
following table sets forth the Company's assets under management as of
December 31, 2000, 1999 and 1998, respectively.
ASSETS UNDER
MANAGEMENT
------------------------------
AS OF DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(DOLLARS IN BILLIONS)
Retirement-oriented insurance products...................... $14.8 $13.7 $13.1
Mutual funds................................................ 36.2 29.8 28.6
Private capital management.................................. -- 9.1 7.9
Institutional asset management.............................. 15.6 12.5 11.4
----- ----- -----
Total..................................................... $66.6 $65.1 $61.0
===== ===== =====
At April 19, 2001, approximately 70.01% 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 that 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 and
provide 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 $7.7 billion of policyholder liabilities
as of December 31, 2000. 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
2
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.
The Company has seven operating units engaged in investment management:
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"), Liberty Asset Management Company ("LAMCO") and Liberty Wanger
Asset Management, L.P. ("Liberty Wanger"), each of which carries strong brand
name recognition in the markets it serves.
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 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 2000 were $17.2 billion (including
$3.1 billion of reinvested dividends). During 2000, 46% of sales were made
through intermediary distributors, with the balance made directly to the
investor. Over 37,000 individual brokers and other intermediaries sold Liberty
Financial products in 2000.
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 its mutual fund administration and transfer
agency operations and has consolidated 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 second largest distributor of Keyport's
annuities and the second largest distributor of the Company's mutual funds
in 2000.
- ------------------------
* "S&P," "S&P 500" and "Standard and Poor's 500" are registered trademarks of
the McGraw-Hill Companies, Inc., and have been licensed for use by Keyport.
3
- 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), Colonial (acquired in
1995), Newport (acquired in 1995), Crabbe Huson (acquired in 1998),
Progress (acquired in 1998), Liberty Wanger (acquired in 2000) and major
components of the Company's bank distribution unit (including Independent,
acquired in 1996) all joined Liberty Financial by acquisition. On
November 1, 2000, the Company announced that it has retained the
investment banking firm of Credit Suisse First Boston Corporation to
review its strategic alternatives, including a possible sale of the
Company.
- 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 and was an early adopter of internet technology
to support its business.
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.
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 and fee
income on its variable annuities.
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, seven and
ten-year terms with interest earnings based on a
4
percentage of the increase in the S&P 500 Index. With the five, seven and ten
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.
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.
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, 2000.
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.
INSTITUTIONAL ANNUITIES. Institutional annuity products are principally
single premium deposits made by financial institutions that provide fixed or
variable returns over a fixed period.
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,
---------------------------------------------
2000 1999 1998
------------- ------------- -------------
(DOLLARS IN MILLIONS, EXCEPT POLICY DATA)
POLICY AND SEPARATE ACCOUNT LIABILITIES:
Fixed annuities................................. $ 7,353 $ 7,197 $ 7,834
Equity Indexed annuities........................ 2,320 2,503 2,125
Variable annuities.............................. 2,821 2,666 1,744
Institutional annuities......................... 1,524 950 412
Life insurance.................................. 2,117 2,095 2,112
------------ ------------ ------------
Total......................................... $ 16,135 $ 15,411 $ 14,227
============ ============ ============
5
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
------------- ------------- -------------
(DOLLARS IN MILLIONS, EXCEPT POLICY DATA)
NUMBER OF IN FORCE POLICIES:
Fixed annuities................................. 167,119 182,858 205,508
Equity Indexed annuities........................ 48,709 49,691 46,484
Variable annuities.............................. 47,256 43,677 37,049
Institutional annuities......................... 11 6 2
Life insurance.................................. 20,232 21,640 23,097
------------ ------------ ------------
Total......................................... 283,327 297,872 312,140
============ ============ ============
AVERAGE IN FORCE POLICY AMOUNT:
Fixed annuities................................. $ 43,996 $ 39,356 $ 38,122
Equity Indexed annuities........................ $ 47,636 $ 50,372 $ 45,720
Variable annuities.............................. $ 59,690 $ 61,048 $ 47,070
Institutional annuities......................... $138,552,465 $158,342,833 $205,977,000
Life insurance.................................. $ 104,665 $ 96,789 $ 91,435
PREMIUMS (STATUTORY BASIS):
Fixed annuities................................. $ 1,239 $ 462 $ 306
Equity Indexed annuities........................ 139 170 278
Variable annuities.............................. 716 866 508
Institutional annuities......................... 685 500 400
Life insurance (net of reinsurance)............. (2) (2) (1)
------------ ------------ ------------
Total......................................... $ 2,777 $ 1,996 $ 1,491
============ ============ ============
NEW CONTRACTS AND POLICIES:
Fixed annuities................................. 42,009 17,301 10,448
Equity Indexed annuities........................ 5,935 6,395 9,249
Variable annuities.............................. 9,963 14,886 12,238
Institutional annuities......................... 3 4 2
------------ ------------ ------------
Total......................................... 57,910 38,586 31,937
============ ============ ============
AGGREGATE AMOUNT SUBJECT TO SURRENDER CHARGES:
Fixed annuities................................. $ 5,546 $ 5,708 $ 6,643
Equity Indexed annuities........................ $ 2,250 $ 2,482 $ 2,125
WITHDRAWALS AND TERMINATIONS (STATUTORY BASIS):
FIXED ANNUITIES:
Death......................................... $ 82 $ 28 $ 29
Maturity...................................... $ 165 $ 141 $ 118
Surrender..................................... $ 1,485 $ 1,220 $ 1,135
INDEXED ANNUITIES:
Death......................................... $ 20 $ 11 $ 11
Maturity...................................... $ 1 -- --
Surrender..................................... $ 233 $ 28 $ 19
VARIABLE ANNUITIES:
Death......................................... $ 19 $ 17 $ 7
Maturity...................................... $ 223 $ 223 $ 87
Surrender..................................... $ 214 $ 199 $ 125
6
AS OF OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
2000 1999 1998
------------- ------------- -------------
(DOLLARS IN MILLIONS, EXCEPT POLICY DATA)
LIFE INSURANCE:
Death......................................... $ 78 $ 76 $ 63
Surrender..................................... $ 70 $ 74 $ 77
SURRENDER RATES:
Fixed annuities:................................ 20.63% 15.39% 13.63%
Equity Indexed annuities........................ 9.32% 1.22% 1.05%
Variable annuities.............................. 8.04% 8.04% 8.26%
Life insurance.................................. 3.34% 3.53% 3.65%
SALES AND ASSET RETENTION
Product sales are influenced primarily by overall market conditions
affecting the attractiveness of the Company's retirement-oriented insurance
products, by product features including interest crediting and participation
rates, innovations and services that distinguish the Company's products from
those of its competitors.
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.
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, 2000, rates on 78.0% 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 4.0% to 8.2% at December 31, 2000. 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 2000 ranged from
4.35% to 8.2%. Guaranteed minimum rates on new policies issued during 2000
ranged from 3.0% to 4.5%.
7
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, 2000, 75.4% 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. 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 2000 were 0.54% 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 and to certain separate account investments (which at
December 31, 2000 totaled $15.1 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 and separate account
assets. The two most important tools in managing policy liabilities are setting
crediting rates and establishing surrender periods. The investment process
requires portfolio
8
techniques that earn acceptable yields while effectively managing both interest
rate risk and credit risk. 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 (76.4% at December 31,
2000). 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 (8.3% at
December 31, 2000) 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 below investment grade portfolio in an effort to optimize its
risk/return profile. At December 31, 2000, the carrying value of fixed maturity
investments that were non-income producing was $24.4 million, which constituted
0.2% of the Company's general account and certain separate account investments.
As of December 31, 2000, the Company owned approximately $3.3 billion of
mortgage-backed securities (21.8% of its general account and certain separate
account investments), 98.8% 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, 2000, approximately $3.3 billion (21.8% 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.
As of December 31, 2000, approximately $439.0 million (2.9% of the Company's
general account and certain separate account investments) were invested in
private equity limited partnerships. Excluding the net change in unrealized and
undistributed gains in private equity limited partnerships, the Company's
investments total $348.7 million as of December 31, 2000.
Affiliates of the Company, primarily Stein Roe, manage the majority
($8.0 billion at December 31, 2000) 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,
---------------------------------
2000 1999 1998
--------- --------- ---------
Fixed maturities.......................................... $10,668.3 $10,516.1 $11,277.2
Policy loans.............................................. 620.8 599.5 578.9
Other invested assets..................................... 792.5 894.5 717.6
Equity securities......................................... 76.4 37.9 24.6
--------- --------- ---------
Investments............................................. 12,158.0 12,048.0 12,598.3
Cash and cash equivalents................................. 1,728.3 1,075.9 719.6
--------- --------- ---------
General account investments............................... $13,886.3 $13,123.9 $13,317.9
========= ========= =========
9
INVESTMENT MANAGEMENT
In 2000, Liberty Financial had three types of investment management product
lines: mutual funds, private capital management, and institutional asset
management. The Company has seven operating units engaged in investment
management: Colonial, Stein Roe, Newport, Crabbe Huson, Progress, LAMCO and
Liberty Wanger. On September 29, 2000 the Company completed its purchase of
Wanger Asset Management, L.P. On December 29, 2000, the Company completed the
sale of PCM to the PCM management team and an outside investor group. The
Company's primary financial objectives with respect to its investment management
businesses are to increase assets under management in both of its remaining 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, 2000, the Company sponsored open-end
mutual funds, as well as closed-end funds. The open-end funds include
intermediary-distributed mutual funds, direct-marketed funds, and other funds
included among the investment options available under the Company's variable
annuities. The closed-end funds include fixed income funds and equity funds. At
December 31, 2000, total mutual fund assets were $36.2 billion. At December 31,
2000, 66.9% of these assets were invested in equity funds, 18.4% in taxable
fixed income funds and 14.7% in tax-exempt fixed income funds.
INSTITUTIONAL ASSET MANAGEMENT. At December 31, 2000, the Company managed
$15.6 billion of investment portfolios for institutional investors such as
insurance companies, public and private retirement funds, endowments,
foundations and other institutions. 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 third 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 for as long as the shares are held and
10
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, 2000 (dollars in billions). Such information includes Keyport's
assets (including its general account investments managed by Stein Roe, as well
as loans to 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 BY PRODUCT LINE 2000 1999 1998
- --------------------------------------------- -------- -------- --------
Mutual funds:
Intermediary-distributed.................................. $17.6 $18.3 $17.9
Direct-marketed........................................... 13.1(1) 6.7 6.8
Closed-end................................................ 2.7 2.7 2.4
Variable annuity.......................................... 2.8 2.1 1.5
----- ----- -----
Total mutual funds...................................... 36.2 29.8 28.6
Private capital management.................................. -- 9.1 7.9
Institutional asset management.............................. 15.6 12.5 11.4
Retirement-oriented insurance products...................... 14.8 13.7 13.1
----- ----- -----
Total................................................. $66.6 $65.1 $61.0
===== ===== =====
(1) As of December 31, 2000, includes $7.1 billion of assets managed by Liberty
Wanger Asset Management Company.
AS OF DECEMBER 31,
------------------------------
TOTAL ASSETS UNDER MANAGEMENT BY ASSET CLASS(1) 2000 1999 1998
- ----------------------------------------------- -------- -------- --------
Fee-based assets:
Equity.................................................... $31.7 $29.1 $26.0
Fixed-income.............................................. 20.1 22.3 21.9
----- ----- -----
Total fee-based assets................................ 51.8 51.4 47.9
Retirement-oriented insurance products...................... 14.8 13.7 13.1
----- ----- -----
Total..................................................... $66.6 $65.1 $61.0
===== ===== =====
(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) 2000 1999 1998
- ----------------------------------------------------------- -------- -------- --------
Equity funds................................................ $24.2 $16.7 $15.0
Fixed-income funds:
Taxable................................................... 6.7 7.5 7.3
Tax-exempt................................................ 5.3 5.6 6.3
----- ----- -----
Total................................................. $36.2 $29.8 $28.6
===== ===== =====
(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 2000 1999 1998
- ------------------------------------------------- -------- -------- --------
Assets under management--beginning.......................... $65.1 $61.0 $51.5
Sales and reinvestments..................................... 17.2 13.4 9.6
Redemptions and withdrawals................................. (12.2) (12.2) (8.2)
Asset acquisitions.......................................... 9.4 -- 5.4
Asset disposition........................................... (9.1) -- --
Net insurance cash flows.................................... 0.6 0.5 0.6
Market appreciation (depreciation).......................... (4.4) 2.4 2.1
----- ----- -----
Assets under management--ending............................. $66.6 $65.1 $61.0
===== ===== =====
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. 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.
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 2000 were $17.2 billion (including $3.1 billion of
reinvested dividends and similar reinvested returns). During 2000, 46% of these
sales were made through intermediary distributors, with the balance made
directly to the investor. Over 37,000 individual brokers and other
intermediaries sold Liberty Financial products in 2000.
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.
12
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. 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, 2000, Independent had 55 bank relationships involving
over 300 registered salespersons and over 1,200 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-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 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. 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.
13
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 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.
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 and institutional
asset management products. For information on these reportable segments, see
Note 12 of Notes to the Company's Consolidated Financial Statements.
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.
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.
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
14
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.
Keyport and Independence Life prepare their statutory-basis financial
statements in accordance with accounting practices prescribed or permitted by
the Insurance Department of the State of Rhode Island. Keyport Benefit prepares
its statutory-basis financial statements in accordance with accounting practices
prescribed or permitted by the New York Department of Insurance. State laws
prescribe certain statutory accounting practices. Permitted statutory accounting
practices encompass all accounting practices that are not proscribed; such
practices may differ between the states and companies within a state. In 1998,
the National Association of Insurance Commissioners (the "NAIC") adopted
codified statutory accounting principles ("Codification"). Codification will
likely change, to some extent, prescribed statutory accounting practices and may
result in changes to the accounting practices that Keyport uses to prepare its
statutory based financial statements. Codification will require adoption by the
various states before it becomes the prescribed statutory-basis of accounting
for insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for Keyport, the State of Rhode Island and New
York must adopt Codification as the prescribed basis of accounting on which
domestic insurers must report their statutory-basis results to the Insurance
Department. The State of Rhode Island and New York (with modification) have
adopted Codification. The adoption of Codification on the Company's
statutory-basis financial statements in Rhode Island will reduce statutory
surplus at January 1, 2001 by approximately $20 million.
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, 2000, 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 Company's Consolidated Financial
Statements. 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
15
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. 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.
Keyport paid $10.0 million in dividends during 2000. The amount of dividends
that Keyport could pay in 2001 without such approval is $38.4 million. In
addition, no person or group may acquire, directly or indirectly, 10% or more of
the voting stock or voting power of Liberty Financial (or of Keyport or
Independence) unless such person has provided certain required information to
the Rhode Island and New York Departments of Business Regulation and such
acquisition is approved by the Departments.
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 the past several years, several proposals to repeal or
modify the Bank Holding Company Act of 1956 (which prohibits banks from being
affiliated with insurance companies) were 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.
On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 was signed into
law. The major provisions of this new law became effective on November 13, 2000.
Notably the Gramm-Leach-Bliley Act eliminated legal barriers to affiliations
among banks, insurance companies and other financial services companies by
repealing key provisions of the Glass-Steagall Act of 1933 (that restricted
banks from engaging in securities-related businesses). It remains to be seen
what effect this will have on the Company and its competitors. Title V of the
Gramm-Leach-Bliley Act also required federal financial regulators to adopt rules
governing the use of consumer personal financial information by the financial
institutions they regulate. On June 22, 2000, the Securities and Exchange
Commission adopted Regulation S-P, which applies to the broker-dealers,
investment advisers and investment companies in the LFC Complex. Among other
things, Regulation S-P requires such entities to disclose their privacy
practices regarding the collection, use and sharing (with both affiliates and
third parties) of customer nonpublic personal information. Compliance with
Regulation S-P is required by July 1, 2001.
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
16
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
Colonial, Stein Roe, Newport, Crabbe Huson, Progress, LAMCO and Liberty Wanger)
are registered with the Securities and Exchange Commission (the "SEC") as
investment advisers under the Advisers Act. They also are subject to the
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.
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 and approved 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.
17
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 and
provisions included in the Gramm-Leach-Bliley Act impose additional restrictions
and duties with respect to bank sales practices, including obligations to
disclose that the products are not subject to deposit insurance.
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 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, 2000, the Company had 2,131 full-time employees
summarized by activity as follows: 384 in annuity insurance operations; 1,268 in
asset management activities; 426 in marketing and distribution operations; and
53 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.
18
EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages at March 31, 2001, 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
- ---- -------- -------------------------------------------------------
Edmund F. Kelly...................... 55 Chairman of the Board of Directors
Gary L. Countryman................... 61 President, Chief Executive Officer and Director
Kevin M. Carome...................... 44 Senior Vice President, General Counsel and Clerk
Lindsay Cook......................... 49 Executive Vice President
Frank A. Faggiano.................... 61 Senior Vice President, Human Resources
Stephen E. Gibson.................... 47 President, Liberty Advisors *
J. Andrew Hilbert.................... 42 Senior Vice President and Chief Financial Officer
C. Allen Merritt, Jr................. 60 Chief of Staff
Porter P. Morgan..................... 60 Senior Vice President, Marketing
Philip Polkinghorn................... 43 President, Keyport Life Insurance Company
* Liberty Advisors includes Stein Roe and Colonial
Mr. Kelly is President and Chief Executive Officer of Liberty Mutual and
Liberty Mutual Fire Insurance Company (an affiliate of Liberty Mutual) and has
served in that position since April 1998. He served as President and Chief
Operating Officer prior to that time. Mr. Kelly was elected Chairman of Liberty
Mutual in April 2000 and was elected Chairman of the Board of Directors of the
Company in May 2000. He served as a director of the Company prior to that time.
Mr. Kelly also serves as a director of the Citizens Financial Group, Inc.
Mr. Countryman was Chairman (from 1991 until 2000) and Chief Executive
Officer (from 1986 until April 1998) of Liberty Mutual and Liberty Fire. He
currently serves as a director of the Company, FleetBoston Financial
Corporation, NSTAR and Harcourt General, Inc. Mr. Countryman became President
and Chief Executive Officer of the Company on January 13, 2000.
Mr. Carome became Senior Vice President and General Counsel of the Company
in August 2000. Mr. Carome served as General Counsel for Liberty Funds Group
LLC, a wholly owned subsidiary of the Company, from August 1998 until
July 2000. Prior to that time Mr. Carome served as Vice President and Associate
General Counsel for the Company.
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 Advisors, a unit of Liberty Financial
that includes Stein Roe and Colonial, in August 2000. Mr. Gibson held various
other executive positions in Liberty Financial's asset management business since
joining the Company in July 1996. He was Executive Vice President of Liberty
Funds Group from July 1996 to January 1997. Prior to that, he was Managing
Director of
19
Marketing at Putnam Investments from 1995 to July 1996, and prior thereto was
Executive Vice President of Putnam Mutual Funds.
Mr. Hilbert joined the Company as Senior Vice President and Chief Financial
Officer in March 1997. He served as Treasurer from March 1998 until May 2000.
From October 1995 until March 1998, 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 of Staff of Liberty Financial in August 2000. Prior
to that time, Mr. Merritt served as Chief Operating Officer of the Company from
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.
ITEM 2. PROPERTIES
As of December 31, 2000, 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 and approximately 19,800 square feet in
a single facility in Lincoln, Rhode Island under a lease which expires in 2007.
Liberty Advisors and certain of its affiliates lease approximately 219,000
square feet in two buildings in downtown Boston under leases which expire in
2006 and approximately 41,200 square feet in Aurora, Colorado under a lease
which expires in 2005. Stein Roe leases 141,900 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 25,600 square feet in Purchase, New York under a lease which
expires in 2006 and approximately 2,000 square feet in Akron, Ohio under a lease
which expires in 2004. Liberty Wanger leases approximately 35,200 square feet in
Chicago, Illinois under leases which expire in 2009. In addition, the Company
leases approximately 24,600 square feet in a building in downtown Boston 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
20
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 November 1, 2000, the Company announced that it has retained
the investment banking firm of Credit Suisse First Boston Corporation to review
its strategic alternatives, including a possible sale of the Company. On
December 31, 2000, the closing price of the Company's Common Stock on the NYSE
was $44 9/16 per share. As of February 28, 2001, there were approximately 180
shareholders of record. In addition, the Company estimates that there are
approximately 2,300 beneficial shareholders whose shares are held in street
name. The high and low sales prices for each quarter during 2000 and 1999, as
traded on the NYSE Composite Tape, were as follows:
2000 1999
- ----------------------------------------------------- -----------------------------------------------------
QUARTER HIGH LOW QUARTER HIGH LOW
- ------- -------- -------- ----------------------------- -------- --------
January-March................ $24 1/8 $18 3/8 January-March................ $28 $21 3/16
April-June................... 24 1/8 17 7/8 April-June................... 29 11/16 20 1/8
July-September............... 25 21 3/4 July-September............... 29 20 15/16
October-December............. 44 9/16 23 1/2 October-December............. 26 11/16 20 7/16
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 had participated in the DRIP since its inception until the first
quarter dividend for 2001 when it took its payment in cash.
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" beginning at page 34.
SALES OF UNREGISTERED SECURITIES
Liberty Financial issued shares of its Common Stock since the beginning of
2000 without registration under the Securities Act of 1933 (the "Securities
Act") in the transaction described below:
On May 16, 2000, the Company issued 77,535 shares of Common Stock to the
former shareholders of Independent, pursuant to the February 1996 Merger
Agreement pursuant to which the Company acquired the business of Independent.
The Independent shareholders made customary investment representations to the
Company, and the issuance of these shares was exempt from registration pursuant
to Section 4(2) of the Securities Act.
21
ITEM 6. SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA
SELECTED CONSOLIDATED FINANCIAL DATA(1)
(IN MILLIONS, EXCEPT PER SHARE DATA)
AS OF OR FOR THE YEAR ENDED DECEMBER 31 2000 1999 1998 1997 1996
- --------------------------------------- --------- --------- --------- --------- ---------
INCOME STATEMENT DATA
Investment income....................... $ 862.3 $ 810.3 $ 820.9 $ 853.1 $ 796.4
Interest credited to policyholders...... (539.6) (526.6) (562.2) (594.1) (572.7)
--------- --------- --------- --------- ---------
Investment spread....................... 322.7 283.7 258.7 259.0 223.7
--------- --------- --------- --------- ---------
Net realized investment gains
(losses).............................. (47.5) (42.2) 2.4 25.9 8.0
--------- --------- --------- --------- ---------
Gain on sale of Private Capital
Management............................ 27.6 -- -- -- --
--------- --------- --------- --------- ---------
Net change in unrealized and
undistributed gains in private equity
limited partnerships.................. 31.6 -- -- -- --
--------- --------- --------- --------- ---------
Fee income:
Investment advisory and administrative
fees................................ 300.2 268.5 237.7 217.9 196.4
Distribution and service fees......... 60.7 60.4 52.7 49.2 44.9
Transfer agency fees.................. 49.0 51.7 49.0 47.7 43.9
Surrender charges and net
commissions......................... 42.3 36.5 33.7 36.1 34.7
Separate account fees................. 43.5 33.5 20.6 17.1 16.0
--------- --------- --------- --------- ---------
Total fee income.................... 495.7 450.6 393.7 368.0 335.9
--------- --------- --------- --------- ---------
Expenses:
Operating expenses.................... (406.0) (360.4) (328.2) (309.7) (277.9)
Restructuring charges................. (18.7) -- -- -- --
Special compensation plan............. (11.1) -- -- -- --
Amortization of deferred policy
acquisition costs................... (116.0) (97.4) (77.4) (86.4) (70.4)
Amortization of deferred distribution
costs............................... (42.9) (40.3) (40.1) (34.2) (33.9)
Amortization of intangible assets..... (24.3) (20.3) (15.3) (13.5) (15.4)
Interest expense, net................. (22.5) (19.3) (14.9) (17.0) (19.7)
--------- --------- --------- --------- ---------
Total expenses...................... (641.5) (537.7) (475.9) (460.8) (417.3)
--------- --------- --------- --------- ---------
Pretax income........................... 188.6 154.4 178.9 192.1 150.3
Income tax expense...................... (61.0) (55.1) (54.4) (62.6) (49.6)
--------- --------- --------- --------- ---------
Income before extraordinary item........ 127.6 99.3 124.5 129.5 100.7
Extraordinary loss on extinguishment of
debt, net of tax...................... -- -- (9.7) -- --
--------- --------- --------- --------- ---------
Net income.............................. $ 127.6 $ 99.3 $ 114.8 $ 129.5 $ 100.7
========= ========= ========= ========= =========
22
AS OF OR FOR THE YEAR ENDED DECEMBER 31 2000 1999 1998 1997 1996
- --------------------------------------- --------- --------- --------- --------- ---------
PER SHARE DATA(2)
Net income per share--basic........... $ 2.65 $ 2.11 $ 2.51 $ 2.94 $ 2.36
Net income per share--assuming
dilution............................ 2.61 2.07 2.42 2.77 2.24
Dividends on common stock............. 0.40 0.40 0.40 0.40 0.40
Dividends on convertible preferred
stock............................... 2.88 2.88 2.88 2.88 2.88
Book value............................ 29.68 24.99 27.41 26.82 24.42
OTHER OPERATING DATA
Net operating income(3)............... $ 144.0 $ 126.7 $ 122.6 $ 112.4 $ 94.8
Extraordinary loss on extinguishment
of debt, net of tax................. -- -- (9.7) -- --
Net realized investment gains
(losses), net of tax................ (30.9) (27.4) 1.9 17.1 5.9
Gain on sale of Private Capital
Management, net of tax.............. 13.2 -- -- -- --
Net change in unrealized and
undistributed gains in private
equity limited partnerships, net of
tax................................. 20.6 -- -- -- --
Restructuring charges, net of tax..... (12.1) -- -- -- --
Special compensation plan, net of
tax................................. (7.2) -- -- -- --
--------- --------- --------- --------- ---------
Net income............................ $ 127.6 $ 99.3 $ 114.8 $ 129.5 $ 100.7
========= ========= ========= ========= =========
BALANCE SHEET DATA
Total investments..................... $12,232.4 $12,195.1 $12,598.3 $12,343.5 $11,537.9
Intangible assets..................... 533.0 282.0 292.8 199.0 205.4
Total assets.......................... 20,150.7 18,372.5 16,519.1 15,851.6 14,427.7
Notes payable to affiliates........... 200.0 -- -- 229.0 229.0
Notes payable......................... 563.2 552.0 486.4 26.5 52.5
Series A redeemable convertible
preferred stock..................... 10.7 16.0 15.3 14.6 13.8
Stockholders' equity.................. 1,447.7 1,185.9 1,271.3 1,198.9 1,051.4
Shares of common stock
outstanding(2)...................... 48.8 47.5 46.4 44.7 43.1
- ------------------------
(1) Includes data for acquired entities from and after the applicable
acquisition date. 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) Net operating income is defined as net income, excluding extraordinary
items, net realized investment gains and losses, gain on sale of Private
Capital Management, net change in unrealized and undistributed gains in
private equity limited partnerships, restructuring charges, and special
compensation plan expense, net of related income taxes.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
MANAGEMENT'S DISCUSSION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On November 1, 2000, the Company announced that it has retained the
investment banking firm of Credit Suisse First Boston Corporation to review its
strategic alternatives, including a possible sale of the Company.
RESULTS OF OPERATIONS
NET INCOME was $127.6 million or $2.61 per share in 2000 compared to
$99.3 million or $2.07 per share in 1999 and $114.8 million or $2.42 per share
in 1998. The increase in 2000 compared to 1999 resulted from higher fee income,
investment spread, net change in unrealized and undistributed gains in private
equity limited partnerships, and gain on sale of Private Capital Management.
Partially offsetting these items were higher operating expenses, amortization
expense, restructuring charges, special compensation plan expense, net realized
investment losses, and income tax expense. 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.
PRETAX INCOME was $188.6 million in 2000 compared to $154.4 million in 1999
and $178.9 million in 1998. The increase in pretax income in 2000 compared to
1999 resulted from higher fee income, investment spread, net change in
unrealized and undistributed gains in private equity limited partnerships, and
gain on sale of Private Capital Management. Partially offsetting these items
were higher operating expenses, amortization expense, restructuring charges,
special compensation plan expense, and net realized investment losses. 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.
INVESTMENT SPREAD is the amount by which investment income earned on the
Company's investments exceeds interest credited on policyholder balances.
Investment spread was $322.7 million in 2000 compared to $283.7 million in 1999
and $258.7 million in 1998. 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 2000 was 2.30%
compared to 2.01% for 1999 and 1.83% for 1998.
Investment income was $862.3 million in 2000 compared to $810.3 million in
1999 and $820.9 million in 1998. The increase of $52.0 million in 2000 compared
to 1999 includes a $62.5 million increase as a result of a higher investment
yield and a $10.5 million decrease resulting from a lower level of average
invested assets. The 2000 investment income was net of $79.7 million of S&P 500
Index call option amortization expense related to the Company's equity-indexed
annuities compared to $77.2 million in 1999. The average investment yield was
6.78% in 2000 compared to 6.29% in 1999. 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 1998 investment
income was net of $70.8 million of S&P 500 Index call option amortization
expense. The average investment yield was 6.41% in 1998.
24
Interest credited to policyholders totaled $539.6 million in 2000 compared
to $526.6 million in 1999 and $562.2 million in 1998. The increase of
$13.0 million in 2000 compared to 1999 primarily relates to a $24.1 million
increase resulting from a higher average interest credited rate, partially
offset by an $11.1 million decrease resulting from a lower level of average
policyholder balances. Policyholder balances averaged $12.0 billion (including
$9.7 billion of fixed products, consisting of fixed annuities and a closed block
of single premium whole life insurance, and $2.3 billion of equity-indexed
annuities) in 2000 compared to $12.3 billion (including $10.1 billion of fixed
products and $2.2 billion of equity-indexed annuities) in 1999. The average
interest credited rate was 4.48% (5.27% on fixed products, consisting of fixed
annuities and a closed block of single premium whole life insurance, and 0.85%
on equity-indexed annuities) in 2000 compared to 4.28% (5.00% on fixed products
and 0.85% on equity-indexed annuities) in 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 and futures, resulting in a 0.85%
net credited rate. The decrease in interest credited to policyholders 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 in 1998 averaged $12.3 billion (including $10.5 billion of fixed
products and $1.8 billion of equity-indexed annuities). The average interest
credited rate in 1998 was 4.58% (5.23% 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
$12.7 billion in 2000 compared to $12.9 billion in 1999 and $12.8 billion in
1998. The decrease of $0.2 billion in 2000 compared to 1999 was primarily due to
net redemptions and transfers to separate accounts, partially offset by the
reinvestment of portfolio earnings. 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.
NET REALIZED INVESTMENT GAINS (LOSSES) were $(47.5) million in 2000 compared
to $(42.2) million in 1999 and $2.4 million in 1998. The net realized investment
losses in 2000 and 1999, and net realized investment gains in 1998 included
losses of $18.9 million, $18.3 million and $28.3 million, respectively, for
investments where the decline in value was determined to be other than
temporary.
GAIN ON SALE OF PRIVATE CAPITAL MANAGEMENT relates to the sale, completed on
December 29, 2000, of the Company's Private Capital Management ("PCM") division
of Stein Roe & Farnham Incorporated, to the current PCM management team and an
outside investor group. The sale price of $40.0 million consisted of
$10.0 million in cash and a $30.0 million 12% note receivable due over five
years. The Company recognized a gain of approximately $27.6 million,
$13.2 million after tax, for the year-ended December 31, 2000.
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 $58.8 million and
net of amounts realized, which are recognized in investment income, of
$13.3 million for the year ended December 31, 2000. The financial information
for these investments is obtained directly from the private equity limited
partnerships on a periodic basis. The corresponding amounts in 1999 and 1998
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.
25
INVESTMENT ADVISORY AND ADMINISTRATIVE FEES are based primarily on the
market value of assets managed for mutual funds, private capital management and
institutional investors. Investment advisory and administrative fees were
$300.2 million in 2000 compared to $268.5 million in 1999 and $237.7 million in
1998. These increases primarily reflect a higher level of average fee-based
assets under management.
Average fee-based assets under management were $55.0 billion in 2000
compared to $48.4 billion in 1999 and $41.9 billion in 1998. The increase during
2000 compared to 1999 resulted primarily from net sales for the year ended
December 31, 2000 and the acquisition of Wanger Asset Management, L.P. on
September 29, 2000. 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. Investment advisory and administrative
fees were 0.55% of average fee-based assets under management in 2000 and 1999,
and 0.57% in 1998.
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).
FEE-BASED ASSETS UNDER MANAGEMENT
AS OF DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
MUTUAL FUNDS:
Intermediary-distributed.................................. $17.6 $18.3 $17.9
Direct-marketed........................................... 13.1 6.7 6.8
Closed-end................................................ 2.7 2.7 2.4
Variable annuity.......................................... 2.8 2.1 1.5
----- ----- -----
36.2 29.8 28.6
Private Capital Management.................................. -- 9.1 7.9
Institutional............................................... 15.6 12.5 11.4
----- ----- -----
Total fee-based assets under management*.................... $51.8 $51.4 $47.9
===== ===== =====
- ------------------------
* As of December 31, 2000, 1999 and 1998, Keyport's insurance assets of
$14.8 billion, $13.7 billion and $13.1 billion, respectively, bring total
assets under management to $66.6 billion, $65.1 billion and $61.0 billion,
respectively.
26
CHANGES IN FEE-BASED ASSETS UNDER MANAGEMENT
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
Fee-based assets under management--beginning................ $51.4 $47.9 $38.7
Sales and reinvestments:
Mutual funds.............................................. 9.0 7.7 5.9
Private Capital Management................................ 1.7 1.4 1.1
Institutional............................................. 4.0 2.8 1.5
----- ----- -----
14.7 11.9 8.5
----- ----- -----
Redemptions and withdrawals:
Mutual funds.............................................. (7.8) (7.3) (5.3)
Private Capital Management................................ (0.8) (0.9) (0.6)
Institutional............................................. (1.5) (2.4) (0.9)
----- ----- -----
(10.1) (10.6) (6.8)
----- ----- -----
Asset acquisitions.......................................... 9.4 -- 5.4
Asset disposition........................................... (9.1) -- --
Market (depreciation) appreciation.......................... (4.5) 2.2 2.1
----- ----- -----
Fee-based assets under management--ending................... $51.8 $51.4 $47.9
===== ===== =====
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 $60.7 million in
2000 compared to $60.4 million in 1999 and $52.7 million in 1998. The increases
in 2000 and 1999 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 0.34% in 2000, 0.35% in 1999
and 0.32% in 1998.
TRANSFER AGENCY FEES for 2000 for the Company's intermediary-distributed
mutual funds are based on a three-tier structure, which includes an account fee,
a transaction fee and a fee based on the market value of the assets managed.
Transfer agency fees for the Company's direct-marketed mutual funds are based on
the market value of the assets in the funds and variable annuity mutual funds
are charged a flat fee. For 1999 and 1998, transfer agency fees were 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 $49.0 million on average assets of $28.8 billion in 2000,
$51.7 million on average assets of $26.1 billion in 1999 and $49.0 million on
average assets of $24.9 billion in 1998. As a percentage of total average assets
under management, transfer agency fees were approximately 0.17% in 2000 and
0.20% in 1999 and 1998.
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 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 $42.3 million in 2000 compared to
$36.5 million in 1999 and $33.7 million in 1998.
27
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 $32.5 million, $24.5 million
and $21.9 million in 2000, 1999 and 1998, respectively. Total annuity
withdrawals represented 16.2%, 14.7% and 13.2% of the total average annuity
policyholder and separate account balances in 2000, 1999 and 1998, respectively.
Net commissions were $9.8 million in 2000, $12.0 million in 1999 and
$11.8 million in 1998.
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
$43.5 million in 2000 compared to $33.5 million in 1999 and $20.6 million in
1998. Such fees represented 1.19%, 1.32% and 1.44% of average variable annuity,
variable life and institutional separate account balances in 2000, 1999 and
1998, respectively.
OPERATING EXPENSES primarily represent compensation, marketing and other
general and administrative expenses. These expenses were $406.0 million in 2000
compared to $360.4 million in 1999 and $328.2 million in 1998. The increase
during 2000 compared to 1999 was primarily related to acquisition of Wanger
Asset Management, L.P. on September 29, 2000 and the expansion of investment
management capabilities, distribution, and electronic commerce activities. The
increase in 1999 compared to 1998 was 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% in 2000 and 1999, and 0.60%
in 1998.
RESTRUCTURING CHARGES in 2000 of $18.7 million consist of severance and
other expenses. The restructuring charges primarily relate to two initiatives,
streamlining the Company's mutual fund product offerings and centralizing
corporate functions. The first initiative followed an in-depth analysis of the
Company's mutual fund and variable annuity products and considered the Wanger
acquisition, which brought additional scale and products to the Company's mutual
fund product offerings. As a result of this analysis, the Company merged 16
mutual funds into other Liberty funds and has liquidated 4 other funds. The
second initiative involves centralizing the finance, human resources, legal and
compliance, and communications functional areas. Previously, these functions
were managed independently in each operating company. The functional
centralization process began in August of 2000 and the Company anticipates that
it will be fully implemented by the end of 2001. The Company currently expects
that there will be additional pre-tax charges of approximately $5.0 million in
2001.
SPECIAL COMPENSATION PLAN expense in 2000 of $11.1 million relates to the
Company's announcement on November 1, 2000 that it has retained the investment
banking firm of Credit Suisse First Boston Corporation to review its strategic
initiatives, including a possible sale of the Company. To help retain its
employees during the strategic review, the Company implemented a special
compensation plan that provides cash retention bonuses to substantially all
employees. The retention bonuses are generally based on employees' base salary
and/or target incentive compensation amounts, except for sales personnel where
retention bonuses are based on sales. The estimated maximum cost of the
retention bonuses, assuming all covered employees remain with the Company, is
approximately $158.0 million with fifty percent payable on November 1, 2001 and
the remainder payable on May 1, 2002. In the event of a change of control of the
Company that occurs prior to November 1, 2001, the payments would be accelerated
and the retention bonus amount would be reduced, subject to a minimum. The
estimated minimum retention bonus is approximately $91.0 million and would be
recognized if a change of control occurs prior to May 14, 2001. The amount of
the retention bonus increases from the minimum on May 14, 2001 to the maximum on
October 31, 2001. In calculating the 2000 expense of $11.1 million, a turnover
rate of 15% was assumed.
28
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
$116.0 million in 2000 compared to $97.4 million in 1999 and $77.4 million in
1998. These increases in amortization were due to the increased profit realized
on the in-force business. Amortization expense represented 31.7%, 30.7% and
27.7% of investment spread and separate account fees in 2000, 1999 and 1998,
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 $42.9 million in 2000 compared to $40.3 million
in 1999 and $40.1 million in 1998.
AMORTIZATION OF INTANGIBLE ASSETS relates to goodwill and certain
identifiable intangible assets arising from business combinations accounted for
as purchases. Amortization was $24.3 million in 2000 compared to $20.3 million
in 1999 and $15.3 million in 1998. These increases in amortization in 2000 and
1999 were primarily attributable to acquisitions during 2000 and 1998,
respectively. The Company has experienced higher than anticipated redemptions of
assets under management at an acquired company, which at December 31, 2000 had
goodwill and other intangible assets of $79.0 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 $22.5 million in 2000 compared to $19.3 million in
1999 and $14.9 million in 1998. 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 sold with 12b-1 distribution fees and
contingent deferred sales charges. Interest expense was net of interest income
of $22.9 million, $17.3 million and $8.4 million in 2000, 1999 and 1998,
respectively.
INCOME TAX EXPENSE was $61.0 million or 32.3% of pretax income in 2000
compared to $55.1 million or 35.7% of pretax income in 1999 and $54.4 million or
30.4% of pretax income in 1998. The decrease in the effective tax rate in 2000
compared to 1999 primarily reflects a reduction to the valuation allowance
established for unrealized capital losses in the "available for sale" investment
portfolio and the issuance of a favorable IRS determination with respect to an
outstanding audit issue in the fourth quarter of 2000. The significantly lower
effective tax rate on pretax income in 1998 was 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, 2000 was $1.45 billion compared to
$1.19 billion as of December 31, 1999. Net income in 2000 was $127.6 million and
cash dividends on the Company's preferred and common stock totaled
$6.5 million. Common stock totaling $9.0 million was issued in connection with
the exercise of stock options. A decrease 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 increased
stockholders' equity by $127.5 million.
BOOK VALUE PER SHARE amounted to $29.68 at December 31, 2000 compared to
$24.99 at December 31, 1999. Excluding net unrealized losses on investments
(computed pursuant to Statement of Financial Accounting Standards No. 115), book
value per share amounted to $30.30 at December 31, 2000 and $28.32 at
December 31, 1999. As of December 31, 2000, there were 48.8 million common
shares outstanding compared to 47.5 million common shares outstanding as of
December 31, 1999.
29
INVESTMENTS not including cash and cash equivalents, totaled $12.2 billion
at December 31, 2000 and 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 December 31, 2000 and 1999
reflected net unrealized losses of $62.0 million and $318.6 million,
respectively.
Approximately $11.6 billion or 76.5% of the Company's general account and
certain separate account investments at December 31, 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 December 31, 2000, the carrying value of investments
in below investment grade securities totaled $1.3 billion or 8.3% of general
account investments, including cash and cash equivalents in the Company's
annuity operations, and certain separate account investments of $15.1 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 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 December 31, 2000 and 1999, the carrying value of fixed maturity securities
that were non-income producing was $24.4 million and $22.6 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.
30
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 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
fair 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, 2000 and 1999, the estimated difference
between the Company's asset and liability duration was approximately 0.8 and
1.8, respectively. The Company believes 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
31
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, 2000 and 1999 levels was a loss of
$79.2 million and $146.3 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 decrease in potential exposure is primarily due to lower
prevailing market interest rates and the decrease in 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,
2000 and 1999, the Company had approximately $76.4 million and $37.9 million,
respectively, in common stocks and $337.7 million and $701.1 million,
respectively, in other equity investments (primarily equity options and equity
futures).
At December 31, 2000 and 1999, the Company had $2.1 billion and
$2.4 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.
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, 2000, 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 $7.2 million. Based upon the
information and assumptions the Company used in its stress-test scenarios at
December 31, 1999, management estimated that if the S&P 500 Index decreased by
10%, the net fair value of its assets and liabilities described above would have
decreased by approximately $0.2 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 $1.4 million
and $5.2 million as of December 31, 2000 and 1999, 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.
32
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 69 and 67 outstanding swap agreements with an
aggregate notional principal amount of $3.8 billion and $3.4 billion as of
December 31, 2000 and 1999, 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 no outstanding interest
rate cap agreements as of December 31, 2000. The Company had interest rate cap
agreements with an aggregate notional amount of $50.0 million as of
December 31, 1999.
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 $337.7 million and $701.1 million as of December 31, 2000 and 1999,
respectively. The Company had total return swap agreements with a carrying value
of $23.9 million and $37.8 million as of December 31, 2000 and 1999,
respectively.
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.
33
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." 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." This
statement amended SFAS No. 133 to defer its effective date one year to fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities"--an amendment of SFAS No. 133. This statement makes certain changes
in the hedging provisions of SFAS No. 133 and is effective concurrent with SFAS
No. 133 (collectively hereafter referred to as the "Statement"). The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset by the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Upon adoption in the
first quarter of 2001, the Company will be required to record a cumulative
effect adjustment to reflect this accounting change.
The cumulative effect, reported after tax and net of related effects of
deferred policy acquisition costs, upon adoption of the Statement at January 1,
2001 will decrease net income and stockholder's equity by approximately
$55.0 million. The adoption of the Statement may increase volatility in future
reported income due, among other reasons, to the requirements of defining an
effective hedging relationship under the Statement as opposed to certain hedges
the Company believes are effective economic hedges. The Company anticipates that
it will continue to utilize its current risk management philosophy, which
includes the use of derivative instruments.
ACQUISITION
On September 29, 2000, the Company completed the acquisition of Wanger Asset
Management, L.P. ("Wanger"), a registered investment advisor with approximately
$9.4 billion in assets under management as of that date. The purchase price for
this transaction was approximately $277.4 million in cash, including transaction
costs. In addition, the Company has agreed to make additional payments over the
next five years of up to $178.0 million in cash, with $170.0 million contingent
upon the attainment of certain earnings objectives and an $8.0 million 3-year
note payable to WAM Rights Partnership bearing interest at the rate of 7.00%.
This transaction was accounted for as a purchase and resulted in the recording
of $133.0 million of intangible assets which will be amortized over 13 years and
$145.9 million of goodwill which will be amortized over 25 years. The Company
funded the acquisition of Wanger with cash and investments and $200.0 million of
debt issued to Liberty Mutual Insurance Company and its affiliates. Such debt
consists of a $180.0 million 12-year note with interest payable semi-annually at
8.85% and a $20.0 million 20-year note with interest payable semi-annually at
9.35%.
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 Wanger acquisition, the Company issued $200.0 million of debt to
Liberty Mutual Insurance Company and its affiliates. Such debt is payable upon
any change of control of the Company. In connection with the Crabbe Huson
acquisition in 1998, 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
34
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, 2000, the interest rate on borrowings under
the Facility was 6.65% 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. The amount of dividends that Keyport could pay in 2001 without
such approval is $38.4 million. Keyport paid dividends totaling $10.0 million
during 2000. 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 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 LLC, also from its credit
facility used to finance sales of mutual fund shares sold with 12b-1
distribution fees and contingent deferred sales charges.
35
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 December 31, 2000, $11.0 billion, or 79.2%,
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 75.4% of the Company's fixed annuity policyholder balances were
subject to surrender charges or restrictions as of December 31, 2000.
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 Company's plans, 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
36
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 and integration of Wanger Asset Management, L.P. will not be as
successful as anticipated; (17) risks that the Company will not achieve
favorable effective tax rates; (18) risks that the Company's restructuring
efforts and retention efforts will not be successful, and risks that the
Company's exploration of strategic alternatives will not be successful or result
in a transaction; and (19) 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.
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 30 of this Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's consolidated financial statements and supplementary data are
included under Item 14 of this Form 10-K beginning on page 52.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
37
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.
There are currently 13 members of the Board of Directors, divided into three
classes with terms expiring at the 2001, 2002 and 2003 Annual Meetings,
respectively. All of the Directors are listed below with their principal
occupations for the last five years.
TERMS EXPIRE AT THE 2001 ANNUAL STOCKHOLDERS' MEETING
GERALD E. ANDERSON Retired; from 1974 until his retirement in 1992, President, Chief
Age 69 Executive Officer and Trustee of Commonwealth Energy System, a
Director since 1991 public utility holding company; Director of Liberty Mutual and
Liberty Fire.
CHARLES I. CLOUGH Chairman and Chief Executive Officer, Clough Capital Partners, LP
Age 58 since January, 2000; Chief Investment Strategist at Merrill Lynch
Director since February 2000 & Company, Inc. from 1987 through 1999; Chairman of the Board of
Trustees of Boston College; Director of Liberty Mutual and
Liberty Fire.
EDMUND F. KELLY Chairman (since 2000), President and Chief Executive Officer of
Age 55 Liberty Mutual and Liberty Fire since April, 1998, President and
Director since 1992 Chief Operating Officer prior thereto; Director of Liberty Mutual
and certain of its affiliates, and Citizens Financial Group, Inc.
RAY B. MUNDT Retired; Chairman and Chief Executive Officer of Unisource
Age 72 Worldwide, Inc., a paper supply and systems company, from 1996 to
Director since 1991 1999; prior thereto Chairman and (prior to September, 1993) Chief
Executive Officer of Alco Standard Corporation, a distributor of
paper packaging products and office equipment; Director of
Liberty Mutual, Liberty Fire, Alco Standard Corporation and
Nocopi Technologies, Inc.
GLENN P. STREHLE Treasurer Emeritus and Advisor to the Chairman and President of
Age 65 the Massachusetts Institute of Technology since January, 1999;
Director since 1991 Treasurer of MIT (and Vice President from 1986 and Vice President
for Finance from June 1994) from 1975 through 1998; Director of
The Otter Group, Inc., Liberty Mutual and Liberty Fire.
38
TERMS EXPIRE AT THE 2002 ANNUAL STOCKHOLDERS' MEETING
WILLIAM F. CONNELL Chairman and Chief Executive Officer of Connell Limited
Age 62 Partnership, a manufacturer of industrial products and metal
Director since 1999 recycler; Director of FleetBoston Financial Corporation, Harcourt
General, Inc., Liberty Mutual and Liberty Fire.
PAUL J. DARLING, II Chairman, President and Chief Executive Officer of Corey Steel
Age 63 Company, a manufacturer of cold finished steel bars and a metal
Director since 1991 service center, since 1984; Director of Liberty Mutual, Liberty
Fire and Unisource Worldwide, Inc.
THOMAS J. MAY Chairman and Chief Executive Officer of NSTAR since 1999;
Age 53 Chairman, President and Chief Executive Officer of Boston Edison
Director since 1998 Company from 1994 to August 1999; Director of Fleet Boston
Corporation, NSTAR, RCN Corporation, New England Business
Service, Inc., Liberty Mutual and Liberty Fire.
DR. KENNETH L. ROSE President and Chief Executive Officer of Henkels & McCoy, Inc., a
Age 64 privately held engineering and construction company; Director of
Director since 1999 Liberty Mutual and Liberty Fire.
TERMS EXPIRE AT THE 2003 ANNUAL STOCKHOLDERS' MEETING
MICHAEL J. BABCOCK Private investor; President and Chief Operating Officer of Leslie
Age 59 Fay Companies, Inc., an apparel manufacturer, from 1993 to 1995;
Director since 1991 Director of Liberty Mutual and Liberty Mutual Fire Insurance
Company ("Liberty Fire"), an affiliate of Liberty Mutual, and
HRDQ, Inc.
GARY L. COUNTRYMAN President and Chief Executive Officer of the Company since
Age 61 January 13, 2000; Chairman (from 1991 until 2000) and Chief
Director since 1991 Executive Officer (from 1986 until April 1998) of Liberty Mutual
and Liberty Fire; Fleet Boston Corporation, NSTAR and Harcourt
General, Inc.
JOHN P. HAMILL Chairman and Chief Executive Officer of Sovereign Bank New
Age 61 England since January 10, 2000; President of Fleet Bank of
Director since 1991 Massachusetts, N.A. from 1992 to December 31, 1999; Director of
Liberty Mutual and Liberty Fire.
MARIAN L. HEARD President and Chief Executive Officer of the United Way of
Age 60 Massachusetts Bay and Chief Executive Officer of the United Way
Director since 1994 of New England since 1992; Director of CVS Corporation, Fleet
Boston Corporation, Liberty Mutual and Liberty Fire and a
Director or Trustee of numerous national and local non-profit
organizations.
39
SECTION 16(A). BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires Liberty Financial's executive
officers and Directors, and any persons who own more than 10% of a class of
Liberty Financial's equity securities registered under the Exchange Act
(currently only the Common Stock), to file reports of ownership and changes in
ownership of securities with the Securities and Exchange Commission (the "SEC")
and the New York Stock Exchange. Executive officers, Directors, and persons who
own more than 10% of the Common Stock are required by SEC regulations to furnish
Liberty Financial with copies of all Section 16(a) reports they file. To Liberty
Financial's knowledge, Liberty Mutual currently is the only stockholder which
owns beneficially more than 10% of the Common Stock.
Based solely on a review of the copies of such reports received by it or
written representations from certain reporting persons that no other reports
were required, Liberty Financial believes that, except for one late report filed
by Mr. Morgan with respect to a single transaction, each of its executive
officers, Directors and 10% stockholders made all Section 16(a) filings required
during 2000.
ITEM 11. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION TABLES AND INFORMATION
The tables that appear below, along with the accompanying text and
footnotes, provide information on compensation and benefits for the named
executive officers, in accordance with applicable SEC requirements. None of the
named executive officers received perquisites during 2000 exceeding the lesser
of $50,000 or 10% of such officer's total salary and bonus for such year.
SUMMARY COMPENSATION TABLE. The following table sets forth compensation
information for the past three fiscal years for each of Liberty Financial's
chief executive officer and the other four most highly compensated executive
officers for fiscal 2000:
SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS (1)
-------------------------- ------------------------------
SECURITIES
NAME AND PRINCIPAL POSITION BASE SALARY RESTRICTED STOCK UNDERLYING ALL OTHER
DURING 2000 YEAR ($) BONUS ($)(2) AWARDS ($)(3) OPTIONS (#) COMPENSATION ($)(4)
- --------------------------- -------- ----------- ------------ ---------------- ----------- -------------------
Gary L. Countryman (5)..... 2000 1,000,000 2,000,000 -- -- --
President and Chief 1999 -- -- -- -- --
Executive Officer 1998 -- -- -- -- --
C. Allen Merritt, Jr....... 2000 510,000 490,000 144,000 32,000 27,570
Chief of Staff 1999 490,000 490,000 176,850 29,000 29,900
1998 460,000 475,000 223,251 30,000 23,580
Stephen E. Gibson.......... 2000 521,667 725,000 126,000 27,500 18,931
President of Liberty 1999 450,000 500,000 135,094 23,000 205,616
Advisors 1998 420,000 550,000 185,938 17,500 226,270
Phil Polkinghorn (6)....... 2000 435,000 501,100 72,000 25,000 22,410
President of Keyport Life 1999 279,960 350,000 377,188 50,000 506,907
Insurance Company 1998 -- -- -- -- --
J. Andrew Hilbert.......... 2000 285,417 341,700 126,000 20,000 16,420
Senior Vice President and 1999 222,000 250,000 115,444 14,000 12,896
Chief Financial Officer 1998 210,000 140,000 111,570 10,000 10,980
- ------------------------
(1) Other than stock options, restricted stock and other stock based incentives
which may be granted under the Company's Amended and Restated 1995 Stock
Incentive Plan (the "1995 Stock Incentive
40
Plan"), the Company does not have a long-term compensation program for its
executive officers that includes long-term incentive payouts.
(2) Bonus payments are reported with respect to the year in which the bonus was
earned.
(3) Calculated by multiplying the closing price of the Company's Common Stock on
the New York Stock Exchange on the dates of grant ($18.00 on May 9, 2000;
$23.1875 on May 5, 1999 and $24.5625 on May 11, 1999; $37.1875 in 1998) by
the number of shares awarded. The number of shares and value of restricted
stock held by the named executive officers as of December 31, 2000 (based on
the New York Stock Exchange closing price of $44.5625 for the Company's
Common Stock at fiscal year end) is as follows: Mr. Merritt: 21,200 shares,
$944,725; Mr. Gibson: 17,500 shares, $779,844; Mr. Polkinghorn: 20,000
shares, $891,250; and Mr. Hilbert: 14,700 shares, $655,069. The restricted
stock granted in 1998 (Mr. Merritt 6,000 shares, Mr. Gibson 5,000 shares,
and Mr. Hilbert 3,000 shares) will vest on May 12, 2004 or any time after
May 11, 2000 if for a 10 consecutive trading day period the closing price of
Liberty Financial common stock exceeds $54.45. The restricted stock granted
to Mr. Polkinghorn on May 5, 1999 (11,500 shares) will vest on May 5, 2005
or any time after May 4, 2001 if for a 10 consecutive trading day period the
closing price of Liberty Financial Common Stock exceeds $33.95. The
restricted stock granted on May 11, 1999 (Mr. Merritt 7,200 shares,
Mr. Gibson 5,500 shares, Mr. Polkinghorn 4,500 shares, and Mr. Hilbert 4,700
shares) will vest on May 11, 2005 or any time after May 10, 2001 if for a 10
consecutive day trading period the closing price of Liberty Financial Common
Stock exceeds $35.96. The restricted stock granted in 2000 (Mr. Merritt
8,000 shares, Mr. Gibson 7,000 shares, Mr. Polkinghorn 4,000 shares, and
Mr. Hilbert 7,000 shares) will vest on May 9, 2006 or any time after May 8,
2002 if for a 10 consecutive trading day period the closing price of Liberty
Financial Common Stock exceeds $26.35. Holders of restricted stock are
entitled to vote their restricted shares and retain all dividends which may
be paid with respect to such shares. In general, in the event of termination
of employment, restricted shares are forfeited by the holders and revert to
the Company. In the event of a change of control of Liberty Financial
(defined as the transfer of 50% or more of the voting power of the Company
or assets of the Company, any merger or consolidation in which the Company's
securityholders prior to the transaction hold less than 50% of the stock of
the surviving company or its parent after the transaction, or the transfer
of all or substantially all of the Company's annuity or asset management
business ("Change of Control")), unvested shares of restricted stock as of
the Change of Control date will be immediately vested provided that the cash
value of a share of the Company's Common Stock on the date of a Change of
Control ("Change of Control Price") exceeds the applicable restricted stock
target price ("Target Price"). If the Change of Control Price is less than
the Target Price, the restricted stock is forfeited. The closing price of
the Company's Common Stock on the New York Stock Exchange on April 19, 2001
was $44.00.
(4) For 2000, consists of contributions under defined contribution plans for the
benefit of the named executive officers.
(5) Mr. Countryman became the President and Chief Executive Officer of the
Company on January 13, 2000.
(6) Mr. Polkinghorn began employment at Keyport Life Insurance Company on
May 5, 1999.
OPTION GRANT TABLE. The following table sets forth certain information
regarding options to purchase Common Stock granted under the 1995 Stock
Incentive Plan during 2000 by Liberty Financial to the executive officers named
in the Summary Compensation Table. Mr. Countryman does not participate in the
1995 Stock Incentive Plan.
41
OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL REALIZABLE VALUE
PERCENT OF AT ASSUMED ANNUAL RATES
TOTAL OPTIONS OF STOCK PRICE APPRECIATION
NUMBER OF SECURITIES GRANTED TO FOR OPTION TERM (2)($)
UNDERLYING OPTIONS EMPLOYEES EXERCISE PRICE EXPIRATION ---------------------------
NAME GRANTED (#) IN 2000 PER SHARE ($) DATE (1) 5% 10%
- ---- -------------------- ------------- -------------- ---------- ------------ ------------
Gary L. Countryman............. -- -- -- -- -- --
C. Allen Merritt, Jr........... 32,000 4.07% 18.0000 5/08/10 362,243 917,996
Stephen E. Gibson.............. 27,500 3.50% 18.0000 5/08/10 311,303 788,903
Phil Polkinghorn............... 25,000 3.18% 18.0000 5/08/10 283,003 717,184
J. Andrew Hilbert.............. 20,000 2.54% 18.0000 5/08/10 226,402 573,747
- ------------------------
(1) Each option becomes exercisable in four equal annual installments,
commencing on May 9, 2001 and vests in full upon the death, disability or
retirement (after age 60) of the optionee. Upon a Change of Control (as
defined above) all unvested options shall immediately vest and the
optionholders shall receive from the Company a cash amount equal to the
Change of Control Price (as defined above) less the exercise price for each
option. No stock appreciation rights were granted to any named executive
officer in 2000.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if such options are not exercised until the end of the
option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% in accordance with applicable regulations of the
SEC, compounded annually from the dates the options were granted until their
expiration dates. These values are not intended to forecast possible future
appreciation in the Common Stock. This table does not take into account
changes in the price of the Common Stock after the date of grant.
OPTION EXERCISES AND YEAR-END OPTION TABLE. The following table sets forth
certain information regarding the stock options exercised during 2000 and stock
options held as of December 31, 2000 by the executive officers named in the
Summary Compensation Table.
AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND AGGREGATE OPTION VALUES
AT FISCAL YEAR-END
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT YEAR-END (#) YEAR-END ($)(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ----------- ------------- ----------- -------------
Gary L. Countryman................... -- -- -- -- -- --
C. Allen Merritt, Jr................. 14,666 210,744 129,038 74,562 3,204,560 1,488,943
Stephen E. Gibson.................... 0 0 69,439 59,312 1,293,342 1,233,333
Phil Polkinghorn..................... 0 0 12,500 62,500 257,047 1,435,203
J. Andrew Hilbert.................... 0 0 15,812 37,938 224,293 817,231
- ------------------------
(1) The value of unexercised in-the-money options is calculated by multiplying
the number of underlying shares by the difference between the closing price
of the Company's Common Stock on the New York Stock Exchange at the end of
2000 ($44.5625) and the option exercise price for those shares. These values
have not been realized. The closing price of the Company's Common Stock on
the New York Stock Exchange on April 19, 2001 was $44.00.
42
CERTAIN ADDITIONAL INFORMATION REGARDING EXECUTIVE OFFICER COMPENSATION
DEFINED BENEFIT RETIREMENT PROGRAMS
Each of the executive officers of Liberty Financial named in the above
summary compensation table, other than Mr. Countryman and Mr. Gibson,
participates in Liberty Financial's Pension Plan and Supplemental Pension Plan
(collectively, the "Pension Plans"). Mr. Countryman and Mr. Gibson do not
participate in a defined benefit or actuarial plan sponsored by the Company.
The following table shows the estimated annual benefits payable under the
Pension Plans upon retirement for the specified compensation and years of
service classifications, assuming retirement at age 65 in 2001.
ESTIMATED ANNUAL RETIREMENT BENEFITS AT AGE 65
UNDER LIBERTY FINANCIAL'S PENSION PLAN AND SUPPLEMENTAL PENSION PLAN
FIVE-YEAR AVERAGE COMPENSATION 15 20 25 30 35
- ------------------------------ --------- --------- --------- --------- ---------
200,000...$.......... $ 51,570 $ 68,760 $ 85,950 $ 92,617 $ 99,283
400,000............. 105,570 140,760 175,950 189,283 202,617
600,000............. 159,570 212,760 265,950 285,950 305,950
800,000............. 213,570 284,760 355,950 382,617 409,283
1,000,000........... 267,570 356,760 445,950 479,283 512,617
1,200,000........... 321,570 428,760 535,950 575,950 615,950
1,400,000........... 375,570 500,760 625,950 672,617 719,283
1,600,000........... 429,570 572,760 715,950 769,283 822,617
Benefits under the Pension Plans are based on an employee's average pay for
the 60 highest consecutive months during the last 120 months of employment
("Average Earnings"), the employee's estimated social security retirement
benefit and years of credited service with Liberty Financial and its
subsidiaries. For purposes of determining benefits payable upon retirement under
the Pension Plans and such additional contractual arrangements, compensation
includes base salary and annual bonus. The current Average Earnings covered by
the Pension Plans for each participating executive officer of Liberty Financial
named in the above summary compensation table who is presently vested under the
Pension Plans' provisions is as follows: Mr. Merritt, $765,599. Benefits are
payable in the form of a single-life annuity providing for monthly payments.
Actuarially equivalent methods of payment may be elected by the recipient. As of
the date hereof, the participating executive officers of Liberty Financial named
in the above summary compensation table had the following full credited years of
service under the Pension Plans: Mr. Merritt, 13 years. Mr. Polkinghorn and
Mr. Hilbert are not yet vested under the Pension Plans, and Mr. Countryman and
Mr. Gibson are not eligible for the Pension Plan.
CHANGE OF CONTROL PROVISIONS OF 1990 STOCK OPTION PLAN AND 1995 STOCK OPTION
PLAN
Liberty Financial's 1990 Stock Option Plan, as amended (the "1990 Plan"),
provided for the grant of options to officers and other key employees of Liberty
Financial for the purchase of shares of Common Stock. As of April 19, 2001,
options to purchase an aggregate of 165,199 shares of Common Stock were issued
and outstanding under the 1990 Plan, all of which were vested, including options
to purchase 45,849 shares held by Mr. Merritt. No additional options will be
granted under the 1990 Plan.
Liberty Financial's 1995 Stock Option Plan provides for the grant of options
for the purchase of shares of Common Stock, and restricted stock to officers and
other key employees of Liberty Financial.
43
As of April 19, 2001, options to purchase an aggregate of 2,882,842 shares of
Common Stock were issued and outstanding under the 1995 Plan.
Upon a Change of Control of Liberty Financial (defined above) all unvested
options shall immediately vest and the optionholders shall receive from the
Company a cash amount equal to the Change of Control Price (as defined above)
less the exercise price for each option.
SPECIAL COMPENSATION PLAN
On November 1, 2000 the Company announced that it has retained the
investment banking firm of Credit Suisse First Boston Corporation to review its
strategic initiatives, including a possible sale of the Company. To help retain
its employees during the strategic review, the Company implemented a special
compensation plan that provides cash retention bonuses to substantially all
employees. The retention bonuses are generally based on employees' base salary
and/or target incentive compensation amounts, except for sales personnel where
retention bonuses are based on sales. The minimum retention bonus would be
recognized if a Change of Control occurs prior to May 14, 2001. The amount of
the retention bonus increases from the minimum on May 14, 2001 to the maximum on
October 31, 2001. The maximum retention bonus payable to each of the executive
officers of Liberty Financial named in the above Summary Compensation table,
other than Mr. Countryman, is as follows: Mr. Merritt, $1,591,500; Mr. Gibson,
$1,512,500; Mr. Polkinghorn, $910,000; and Mr. Hilbert, $787,500.
Mr. Countryman does not participate in this retention plan.
The Special Compensation Plan also provides employees with a severance
benefit if, on or within 18 months following the date of a Change in Control
(defined above), an eligible employee is terminated by the Company other than
for cause, or such employee resigns for good reason (each as defined in the
special compensation plans filed as exhibits to this Report). The maximum
severance payment payable to each of the executive officers of Liberty Financial
named in the above Summary Compensation table, other than Mr. Countryman, is as
follows: Mr. Merritt, $1,061,000; Mr. Gibson, $1,966,250; Mr. Polkinghorn,
$1,365,000; and Mr. Hilbert, $1,023,750. Mr. Countryman does not participate in
this severance plan.
In addition, employees will be eligible to receive an additional payment if
any of the payments or benefits received or to be received by such employee in
connection with a Change of Control (defined above) or by reason of a
termination of employment trigger excise tax obligations under Section 4999 of
the Internal Revenue Code. The additional payment ("Gross Up Payment") is
designed to offset the effects of excise taxes on the severance payments and
other payments received by such employees in connection with a Change of Control
or by reason of such employee's termination of employment (as well as federal,
state, and local taxes on the Gross Up Payment).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Michael J. Babcock, William F. Connell, Paul J. Darling, II, John P. Hamill,
and Ray B. Mundt (Chair) served as members of Liberty Financial's Compensation
Committee during 2000. The membership of Liberty Financial's Compensation
Committee is identical to the membership of the Compensation Committee of the
Board of Directors of Liberty Mutual.
2000 MEETINGS AND STANDARD FEE ARRANGEMENTS
2000 MEETINGS. During 2000, the Board of Directors held seven meetings. The
Board has an Executive Committee, an Audit Committee, a Compensation Committee
and an Investment Committee. No member of the Audit Committee or the
Compensation Committee is an employee of Liberty Financial or its subsidiaries.
Mr. Countryman, who is an employee of Liberty Mutual and a member of the
Investment Committee, is currently serving as President and Chief Executive
Officer of Liberty Financial Companies, Inc.
44
EXECUTIVE COMMITTEE. The Executive Committee has and may exercise all the
powers of the full Board of Directors, except as otherwise limited by
Massachusetts corporation law or Liberty Financial's Restated Articles of
Organization or Restated By-laws. The Executive Committee did not meet in 2000.
As of April 19, 2001, its members were Messrs. Kelly (Chairman), Countryman,
Hamill, Strehle and Ms. Heard.
AUDIT COMMITTEE. The Audit Committee is responsible for obtaining and
reviewing independent analyses of Liberty Financial's accounting policies and
procedures, financial controls and financial information provided to the Board
of Directors. The Audit Committee makes reports and recommendations to the Board
of Directors, at least annually, with respect to such reviews, including matters
such as: accounting records, practices and procedures; the annual appointment of
outside auditors, together with the scope, adequacy, cost and results of the
annual audit and the relationship between management and such outside auditors;
the scope and adequacy of internal audit procedures; controls for disbursement
procedures and asset safekeeping; and such other matters as the Board of
Directors may request.
The Audit Committee held three meetings in 2000. As of April 19, 2001, its
members were Ms. Heard and Messrs. Anderson, Clough, May, Rose and Strehle
(Chairman).
COMPENSATION COMMITTEE. The Compensation Committee (i) reviews and approves
all director and management compensation, including salaries, incentive
compensation, pension and fringe benefit policies and procedures and
(ii) administers Liberty Financial's employee benefit plans.
The Compensation Committee held four meetings in 2000. As of April 19, 2001,
its members were Messrs. Connell, Darling, Babcock, Hamill and Mundt (Chairman).
All members of the Compensation Committee are considered to be non-employee
directors of Liberty Financial for purposes of Rule 16b-3 under the Securities
Exchange Act of 1934 (the "Exchange Act"). The Committee has exclusive authority
for approving transactions involving equity securities of the Company (including
acquisitions [such as grants and other awards] and dispositions [such as
redemptions and other repurchases]) under benefit plans administered by the
Committee involving persons subject to the provisions of Section 16 under the
Exchange Act with respect to equity securities of Liberty Financial.
INVESTMENT COMMITTEE. The Investment Committee met four times in 2000. The
purpose of the Investment Committee is to review the investment policies and
activities of the Investment Committee of the Company's subsidiary, Keyport Life
Insurance Company. As of April 19, 2001, the members of the Investment Committee
were Messrs. Kelly (Chairman), Anderson, Countryman, Clough, Darling, Hamill and
Strehle.
In 2000, each incumbent Director attended at least 75% of the total number
of meetings of the Board of Directors and the Committees of the Board on which
he or she served while he or she was in office.
FEE ARRANGEMENTS. Directors who are officers or employees of Liberty
Financial, Liberty Mutual or their affiliates receive no compensation for their
service as Directors of Liberty Financial. Each member of the Board of Directors
who is not an officer or employee of Liberty Financial, Liberty Mutual or their
affiliates is paid by Liberty Mutual a retainer at a rate of $40,000 per annum.
Liberty Financial pays each such director a $200 fee for each Board or Committee
meeting attended, except that the fee for attendance at each Investment
Committee meeting is $100. Each Director of Liberty Financial who does not serve
on any other Liberty Mutual Group Board of Directors is paid an annual retainer
of $18,000, plus $1,200 for each Board meeting attended, and $200 for each
Committee meeting attended.
45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
COMMON STOCK
The following table sets forth certain information with respect to the
beneficial ownership of Common Stock by Liberty Mutual (the only person or
entity known to Liberty Financial to be the beneficial owner of 5% or more of
Liberty Financial's Common Stock), each executive officer of Liberty Financial
named in the summary compensation table appearing elsewhere in this Report, each
Director of Liberty Financial who owns beneficially any shares of Common Stock,
and all Directors and executive officers as a group, in each case as of
April 19, 2001. Except as noted in the footnotes to such table, based on
information provided by such persons, each holder of Common Stock has or will
have sole voting and investment power with respect to the shares of Common Stock
set forth below. Unless otherwise indicated below, the address of each such
person is: c/o Liberty Financial Companies, Inc., 600 Atlantic Avenue, Boston,
Massachusetts 02210.
SHARES OWNED
NAME BENEFICIALLY PERCENTAGE(1)
- ---- ------------ -------------
Liberty Mutual Insurance Company ........................ 34,475,260 70.49%
175 Berkeley Street
Boston, MA 02117
Gary L. Countryman....................................... 0 *
C. Allen Merritt, Jr. (2)................................ 210,158 *
J. Andrew Hilbert (2).................................... 43,950 *
Stephen E. Gibson (2).................................... 113,145 *
Phil Polkinghorn (2)..................................... 51,324 *
Gerald E. Anderson....................................... 1,000 *
William F. Connell....................................... 1,500 *
Paul J. Darling II....................................... 1,500 *
Glenn P. Strehle......................................... 750 *
All executive officers and Directors as a group:
(21 persons)(3)........................................ 837,475 1.69%
- ------------------------
* Less than 1%.
(1) Percentages are calculated pursuant to Rule 13d-3(d)(1) under the Exchange
Act. Such calculations assume, for each person and group, that all shares
which may be acquired by such person or group pursuant to options presently
exercisable or which become exercisable within 60 days following April 19,
2001 are outstanding for the purpose of computing the percentage of Common
Stock owned by such person or group. However, those unissued shares of
Common Stock are not deemed to be outstanding for the purpose of calculating
the percentage of Common Stock owned by any other person.
(2) Includes options to purchase shares of Common Stock which are presently
exercisable or which become exercisable within 60 days following April 19,
2001 in the following amounts: 157,601 shares exercisable by Mr. Merritt;
88,742 shares exercisable by Mr. Gibson; 31,250 shares exercisable by
Mr. Polkinghorn; and 29,250 shares exercisable by Mr. Hilbert.
(3) Includes (without duplication), (i) the option shares referenced in note 2
above and (ii) options to purchase an additional 285,946 shares of Common
Stock held by other executive officers which are presently exercisable or
which become exercisable within 60 days following April 19, 2001.
46
PREFERRED STOCK
The table below sets forth certain information with respect to the
beneficial ownership of Preferred Stock by each person or entity known to
Liberty Financial to be the beneficial owner of more than five percent of the
shares of Preferred Stock as of April 19, 2001. No executive officer or Director
of Liberty Financial beneficially owns any shares of Preferred Stock as of such
date. Except as noted in the footnotes to such table, based on information
provided by such persons, each holder of Preferred Stock has sole voting and
investment power with respect to the shares of Preferred Stock set forth below.
SHARES OWNED
NAME BENEFICIALLY PERCENTAGE
- ---- ------------ ----------
Trustees of the Irrevocable Trust For Children dated
September 24, 1985 (of C. Herbert Emilson) (1)........... 145,808 68.4%
Harold W. Cogger (2)....................................... 62,755 29.4%
- ------------------------
(1) The trustees of such trust are John A. McNeice, Jr., Davey S. Scoon and
Linda S. Dalby, who share voting and investment power and disclaim any
beneficial ownership. The address of such trust is c/o Linda S. Dalby, Esq.,
50 Rowes Wharf, Boston, Massachusetts 02110.
(2) Mr. Cogger's address is 638 Bay Road, Hamilton, Massachusetts 01936.
In connection with Liberty Financial's acquisition of The Colonial
Group, Inc. ("Colonial") effective March 24, 1995, each person acquiring shares
of Preferred Stock had the right to become a party to a stockholders agreement
(the "Preferred Stockholders Agreement"). The Preferred Stockholders Agreement
provided that a holder of Preferred Stock who is a party thereto could not
transfer the Preferred Stock without the prior written consent of Liberty
Financial prior to March 24, 2000, except to certain permitted transferees.
Holders of substantially all of the Preferred Stock were parties to the
Preferred Stockholders Agreement. The 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. Beginning March 24, 2000, and for the five year
period ending March 24, 2005, the Preferred Stock is redeemable at the option of
the Company at a declining premium over the $50 face value. On March 24, 2005,
the Company must redeem the Preferred Stock. In addition, for the sixty-day
period after March 24, 2000, holders of the Preferred Stock had an option to put
such Preferred Stock to the Company (the "Put Shares") at a price of $50 per Put
Share plus accrued but unpaid dividends through the date of purchase. Holders of
approximately 111,000 shares of Preferred Stock exercised this option. Each
share of Preferred Stock is entitled to that number of votes equal to the number
of common shares into which it is convertible.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Matters Pertaining to Liberty Mutual
GENERAL
Prior to the acquisition of Colonial in March, 1995, Liberty Financial was
an indirect wholly-owned subsidiary of Liberty Mutual. As of April 19, 2001,
Liberty Mutual owned beneficially approximately 70.49% of the outstanding shares
of Common Stock and approximately 70.01% of the combined voting power of the
outstanding Common Stock and Preferred Stock.
Liberty Mutual is a Massachusetts-chartered property and casualty mutual
insurance company with more than $50.0 billion in assets and $7.1 billion in
surplus at December 31, 2000. The principal business activities of Liberty
Mutual's subsidiaries and affiliates (other than Liberty Financial) are
property-casualty insurance, insurance services and life insurance (including
group life and health insurance products) marketed through its own sales force.
47
Although at present all of Liberty Financial's 13 directors are also
directors of Liberty Mutual, including the President and Chief Executive Officer
of Liberty Financial, Liberty Financial's operations are separate from, and
generally have been conducted independently of, Liberty Mutual and its other
business activities. Liberty Financial and its operating subsidiaries have their
own personnel responsible for operations, strategic planning, marketing,
finance, administration, human resources, accounting, legal and other management
functions.
REIMBURSEMENT OF CERTAIN DIRECT COSTS AND INTERCOMPANY AGREEMENTS
Liberty Mutual from time to time has provided management, legal, internal
audit and treasury services to Liberty Financial, as well as to other Liberty
Mutual subsidiaries which services are of the type normally performed by a
parent company's corporate staff. In connection with the Colonial acquisition,
Liberty Financial and Liberty Mutual entered into an Intercompany Agreement (the
"Intercompany Agreement") governing ongoing services provided by Liberty Mutual
to Liberty Financial. Under the Intercompany Agreement, such services are
provided only as requested by Liberty Financial and may include executive,
legal, tax, treasury and certain other services. Liberty Financial pays Liberty
Mutual a fee based upon Liberty Mutual's direct costs allocable to the services
provided, and reimburses Liberty Mutual for all associated out of pocket fees
and expenses incurred by it. The agreement provides for estimated quarterly
payments and subsequent adjustments thereto based upon actual experience. For
2000, Liberty Financial paid Liberty Mutual $3.5 million for services under the
Intercompany Agreement.
The Intercompany Agreement also provides that, during any period in which
Liberty Mutual owns at least 20% of the voting power of the outstanding capital
stock of Liberty Financial, Liberty Financial will provide Liberty Mutual with
certain financial and other information. During any period in which Liberty
Mutual owns at least 50% of the voting power of the outstanding capital stock of
Liberty Financial or in which Liberty Mutual is required or elects to
consolidate Liberty Financial's financial results in its own financial
statements, Liberty Financial must obtain Liberty Mutual's prior written consent
to any significant changes in accounting principles of Liberty Financial.
In addition, the Intercompany Agreement provides that Liberty Financial will
indemnify Liberty Mutual, its subsidiaries (other than Liberty Financial and its
subsidiaries), and each of their respective officers, directors, employees, and
agents against losses from third-party claims based on, arising out of or
resulting from (i) the activities of Liberty Financial or its subsidiaries
(including without limitation liabilities under the Securities Act, the Exchange
Act and other securities laws) and (ii) any other acts or omissions arising out
of performance of the Intercompany Agreement.
TAX SHARING AGREEMENT
With respect to the period from January 1, 1990 through July 17, 1997 (the
"Deconsolidation Date"), Liberty Financial and its subsidiaries (except for
Keyport and its subsidiaries, each of which filed a separate federal income tax
return through 1993) were included in the consolidated federal income tax return
filed by Liberty Mutual. Prior to 1994, Keyport and its subsidiaries were not
eligible for inclusion in Liberty Mutual's consolidated federal income tax
return.
Liberty Financial and Liberty Mutual are parties to a written Tax Sharing
Agreement (the "Tax Sharing Agreement"). The Tax Sharing Agreement provides for
the allocation between Liberty Financial and Liberty Mutual of the liability for
federal income taxes and foreign, state, and local income, franchise, and excise
taxes, and details the methodology and procedures for determining the payments
or reimbursements to be made by or to Liberty Financial with respect to such
taxes. The Tax Sharing Agreement applies primarily to taxable years or periods
beginning on or after January 1, 1990 and ending before or on the
Deconsolidation Date.
Liberty Mutual's ownership of the outstanding capital stock of the Company
fell below 80% effective on the Deconsolidation Date. As a result, Liberty
Financial and its subsidiaries are no longer included in
48
the consolidated federal and certain other income tax returns filed by Liberty
Mutual, and the Tax Sharing Agreement generally will no longer be in effect, for
periods beginning after the Deconsolidation Date, except for certain provisions
that may affect carryovers and carrybacks of net operating losses or other tax
attributes and subsequent examination adjustments by taxing authorities (as
described below). Liberty Mutual's 1997 consolidated federal income tax return
included Liberty Financial and its subsidiaries through the Deconsolidation
Date. Subsequently, the Company and its subsidiaries (other than Keyport and
Keyport's subsidiaries) file a consolidated federal income tax return. For the
remainder of 1997 through July 17, 2002, Keyport and its subsidiaries will file
separately from the Company, after which period Keyport and its current
subsidiaries will be eligible to be included in the Company's consolidated
federal income tax return.
The Tax Sharing Agreement generally provides with respect to periods prior
to the Deconsolidation Date, among other things, that Liberty Financial will pay
to Liberty Mutual an amount for federal income tax purposes determined as if
Liberty Financial filed a separate consolidated federal income tax return for
Liberty Financial and its subsidiaries (i.e., as if Liberty Financial were the
common parent of an affiliated group including its subsidiaries but not
including Liberty Mutual and its other subsidiaries [in each case excluding
Keyport and its subsidiaries for periods prior to 1994]), regardless of the
amount of federal income tax shown on the actual consolidated federal income tax
return filed by Liberty Mutual on behalf of its entire affiliated group
(including Liberty Financial and its subsidiaries). The determination of the
amounts paid by Liberty Financial pursuant to the Tax Sharing Agreement
generally takes into account carryovers and carrybacks of net operating losses
and other attributes, again as if Liberty Financial and its subsidiaries (other
than Keyport and its subsidiaries for periods prior to 1994) independently filed
a consolidated federal income tax return for such periods.
The Tax Sharing Agreement also provides for procedures with respect to
adjustments to tax payments or reimbursements resulting from audits or other
proceedings with respect to taxable years for which Liberty Financial and/or its
subsidiaries have been included with Liberty Mutual and its other subsidiaries
in any consolidated federal income tax return or any combined, joint,
consolidated, or similar foreign, state, or local income, franchise, or excise
tax return. In addition, while the Tax Sharing Agreement generally applies to
taxable years in which Liberty Financial has been included in a consolidated
federal income tax return filed by Liberty Mutual, it also contains provisions
that may affect carryovers or carrybacks of net operating losses or other tax
attributes from or to taxable years prior or subsequent to such consolidation.
For 2000, there were no payments between Liberty Mutual and Liberty
Financial pursuant to the Tax Sharing Agreement.
As the common parent of an affiliated group filing a consolidated federal
income tax return and under the terms of the Tax Sharing Agreement, Liberty
Mutual has various rights. Among other things, for periods prior to
deconsolidation, Liberty Mutual is the sole and exclusive agent for Liberty
Financial in any and all matters relating to the U.S. income tax liability of
Liberty Financial. Liberty Mutual has sole and exclusive responsibility for the
preparation and filing of the U.S. consolidated federal income tax return for
such affiliated group, and Liberty Mutual has the power, in its sole discretion,
to contest or compromise any asserted tax adjustment or deficiency and to file,
litigate, or compromise any claim for refund on behalf of Liberty Financial.
REGISTRATION RIGHTS AGREEMENT
In connection with the Colonial acquisition, Liberty Financial and Liberty
Mutual entered into a Registration Rights Agreement (the "Registration Rights
Agreement") which, among other things, provides that Liberty Financial will,
upon Liberty Mutual's request, register under the Securities Act any of the
shares of Common Stock currently held indirectly or hereafter acquired directly
or indirectly by Liberty Mutual for sale in accordance with Liberty Mutual's
intended method of disposition thereof, and
49
will take such other actions necessary to permit the sale thereof in other
jurisdictions. Liberty Mutual has the right to request up to three such
registrations per year, subject to certain minimum share requirements. Liberty
Mutual has agreed to pay the costs and expenses in connection with each such
registration of its shares. Liberty Financial has the right (exercisable not
more than once in any 12-month period) to require Liberty Mutual to delay any
exercise by Liberty Mutual of such rights to require registration and other
actions under the agreement for a period of up to 120 days if Liberty Financial
determines, and the underwriters concur, that any other offerings by Liberty
Financial then being conducted or about to be conducted would be adversely
affected, or if Liberty Financial determines that it would be required to
disclose publicly material business information which would cause a material
disruption of a major corporate development then pending or in progress or that
such registration would have other material adverse consequences.
Liberty Mutual also has the right, which it may exercise at any time and
from time to time in the future, to include the shares of Common Stock held
directly or indirectly by it in certain other registrations of common equity
securities of Liberty Financial initiated by Liberty Financial on its own
behalf. Liberty Mutual has agreed to pay its pro rata share of all costs and
expenses in connection with each such registration.
Each of Liberty Financial and Liberty Mutual will indemnify the other, and
the officers, directors and controlling persons of the other, against certain
liabilities arising in respect of any registration or other offering under the
Registration Rights Agreement.
CERTAIN OTHER TRANSACTIONS INVOLVING LIBERTY MUTUAL
Prior to 1999, Keyport had a sales arrangement with Liberty Life Assurance
Company of Boston ("Liberty Life"), a subsidiary of Liberty Mutual which is
licensed to sell variable annuity contracts in the State of New York. Liberty
Life issued variable annuity contracts in New York with substantially the same
policy terms and underlying investment options as Keyport's variable annuity
products, the premiums for which are deposited in a separate account of Liberty
Life. Keyport continues to provide administrative services to Liberty Life with
respect to such annuities. All contractual obligations in respect of such
annuities are those of Liberty Life rather than of Keyport. Liberty Life charges
the fees payable under the annuities, pays Keyport a fee designed to cover
Keyport's expenses in administering these annuities, and retains the balance.
During 2000 Liberty Life paid Keyport fees of approximately $0.3 million under
these arrangements.
Keyport has entered into certain structured settlement arrangements with
Liberty Mutual and Liberty Life. Under qualified assignments, Keyport has
assumed obligations of Liberty Mutual to make payments to claimants under its
liability insurance policies. Also, Keyport has purchased from Liberty Life,
annuities that are qualified funding assets in order that Liberty Life will pay
claimants the Liberty Mutual obligations assumed by Keyport. As a result of
these structured settlement arrangements, Keyport is contingently liable on the
obligations it assumes in the event of Liberty Life's non-performance. As of
December 31, 2000, Keyport's loss contingency was approximately $827.3 million.
During 2000, Keyport received fees of approximately $0.3 million in connection
with these structured settlements.
The Company provides certain investment management services to Liberty
Mutual. Liberty Mutual paid the Company $1.1 million for these services in 2000.
In addition, Liberty Financial provides investment advisory services to oil and
gas investment subsidiaries of Liberty Mutual. These subsidiaries reimburse
Liberty Financial for all direct out-of-pocket costs for these services. These
cost reimbursements totaled $0.2 million in 2000.
As of December 31, 2000, Liberty Mutual and Liberty Fire owned approximately
6.4% and 0.7%, respectively, of the outstanding shares of beneficial interest of
Liberty All-Star Equity Fund, a closed-end fund listed on the New York Stock
Exchange. All of such shares were purchased in open market
50
transactions. Liberty Asset Management Company, a Liberty Financial subsidiary,
is the investment adviser to the fund.
The existing and proposed agreements between Liberty Financial and Liberty
Mutual may be modified in the future and additional transactions or agreements
may be entered into between Liberty Financial and Liberty Mutual. Conflicts of
interest could arise between Liberty Financial and Liberty Mutual with respect
to any of the foregoing, or any future agreements or arrangements between them.
Neither Liberty Mutual nor Liberty Financial has instituted, or has any current
plans to institute, any formal plan or arrangement to address any possible
conflicts of interest.
51
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
($ IN MILLIONS)
DECEMBER 31 2000 1999
- ----------- --------- ---------
ASSETS
ASSETS:
Investments............................................... $12,232.4 $12,195.1
Cash and cash equivalents................................. 1,891.0 1,232.6
Accrued investment income................................. 163.5 162.0
Deferred policy acquisition costs......................... 547.9 739.2
Deferred distribution costs............................... 169.4 153.7
Intangible assets......................................... 533.0 282.0
Other assets.............................................. 401.0 244.8
Separate account assets................................... 4,212.5 3,363.1
--------- ---------
$20,150.7 $18,372.5
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Policyholder balances..................................... $11,968.5 $12,109.6
Notes payable to affiliates............................... 200.0 --
Notes payable............................................. 563.2 552.0
Payable for investments purchased and loaned.............. 1,364.5 754.9
Other liabilities......................................... 429.3 453.1
Separate account liabilities.............................. 4,166.8 3,301.0
--------- ---------
Total liabilities....................................... 18,692.3 17,170.6
--------- ---------
Series A redeemable convertible preferred stock, par value
$.01; authorized, issued and outstanding 213,242 shares in
2000 and 324,759 shares in 1999........................... 10.7 16.0
--------- ---------
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, authorized 100,000,000
shares; issued and outstanding 48,784,459 shares in 2000
and 47,462,995 shares in 1999........................... 0.5 0.5
Additional paid-in capital................................ 949.1 923.0
Retained earnings......................................... 532.4 425.2
Accumulated other comprehensive loss...................... (30.6) (158.1)
Unearned compensation..................................... (3.7) (4.7)
--------- ---------
Total stockholders' equity.............................. 1,447.7 1,185.9
--------- ---------
$20,150.7 $18,372.5
========= =========
See accompanying notes to consolidated financial statements.
52
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED INCOME STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
Investment income, including distributions from private
equity limited partnerships of $13.3 million in 2000...... $ 862.3 $ 810.3 $ 820.9
Interest credited to policyholders.......................... (539.6) (526.6) (562.2)
------- ------- -------
Investment spread........................................... 322.7 283.7 258.7
------- ------- -------
Net realized investment gains (losses)...................... (47.5) (42.2) 2.4
------- ------- -------
Gain on sale of Private Capital Management.................. 27.6 -- --
------- ------- -------
Net change in unrealized and undistributed gains in private
equity limited partnerships............................... 31.6 -- --
------- ------- -------
FEE INCOME:
Investment advisory and administrative fees............... 300.2 268.5 237.7
Distribution and service fees............................. 60.7 60.4 52.7
Transfer agency fees...................................... 49.0 51.7 49.0
Surrender charges and net commissions..................... 42.3 36.5 33.7
Separate account fees..................................... 43.5 33.5 20.6
------- ------- -------
Total fee income........................................ 495.7 450.6 393.7
------- ------- -------
EXPENSES:
Operating expenses........................................ (406.0) (360.4) (328.2)
Restructuring charges..................................... (18.7) -- --
Special compensation plan................................. (11.1) -- --
Amortization of deferred policy acquisition costs......... (116.0) (97.4) (77.4)
Amortization of deferred distribution costs............... (42.9) (40.3) (40.1)
Amortization of intangible assets......................... (24.3) (20.3) (15.3)
Interest expense, net..................................... (22.5) (19.3) (14.9)
------- ------- -------
Total expenses.......................................... (641.5) (537.7) (475.9)
------- ------- -------
Pretax income............................................... 188.6 154.4 178.9
Income tax expense.......................................... (61.0) (55.1) (54.4)
------- ------- -------
Income before extraordinary item............................ 127.6 99.3 124.5
Extraordinary loss on extinguishment of debt, net of tax.... -- -- (9.7)
------- ------- -------
Net income.................................................. $ 127.6 $ 99.3 $ 114.8
======= ======= =======
Net income per share--basic:
Income before extraordinary item........................ $ 2.65 $ 2.11 $ 2.72
======= ======= =======
Net income.............................................. $ 2.65 $ 2.11 $ 2.51
======= ======= =======
Net income per share--assuming dilution:
Income before extraordinary item........................ $ 2.61 $ 2.07 $ 2.63
======= ======= =======
Net income.............................................. $ 2.61 $ 2.07 $ 2.42
======= ======= =======
See accompanying notes to consolidated financial statements.
53
LIBERTY FINANCIAL COMPANIES, INC.
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, 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) 1,271.3
--------
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
--------
Comprehensive loss:
Net income..................... 127.6 127.6
Other comprehensive income, net
of taxes:
Net unrealized gains on
securities................. 127.5 127.5
--------
Total comprehensive income....... 255.1
--------
Common stock issued for
acquisition.................... 1.8 1.8
Effect of stock-based
compensation plans............. 10.6 1.0 11.6
Accretion to face value of
preferred stock................ (0.2) (0.2)
Common stock dividends........... 13.7 (19.4) (5.7)
Preferred stock dividends........ (0.8) (0.8)
------ ------ ------ ------ ----- --------
BALANCE, DECEMBER 31, 2000....... $ 0.5 $949.1 $532.4 $(30.6) $(3.7) $1,447.7
====== ====== ====== ====== ===== ========
See accompanying notes to consolidated financial statements.
54
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
YEAR ENDED DECEMBER 31 2000 1999 1998
- ---------------------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................... $ 127.6 $ 99.3 $ 114.8
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.......................... 83.3 77.4 81.6
Interest credited to policyholders..................... 539.6 526.6 562.2
Net realized investment (gains) losses................. 47.5 42.2 (2.4)
Gain on sale of Private Capital Management............. (27.6) -- --
Net change in unrealized and undistributed gains in
private equity limited partnerships.................. (31.6) -- --
Net amortization on investments........................ 59.8 79.5 75.4
Change in deferred policy acquisition costs............ 9.0 (17.4) (24.2)
Change in current and deferred income taxes............ (4.5) 62.9 (3.8)
Net change in other assets and liabilities............. 8.9 (114.9) (124.6)
--------- --------- ---------
Net cash provided by operating activities............ 812.0 755.6 688.7
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased available for sale................. (3,802.3) (4,993.3) (6,789.0)
Investments sold available for sale...................... 2,953.5 4,322.7 5,406.0
Investments matured available for sale................... 894.8 823.2 1,273.5
Increase in policy loans, net............................ (21.3) (20.7) (24.1)
Decrease in mortgage loans, net.......................... 2.7 43.0 5.5
Acquisitions, net of cash acquired....................... (274.2) -- (98.7)
Other.................................................... (4.6) (37.3) (9.7)
--------- --------- ---------
Net cash (used in) provided by investing
activities......................................... (251.4) 137.6 (236.5)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals from policyholder accounts................... (2,250.0) (2,108.9) (1,690.0)
Deposits to policyholder accounts........................ 1,569.2 894.4 1,225.0
Securities lending....................................... 600.4 505.0 (510.6)
Change in notes receivable............................... (30.0) -- --
Change in notes payable to affiliates.................... 200.0 -- (244.0)
Change in notes payable.................................. 11.2 65.6 459.9
Exercise of stock options................................ 9.0 5.5 7.4
Dividends paid........................................... (6.5) (6.3) (5.9)
Redemption of preferred stock............................ (5.5) -- --
--------- --------- ---------
Net cash provided by (used in) financing
activities......................................... 97.8 (644.7) (758.2)
--------- --------- ---------
Increase (decrease) in cash and cash equivalents........... 658.4 248.5 (306.0)
Cash and cash equivalents at beginning of year............. 1,232.6 984.1 1,290.1
--------- --------- ---------
Cash and cash equivalents at end of year................... $ 1,891.0 $ 1,232.6 $ 984.1
========= ========= =========
Noncash Financing Activities: Noncash financing activities relate to dividends
paid in common stock, primarily to an affiliate of Liberty Mutual, in the amount
of $13.7 million, $13.4 million and $13.2 million in 2000, 1999 and 1998,
respectively, pursuant to the Company's dividend reinvestment plan.
See accompanying notes to consolidated financial statements.
55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY FINANCIAL COMPANIES, INC.
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 Financial Marketing Group, 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"), Progress Investment
Management Company ("Progress"), and Liberty Wanger Asset Management ("Wanger").
All significant intercompany balances and transactions have been eliminated.
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. Investments in private
equity limited partnerships, which are included in other invested assets, are
accounted for on either the cost method or equity method. The equity method of
accounting is used for all partnerships in which the Company has an ownership
interest in excess of 3%, and the cost method is used for all other partnership
investments.
56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
Net change in unrealized and undistributed gains in private equity limited
partnerships 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 $58.8 million and net of amounts realized, which are recognized in
investment income, of $13.3 million for the year ended December 31, 2000. The
financial information for these investments is obtained directly from the
private equity limited partnerships on a periodic basis. The corresponding
amounts in 1999 and 1998 were insignificant. Investments in private equity
limited partnerships totaled $439.0 million ($348.7 million excluding the net
change in unrealized and undistributed gains in private equity limited
partnerships) and $180.7 million at December 31, 2000 and 1999, 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 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
57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
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." 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." This
statement amended SFAS No. 133 to defer its effective date one year to fiscal
years beginning after June 15, 2000. In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities"--an amendment of SFAS No. 133. This statement makes certain changes
in the hedging provisions of SFAS No. 133 and is effective concurrent with SFAS
No. 133 (collectively hereafter referred to as the "Statement"). The Statement
will require the Company to recognize all derivatives on the balance sheet at
fair value. Derivatives that are not hedges must be adjusted to fair value
through income. If the derivative is a hedge, depending on the nature of the
hedge, changes in the fair value of derivatives will either be offset by the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's change
in fair value will be immediately recognized in earnings. Upon adoption in the
first quarter of 2001, the Company will be required to record a cumulative
effect adjustment to reflect this accounting change.
The cumulative effect, reported after tax and net of related effects of
deferred policy acquisition costs, upon adoption of the Statement at January 1,
2001 will decrease net income and stockholder's equity by approximately
$55.0 million. The adoption of the Statement may increase volatility in future
reported income due, among other reasons, to the requirements of defining an
effective hedging relationship under the Statement as opposed to certain hedges
the Company believes are effective economic hedges. The Company anticipates that
it will continue to utilize its current risk management philosophy, which
includes the use of derivative instruments.
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.
58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
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 $43.4 million and $235.7 million at December 31, 2000 and
December 31, 1999, respectively, 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 in
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 3 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 undiscounted
future cash flows derived from such goodwill and other intangible assets are
less than their carrying value.
The Company has experienced higher than anticipated redemptions of assets
under management at an acquired company, which at December 31, 2000 had goodwill
and other intangible assets of $79.0 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.
59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES (CONTINUED)
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 also classified as separate account assets
investments in Company-sponsored mutual funds and other investments of
$44.9 million and $62.2 million at December 31, 2000 and 1999, 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
Income taxes have been provided using the liability method in accordance
with Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes."
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.
60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. ACQUISITIONS
On September 29, 2000, the Company completed the acquisition of Wanger Asset
Management, L.P. ("Wanger"), a registered investment advisor with approximately
$9.4 billion in assets under management as of that date. The purchase price for
this transaction was approximately $277.4 million in cash, including transaction
costs. In addition, the Company has agreed to make additional payments over the
next five years of up to $178.0 million in cash, with $170.0 million contingent
upon the attainment of certain earnings objectives and an $8.0 million 3-year
note payable to WAM Rights Partnership bearing interest at the rate of 7.00%.
This transaction was accounted for as a purchase and resulted in the recording
of $133.0 million of intangible assets which will be amortized over 13 years and
$145.9 million of goodwill which will be amortized over 25 years. The Company
funded the acquisition of Wanger with cash and investments and $200.0 million of
debt issued to Liberty Mutual Insurance Company and its affiliates. Such debt
consists of a $180.0 million 12-year note with interest payable semi-annually at
8.85% and a $20.0 million 20-year note with interest payable semi-annually at
9.35%.
The following unaudited pro forma summary presents information as if the
acquisition of Wanger had occurred as of January 1, 1999. The pro forma
information does not necessarily reflect the actual results that would have
occurred nor is it necessarily indicative of future results of operations of the
combined companies:
YEAR ENDED DECEMBER 31 2000 1999
- ---------------------- -------- --------
Net income (in millions).................................... $123.0 $91.0
Net income per share--assuming dilution..................... $ 2.52 $1.90
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 three years, contingent upon the
attainment of certain earnings objectives. In 2000 and 1999, the Company paid
$2.7 million and $4.0 million, respectively, of such contingent payments. An
additional $64.8 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 $107.8 million.
61
3. INVESTMENTS
Investments, which largely pertain to the Company's annuity insurance
operations, were comprised of the following (in millions):
DECEMBER 31 2000 1999
- ----------- --------- ---------
Fixed maturities............................................ $10,668.3 $10,516.1
Equity securities........................................... 76.4 37.9
Policy loans................................................ 620.8 599.5
Other invested assets....................................... 866.9 1,041.6
--------- ---------
$12,232.4 $12,195.1
========= =========
As of December 31, 2000, 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, 2000, $1.3 billion of fixed maturities were below
investment grade. These securities represented 8.3% 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
DECEMBER 31, 2000 COST GAINS LOSSES FAIR VALUE
- ----------------- --------- ---------- ---------- ----------
U.S. Treasury securities........................ $ 40.2 $ 1.7 $ (0.1) $ 41.8
Mortgage backed securities of U.S. government
corporations and agencies..................... 893.1 16.2 (5.4) 903.9
Debt securities issued by foreign governments... 102.2 0.6 (0.2) 102.6
Corporate securities............................ 5,597.6 88.9 (215.9) 5,470.6
Other mortgage backed securities................ 2,403.2 74.6 (17.7) 2,460.1
Asset backed securities......................... 1,683.4 20.7 (21.8) 1,682.3
Senior secured loans............................ 8.8 -- (1.8) 7.0
--------- ------ ------- ---------
Total fixed maturities.......................... $10,728.5 $202.7 $(262.9) $10,668.3
========= ====== ======= =========
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED
DECEMBER 31, 1999 COST GAINS LOSSES FAIR 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
========= ====== ======= =========
62
3. INVESTMENTS (CONTINUED)
At December 31, 2000 and 1999, gross unrealized gains on equity securities,
investments in separate accounts and other invested assets aggregated
$17.3 million and $32.4 million, and gross unrealized losses aggregated
$18.5 million and $11.1 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 $12.9 million and $84.8 million at December 31, 2000 and
1999, respectively.
The change in net unrealized gains (losses) on securities included in other
comprehensive income in 2000, 1999 and 1998 include: gross unrealized gains
(losses) on securities of $204.3 million, $(470.2) million and $(182.1) million,
respectively; reclassification adjustments for realized (gains) losses in net
income of $45.9 million, $53.5 million and $3.6 million, respectively; and
adjustments to deferred policy acquisition costs of $(192.3) million,
$302.2 million and $92.5 million, respectively. The above amounts are shown
before income tax expense (benefit) of $(69.6) million, $70.7 million and
$(30.2) million, respectively. The 2000 and 1999 income tax expense (benefit)
amounts include changes in the valuation allowances of $(90.8) million and
$109.9 million, respectively, 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, 2000 are as follows (in millions):
AMORTIZED FAIR
DECEMBER 31, 2000 COST VALUE
- ----------------- --------- ---------
Due in one year or less..................................... $ 131.0 $ 127.9
Due after one year through five years....................... 2,138.4 2,134.5
Due after five years through ten years...................... 1,945.2 1,909.6
Due after ten years......................................... 1,534.2 1,450.0
--------- ---------
5,748.8 5,622.0
Mortgage and asset backed securities........................ 4,979.7 5,046.3
--------- ---------
$10,728.5 $10,668.3
========= =========
Actual maturities may differ from those shown above because borrowers may
have the right to call or prepay obligations.
63
3. INVESTMENTS (CONTINUED)
NET INVESTMENT INCOME
Net investment income is summarized as follows (in millions):
YEAR ENDED DECEMBER 31 2000 1999 1998
- ---------------------- -------- -------- --------
Fixed maturities............................................ $807.9 $814.7 $810.5
Equity securities........................................... 0.3 1.5 4.4
Policy loans................................................ 37.0 36.3 33.2
Other invested assets....................................... 85.7 28.4 18.2
Cash and cash equivalents................................... 27.3 20.8 38.3
------ ------ ------
Gross investment income..................................... 958.2 901.7 904.6
Investment expenses......................................... (15.5) (14.2) (11.6)
Amortization of call options and interest rate caps......... (80.4) (77.2) (72.1)
------ ------ ------
Net investment income....................................... $862.3 $810.3 $820.9
====== ====== ======
As of December 31, 2000 and 1999, the carrying value of fixed maturity
investments that were non-income producing was $24.4 million and $22.6 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 $44.0 million,
$48.1 million and $88.5 million for 2000, 1999 and 1998, respectively. Gross
realized losses were $101.6 million, $102.3 million and $90.4 million for 2000,
1999 and 1998, respectively. Gross realized losses in 2000, 1999 and 1998
included $18.9 million, $18.3 million and $28.3 million, respectively, for
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)
-----------------------------------------
2000 1999
NOTIONAL AMOUNTS ------------------- -------------------
------------------- CARRYING FAIR CARRYING FAIR
DECEMBER 31 2000 1999 VALUE VALUE VALUE VALUE
- ----------- -------- -------- -------- -------- -------- --------
Interest rate swap agreements................ $2,797.8 $2,917.3 $(33.5) $(33.5) $41.4 $41.4
Total return swap agreements................. 1,031.6 500.0 23.9 23.9 37.8 36.3
Interest rate cap agreements................. -- 50.0 -- -- -- --
S&P 500 Index call options................... -- -- 337.7 358.2 701.1 803.1
The interest rate and total return swap agreements expire in 2001 through
2029. The interest rate cap agreement expired in 2000. The S&P 500 call options
maturities range from 2001 to 2008.
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
64
4. DERIVATIVES (CONTINUED)
to provide returns based upon this index. At December 31, 2000 and 1999, the
Company had approximately $115.0 million and $128.7 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.
5. NOTES PAYABLE
Notes payable include the following (in millions):
DECEMBER 31 2000 1999
- ----------- ---- ----
Notes payable to affiliates:
8.85% promissory notes due 2012........................... $180.0 $ --
9.35% promissory note due 2020............................ 20.0 --
------ ------
200.0 --
------ ------
NOTES PAYABLE:
6 3/4% notes due 2008, net of unamortized discount of
$2.0 million and $2.2 million in 2000 and 1999,
respectively, effective rate 6.86%...................... 298.0 297.8
7 5/8% debentures due 2028, net of unamortized discount of
$0.8 million in 2000 and 1999, effective rate 7.67%..... 149.2 149.2
Revolving credit facility................................. 108.0 105.0
7.00% promissory note due 2003............................ 8.0 --
------ ------
563.2 552.0
------ ------
$763.2 $552.0
====== ======
In connection with the Wanger acquisition, the Company issued
$200.0 million of debt to Liberty Mutual Insurance Company and its affiliates.
Such debt consists of $180.0 million of 12-year notes with interest payable
semi-annually at 8.85% and a $20.0 million 20-year note with interest payable
semi-annually at 9.35%. In addition, the Company issued an $8.0 million 3-year
note payable to WAM Rights Partnership bearing interest at the rate of 7.00%.
In connection with the Crabbe Huson acquisition in 1998, 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
65
5. NOTES PAYABLE (CONTINUED)
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 restrict 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, 2000, the interest paid on borrowings under
the Facility was at the rate of 6.65% per annum.
Interest paid was $45.4 million, $36.6 million and $25.5 million in 2000,
1999 and 1998, respectively.
6. INCOME TAXES
Income tax expense is summarized as follows (in millions):
YEAR ENDED DECEMBER 31 2000 1999 1998
- ---------------------- -------- -------- --------
Current..................................................... $ 101.5 $ (9.9) $10.1
Deferred.................................................... (40.5) 65.0 44.3
------- ------ -----
$ 61.0 $ 55.1 $54.4
======= ====== =====
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 2000 1999 1998
- ---------------------- -------- -------- --------
Expected income tax expense................................. $ 66.1 $ 54.3 $62.6
Increase (decrease) in income taxes resulting from:
Nontaxable investment income.............................. (2.7) (2.2) (2.1)
Reduction in deferred tax asset valuation allowance....... (9.4) (2.3) (10.6)
Amortization of goodwill and other intangible assets...... 7.3 4.2 3.8
State taxes, net of federal tax benefit................... 3.2 0.4 0.7
Prior year's tax adjustment............................... (6.0) -- --
Other, net................................................ 2.5 0.7 --
------- ------ -----
Income tax expense.......................................... $ 61.0 $ 55.1 $54.4
======= ====== =====
66
The components of deferred federal income taxes are as follows (in
millions):
DECEMBER 31 2000 1999
- ----------- -------- --------
Deferred tax assets:
Policyholder balances..................................... $ 65.6 $ 85.2
Guaranty fund expense..................................... 2.3 2.1
Deferred compensation and other benefit plans............. 15.0 18.8
Net operating loss carryforwards.......................... 22.6 24.1
Distribution fees......................................... 33.9 25.9
Net unrealized capital losses............................. 22.6 111.2
Other..................................................... 3.4 7.9
------- -------
Total deferred tax assets................................. 165.4 275.2
Less: valuation allowance................................. (9.7) (109.9)
------- -------
Net deferred tax assets................................. 155.7 165.3
------- -------
Deferred tax liabilities:
Deferred policy acquisition costs......................... (160.1) (231.3)
Excess of book over tax basis of investments.............. (72.8) (120.0)
Deferred revenue.......................................... (35.7) (33.7)
Separate account assets................................... (2.5) (5.8)
Amortization of deferred distribution costs............... (50.6) (49.0)
Other..................................................... (9.5) (9.6)
------- -------
Total deferred tax liabilities.......................... (331.2) (449.4)
------- -------
Net deferred tax liability.............................. $(175.5) $(284.1)
======= =======
As of December 31, 2000, the Company had Federal net operating loss
carryforwards related to certain of the Company's non-insurance operations of
$59.7 million, which expire through 2019. As of December 31, 2000, 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 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.
As of December 31, 2000, the Company had $54.7 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. A valuation allowance is provided
when it is more likely than not that the deferred tax assets will not be
realized. As of December 31, 2000, the valuation allowance in stockholders'
equity is $9.7 million. Reversal of the prior year's balance through
stockholders equity in 2000 was the result of changes in market value. In
addition, the Company released $9.4 million of the valuation allowance through
operating earnings during 2000 as a result of additional partnership capital
gains which caused a change in judgement regarding the realizability of the
applicable deferred tax asset.
Income taxes paid (refunded) were $52.7 million, $(6.2) million and
$27.6 million in 2000, 1999 and 1998, 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. Effective March 24, 2000, and for the five year
period ending March 24, 2005, the preferred stock is redeemable at the option of
the Company
67
7. REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
at a declining premium over face value. On March 24, 2005, the Company must
redeem the preferred stock. In addition, for the sixty-day period after
March 24, 2000, holders of the preferred stock had an option to put such
preferred stock at face value plus cumulative unpaid dividends and holders of
approximately 111,000 shares of preferred stock exercised this option. 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 has
been added to the carrying value of the preferred stock ratably over a five year
period ending in March of 2000 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, Progress and Wanger). 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.
The following table sets forth the Plans' funded status (in millions) as of
December 31, 2000 and 1999.
DECEMBER 31 2000 1999
- ----------- -------- --------
Change in benefit obligation
Benefit obligation at beginning of year................... $31.5 $32.8
Service cost.............................................. 1.5 2.1
Interest cost............................................. 2.6 2.4
Actuarial loss (gain)..................................... 1.2 (4.9)
Benefits paid............................................. (1.0) (0.9)
----- -----
Benefit obligation at end of year......................... $35.8 $31.5
===== =====
Change in plan assets
Fair value of plan assets at beginning of year............ $19.2 $16.1
Actual return on plan assets.............................. 0.1 2.7
Employer contribution..................................... 1.2 1.3
Benefits paid............................................. (1.0) (0.9)
----- -----
Fair value of plan assets at end of year.................. $19.5 $19.2
===== =====
Projected benefit obligation in excess of the plans'
assets.................................................... $16.3 $12.3
Unrecognized net actuarial (loss) gain...................... (0.6) 2.1
Prior service cost not yet recognized in net periodic
pension cost.............................................. (1.1) (1.4)
----- -----
Accrued pension cost........................................ $14.6 $13.0
===== =====
68
8. RETIREMENT PLANS (CONTINUED)
Pension cost includes the following components (in millions):
YEAR ENDED DECEMBER 31 2000 1999 1998
- ---------------------- -------- -------- --------
Service cost benefits earned during the period.............. $1.5 $2.1 $1.8
Interest cost on projected benefit obligation............... 2.6 2.4 2.1
Expected return on plan assets.............................. (1.6) (1.4) (1.2)
Net amortization and deferred amounts....................... 0.4 0.7 0.4
---- ---- ----
Total net periodic pension cost............................. $2.9 $3.8 $3.1
==== ==== ====
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 2000 1999 1998
- ---------------------- -------- -------- --------
Discount rate............................................... 7.75% 7.75% 6.75%
Rate of increase in compensation level...................... 4.50% 4.50% 4.75%
Expected long-term rate of return on assets................. 9.00% 9.00% 9.00%
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
$9.8 million, $9.3 million and $9.5 million in 2000, 1999 and 1998,
respectively.
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.
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
stock price performance targets. Upon termination of employment, any nonvested
shares would generally be forfeited. The Company recorded $1.3 million,
$1.4 million and $1.0 million in compensation expense related to nonvested stock
in 2000, 1999 and 1998 respectively.
In the event of a change of control of the Company, unvested options will
vest and nonvested stock will vest if the stock price performance targets are
achieved.
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
69
9. STOCKHOLDERS' EQUITY (CONTINUED)
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: 4.99% for 2000, 6.46% for 1999 and 4.68%
for 1998; dividend yield: 1.60% for 2000, 1.64% for 1999 and 1.22% for 1998;
expected volatility of the market price of the Company's Common Stock: 29.9% for
2000, 26.0% for 1999 and 23.2% for 1998; 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):
YEAR ENDED DECEMBER 31 2000 1999 1998
- ---------------------- -------- -------- --------
Income before extraordinary item............................ $125.3 $96.0 $120.6
Extraordinary loss on extinguishment of debt, net of tax.... -- -- (9.7)
------ ----- ------
Net income.................................................. $125.3 $96.0 $110.9
====== ===== ======
Net income per share--basic:
Income before extraordinary item.......................... $ 2.60 $2.04 $ 2.64
Extraordinary loss on extinguishment of debt, net of
tax..................................................... -- -- (0.21)
------ ----- ------
Net income................................................ $ 2.60 $2.04 $ 2.43
====== ===== ======
Net income per share--assuming dilution:
Income before extraordinary item.......................... $ 2.56 $2.00 $ 2.55
Extraordinary loss on extinguishment of debt, net of
tax..................................................... -- -- (0.21)
------ ----- ------
Net income................................................ $ 2.56 $2.00 $ 2.34
====== ===== ======
A summary of the stock option activity, and related information for the
years ended December 31 follows (in thousands, except price data):
2000 1999 1998
------------------- ------------------- -------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
-------- -------- -------- -------- -------- --------
Outstanding--beginning of year............... 3,726 $22.93 3,729 $21.72 4,038 $16.31
Granted...................................... 786 18.19 788 24.52 627 36.92
Exercised.................................... (775) 14.99 (459) 12.65 (936) 8.58
Forfeited.................................... (664) 25.28 (332) 27.34 -- --
----- ------ ------ ------ ------ ------
Outstanding--end of year..................... 3,073 $23.21 3,726 $22.93 3,729 $21.72
===== ====== ====== ====== ====== ======
Exercisable--end of year..................... 1,733 $23.31 2,132 $19.09 2,051 $15.72
===== ====== ====== ====== ====== ======
Weighted-average fair value of options
granted during year........................ $5.96 $ 8.12 $10.62
===== ====== ======
Exercise prices for options outstanding as of December 31, 2000 ranged from
$6.90 to $38.94. The weighted-average remaining contractual life of these
options is 6.95 years.
70
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 2000 1999 1998
- ---------------------- ----------- ----------- -----------
Numerator (in millions)
Income before extraordinary item................... $ 127.6 $ 99.3 $ 124.5
Less: preferred stock dividends.................... (0.8) (0.9) (0.9)
----------- ----------- -----------
Numerator for income per share--basic--income
before extraordinary item available to common
stockholders..................................... 126.8 98.4 123.6
Extraordinary loss on extinguishment of debt, net
of tax........................................... -- -- (9.7)
----------- ----------- -----------
Numerator for net income per share--basic--net
income available to common stockholders.......... $ 126.8 $ 98.4 $ 113.9
=========== =========== ===========
Income available to common stockholders............ $ 126.8 $ 98.4 $ 123.6
Plus: income impact of assumed conversions
Preferred stock dividends........................ 0.8 0.9 0.9
----------- ----------- -----------
Numerator for income per share--assuming dilution--
income before extraordinary item available to
common stockholders after assumed conversions.... 127.6 99.3 124.5
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........... $ 127.6 $ 99.3 $ 114.8
=========== =========== ===========
Denominator
Denominator for basic--weighted average shares..... 47,834,973 46,719,223 45,330,561
----------- ----------- -----------
Effect of dilutive securities:
Employee stock options........................... 654,142 679,210 1,521,333
Convertible preferred stock...................... 414,703 514,370 515,657
----------- ----------- -----------
Dilutive potential common shares................... 1,068,845 1,193,580 2,036,990
----------- ----------- -----------
Denominator for assuming dilution.................. 48,903,818 47,912,803 47,367,551
=========== =========== ===========
Net income per share--basic:
Income before extraordinary item................... $ 2.65 $ 2.11 $ 2.72
Extraordinary loss on extinguishment of debt, net
of tax........................................... -- -- (0.21)
----------- ----------- -----------
Net income......................................... $ 2.65 $ 2.11 $ 2.51
=========== =========== ===========
Net income per share--assuming dilution:
Income before extraordinary item................... $ 2.61 $ 2.07 $ 2.63
Extraordinary loss on extinguishment of debt, net
of tax........................................... -- -- (0.21)
----------- ----------- -----------
Net income......................................... $ 2.61 $ 2.07 $ 2.42
=========== =========== ===========
71
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. Financial
information for investments in private equity limited partnerships is obtained
directly from such entities on a periodic basis.
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.
NOTE RECEIVABLE: The fair value of the note receivable, which is included
in other assets on the balance sheet, is estimated using discounted cash flow
analysis.
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 are either
estimated based on quoted market prices or using discounted cash flow analyses
based on the Company's incremental borrowing rate.
The fair values and carrying values of the Company's financial instruments
are as follows (in millions):
2000 1999
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
DECEMBER 31 VALUE VALUE VALUE VALUE
- ----------- --------- --------- --------- ---------
Assets:
Fixed maturity securities.................... $10,668.3 $10,668.3 $10,516.1 $10,516.1
Equity securities............................ 76.4 76.4 37.9 37.9
Policy loans................................. 620.8 620.8 599.5 599.5
Other invested assets........................ 866.9 893.3 1,041.6 1,145.1
Note receivable.............................. 30.0 30.0 -- --
Cash and cash equivalents.................... 1,891.0 1,891.0 1,232.6 1,232.6
Liabilities:
Policyholder balances........................ 9,850.9 9,460.3 10,015.1 9,306.8
Notes payable................................ 763.2 747.3 552.0 531.7
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 non-operating items and income taxes. The Company's
reportable segments offer
72
12. SEGMENT INFORMATION (CONTINUED)
different products and are each managed separately. Information by reported
segment for 2000, 1999 and 1998 is shown below (in millions):
YEAR ENDED DECEMBER 31 2000 1999 1998
- ---------------------- -------- -------- --------
Statement of Operations Data
Revenues (excluding net realized investment gains and
losses):
Annuity:
Unaffiliated............................................ $ 949.4 $ 877.0 $ 870.1
Intersegment............................................ (17.4) (14.0) (10.5)
-------- -------- --------
Total annuity........................................... 932.0 863.0 859.6
-------- -------- --------
Asset management:
Unaffiliated............................................ 408.6 383.9 344.5
Intersegment............................................ 17.4 14.0 10.5
-------- -------- --------
Total asset management.................................. 426.0 397.9 355.0
-------- -------- --------
Total revenues (excluding net realized investment gains
and losses)........................................... $1,358.0 $1,260.9 $1,214.6
======== ======== ========
Income before income taxes and extraordinary item:
Annuity:
Income before amortization of intangible assets......... $ 197.7 $ 179.0 $ 155.2
Amortization of intangible assets....................... (1.2) (1.2) (1.3)
-------- -------- --------
Subtotal annuity...................................... 196.5 177.8 153.9
-------- -------- --------
Asset management:
Income before amortization of intangible assets......... 80.3 85.8 77.0
Amortization of intangible assets....................... (23.1) (18.9) (13.8)
-------- -------- --------
Subtotal asset management............................. 57.2 66.9 63.2
-------- -------- --------
Other:
Loss before amortization of intangible assets........... (47.0) (47.9) (40.4)
Amortization of intangible assets....................... -- (0.2) (0.2)
-------- -------- --------
Subtotal other........................................ (47.0) (48.1) (40.6)
-------- -------- --------
Income before non-operating items, income taxes and
extraordinary item...................................... 206.7 196.6 176.5
Net realized investment gains (losses).................... (47.5) (42.2) 2.4
Gain on sale of Private Capital Management................ 27.6 -- --
Net change in unrealized and undistributed gains in
private equity limited partnerships..................... 31.6 -- --
Restructuring............................................. (18.7) -- --
Special compensation plan................................. (11.1) -- --
-------- -------- --------
Pretax income........................................... $ 188.6 $ 154.4 $ 178.9
======== ======== ========
DECEMBER 31 2000 1999
- ----------- --------- ---------
Balance Sheet Data
Identifiable Assets:
Annuity................................................... $19,007.4 $17,460.6
Asset management.......................................... 929.3 643.4
Other..................................................... 214.0 268.5
--------- ---------
Total consolidated assets............................... $20,150.7 $18,372.5
========= =========
All revenues are attributed to the United States. All long-lived assets are
located in the United States.
73
13. QUARTERLY FINANCIAL DATA, IN MILLIONS, EXCEPT PER SHARE AMOUNTS (UNAUDITED)
QUARTER ENDED 2000 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
- ------------------ -------- -------- ------------ -----------
Investment income.............................. $ 205.9 $ 216.4 $ 214.1 $ 225.9
Interest credited to policyholders............. (127.3) (133.2) (135.8) (143.3)
------- ------- ------- -------
Investment spread.............................. 78.6 83.2 78.3 82.6
Net realized investment losses................. (3.9) (12.9) (20.8) (9.9)
Gain on sale of Private Capital Management..... -- -- -- 27.6
Net change in unrealized and undistributed
gains in private equity limited
partnerships................................. 15.0 7.5 5.9 3.2
Fee income..................................... 121.4 119.0 121.0 134.3
Pretax income.................................. 62.4 47.7 27.3 51.2
Net income..................................... 39.4 29.0 22.1 37.1
Net income per share--basic.................... 0.83 0.60 0.46 0.76
Net income per share--assuming dilution........ 0.82 0.60 0.45 0.74
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
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 2000 1999 1998
- ---------------------- -------- -------- --------
Statutory surplus........................................... $805.2 $877.8 $790.9
Statutory net income (loss)................................. $ (5.9) $116.3 $ 98.9
15. OTHER 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 $3.5 million, $0.6 million and $0.6 million in 2000, 1999 and
1998, 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.
74
15. OTHER TRANSACTIONS WITH AFFILIATED COMPANIES (CONTINUED)
Keyport has entered into certain structured settlement arrangements with
Liberty Mutual and Liberty Life. Under qualified assignments, Keyport has
assumed obligations of Liberty Mutual to make payments to claimants under its
liability insurance policies. Also, Keyport has purchased from Liberty Life,
annuities that are qualified funding assets in order that Liberty Life will pay
claimants the Liberty Mutual obligations assumed by Keyport. As a result of
these structured settlement arrangements, Keyport is contingently liable on the
obligations it assumes in the event of Liberty Life's non-performance. As of
December 31, 2000, Keyport's loss contingency was approximately $827.3 million.
During 2000, Keyport received fees of approximately $0.3 million in connection
with these structured settlements.
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.
Keyport could pay dividends of up to $38.4 million in 2001 without the approval
of the Commissioner of Insurance of the State of Rhode Island. Keyport paid
dividends of $10.0 million during 2000.
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 $22.8 million, $19.7 million and
$16.5 million for the years ended December 31, 2000, 1999 and 1998,
respectively. For each of the next five years, and in the aggregate, as of
December 31, 2000, the following are the minimum future rental payments under
noncancelable operating leases having remaining terms in excess of one year (in
millions):
YEAR PAYMENTS
- ---- --------
2001........................................................ $24.5
2002........................................................ 24.2
2003........................................................ 23.3
2004........................................................ 21.4
2005........................................................ 20.8
Thereafter.................................................. 36.7
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. At December 31,
2000 and 1999, the reserve for such assessments was $6.7 million and
$5.9 million, respectively.
OTHER: On November 1, 2001, the Company announced that it has retained the
investment banking firm of Credit Suisse First Boston Corporation to review its
strategic alternatives, including a possible sale of the Company.
17. GAIN ON SALE OF PRIVATE CAPITAL MANAGEMENT
On December 29, 2000, the Company completed the sale of the Private Capital
Management ("PCM") division of Stein Roe & Farnham Incorporated, to the current
PCM management team and an
75
17. GAIN ON SALE OF PRIVATE CAPITAL MANAGEMENT (CONTINUED)
outside investor group. The sale price of $40.0 million consisted of
$10.0 million in cash and a $30.0 million 12% note receivable due over five
years. The Company recognized a gain of approximately $27.6 million,
$13.2 million after tax, for the year-ended December 31, 2000.
18. RESTRUCTURING CHARGES
Restructuring charges in 2000 of $18.7 million consist of severance and
other expenses. The restructuring charges primarily relate to two initiatives,
streamlining the Company's mutual fund product offerings and centralizing
corporate functions. The first initiative followed an in-depth analysis of the
Company's mutual fund and variable annuity products and considered the Wanger
acquisition, which brought additional scale and products to the Company's mutual
fund product offerings. As a result of this analysis, the Company merged 16
mutual funds into other Liberty funds and has liquidated 4 other funds. The
second initiative involves centralizing the finance, human resources, legal and
compliance, and communications functional areas. Previously, these functions
were managed independently in each operating company. The functional
centralization process began in August of 2000 and the Company anticipates that
it will be fully implemented by the end of 2001.
19. SPECIAL COMPENSATION PLAN
Special compensation plan expense in 2000 of $11.1 million relates to the
Company's announcement on November 1, 2000 that it has retained the investment
banking firm of Credit Suisse First Boston Corporation to review its strategic
initiatives, including a possible sale of the Company. To help retain its
employees during the strategic review, the Company implemented a special
compensation plan that provides cash retention bonuses to substantially all
employees. The retention bonuses are generally based on employees' base salary
and/or target incentive compensation amounts, except for sales personnel where
retention bonuses are based on sales. The estimated maximum cost of the
retention bonuses, assuming all covered employees remain with the Company, is
approximately $158.0 million with fifty percent payable on November 1, 2001 and
the remainder payable on May 1, 2002. In the event of a change of control of the
Company that occurs prior to November 1, 2001, the payments would be accelerated
and the retention bonus amount would be reduced, subject to a minimum. The
estimated minimum retention bonus is approximately $91.0 million and would be
recognized if a change of control occurs prior to May 14, 2001. The amount of
the retention bonus increases from the minimum on May 14, 2001 to the maximum on
October 31, 2001. In calculating the 2000 expense of $11.1 million, a turnover
rate of 15% was assumed.
76
REPORT OF INDEPENDENT AUDITORS
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, 2000 and 1999, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 2000. Our audits also
included the financial statement schedules listed in Item 14(a). These financial
statements and schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Liberty
Financial Companies, Inc. at December 31, 2000 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 29, 2001
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 10.12.1 and 10.34 through 10.36.3.
(b) Reports on Form 8-K.
On November 1, 2000, the Company filed a Current Report on form 8-K pursuant
to which the Company stated that it had issued a press release stating that it
had retained CS First Boston to help explore strategic alternatives, including
the possible sale of the Company. The Company added that, because the strategic
review was then ongoing, it could not speculate on the outcome, and there is no
assurance that any transaction will be completed. The report also stated that
the Company would have no further public comment on this subject until the
Company and CS First Boston complete the review.
PART IV
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 April 26, 2001.
LIBERTY FINANCIAL COMPANIES, INC.
By: /s/ GARY L. COUNTRYMAN
-----------------------------------------
Gary L. Countryman
Chief Executive Officer, President and
Director
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, April 26, 2001
Gary L. Countryman President and Director
Senior Vice President and
/s/ J. ANDREW HILBERT Chief Financial Officer
------------------------------------------- (Principal Financial April 26, 2001
J. Andrew Hilbert and Accounting Officer)
/s/ GERALD E. ANDERSON
------------------------------------------- Director April 26, 2001
Gerald E. Anderson
/s/ MICHAEL J. BABCOCK
------------------------------------------- Director April 26, 2001
Michael J. Babcock
/s/ CHARLES I. CLOUGH
------------------------------------------- Director April 26, 2001
Charles I. Clough
/s/ WILLIAM F. CONNELL
------------------------------------------- Director April 26, 2001
William F. Connell
/s/ PAUL J. DARLING, II
------------------------------------------- Director April 26, 2001
Paul J. Darling, II
/s/ JOHN P. HAMILL
------------------------------------------- Director April 26, 2001
John P. Hamill
/s/ MARIAN L. HEARD
------------------------------------------- Director April 26, 2001
Marian L. Heard
SIGNATURE TITLE DATE
--------- ----- ----
/s/ EDMUND F. KELLY
------------------------------------------- Director April 26, 2001
Edmund F. Kelly
/s/ THOMAS J. MAY
------------------------------------------- Director April 26, 2001
Thomas J. May
/s/ RAY B. MUNDT
------------------------------------------- Director April 26, 2001
Ray B. Mundt
/s/ KENNETH L. ROSE
------------------------------------------- Director April 26, 2001
Kenneth L. Rose
/s/ GLENN P. STREHLE
------------------------------------------- Director April 26, 2001
Glenn P. Strehle
SCHEDULE I
LIBERTY FINANCIAL COMPANIES, INC.
SUMMARY OF INVESTMENTS
(IN MILLIONS)
DECEMBER 31, 2000
--------------------------------------
AMORTIZED BALANCE SHEET
COST FAIR VALUE AMOUNT
--------- ---------- -------------
TYPE OF INVESTMENT
Fixed maturity securities:
U.S. Treasury securities and obligations of U.S.
government corporations and agencies................ $ 933.3 $ 945.7 $ 945.7
Foreign governments................................... 102.2 102.6 102.6
Corporate and other securities........................ 7,289.8 7,159.9 7,159.9
Mortgage backed securities............................ 2,403.2 2,460.1 2,460.1
--------- --------- ---------
Total fixed maturity securities................... 10,728.5 10,668.3 10,668.3
Equity securities:
Common stocks:
Industrial, miscellaneous and all other............. 71.5 76.4 76.4
Policy loans.......................................... 620.8 620.8 620.8
Other long-term investments........................... 866.9 893.3 866.9
--------- --------- ---------
Total investments................................. $12,287.7 $12,258.8 $12,232.4
========= ========= =========
SCHEDULE II
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN MILLIONS, EXCEPT PER SHARE DATA)
BALANCE SHEETS
DECEMBER 31
-------------------
2000 1999
-------- --------
Assets:
Investments............................................... $ -- $ 147.1
Cash and cash equivalents................................. 36.2 81.0
Investments in subsidiaries............................... 2,056.6 1,368.6
Notes receivable -- subsidiaries.......................... 34.1 31.5
Accounts receivable -- subsidiaries....................... 20.8 17.0
Other assets.............................................. 80.6 63.0
-------- --------
$2,228.3 $1,708.2
======== ========
Liabilities:
Notes payable to affiliates............................... $ 200.0 $ --
Notes payable............................................. 455.2 447.0
Accounts payable and accrued expenses..................... 114.7 59.3
-------- --------
769.9 506.3
======== ========
Redeemable convertible preferred stock...................... 10.7 16.0
-------- --------
Stockholders' Equity:
Common stock.............................................. 0.5 0.5
Additional paid-in capital................................ 949.1 923.0
Retained earnings......................................... 532.4 425.2
Accumulated other comprehensive loss...................... (30.6) (158.1)
Unearned compensation..................................... (3.7) (4.7)
-------- --------
Total stockholders' equity............................ 1,447.7 1,185.9
-------- --------
$2,228.3 $1,708.2
======== ========
SCHEDULE II
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN MILLIONS, EXCEPT PER SHARE DATA)
INCOME STATEMENTS
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
Interest expense, net....................................... $ (24.4) $(16.7) $ (2.6)
Realized investment gains (losses).......................... 2.7 (0.7) 0.3
Operating expenses.......................................... (47.1) (0.6) (0.6)
------- ------ ------
Loss before income taxes.................................... (68.8) (18.0) (2.9)
Benefit for income taxes.................................... 30.3 5.1 7.5
Equity in net income of subsidiaries........................ 166.1 112.2 119.9
------- ------ ------
Income before extraordinary item............................ 127.6 99.3 124.5
Extraordinary loss on extinguishment of debt, net of tax.... -- -- (9.7)
------- ------ ------
Net income.................................................. $ 127.6 $ 99.3 $114.8
======= ====== ======
Net income per share -- basic:
Income before extraordinary item.......................... $ 2.65 $ 2.11 $ 2.72
======= ====== ======
Net income................................................ $ 2.65 $ 2.11 $ 2.51
======= ====== ======
Net income per share -- assuming dilution:
Income before extraordinary item.......................... $ 2.61 $ 2.07 $ 2.63
======= ====== ======
Net income................................................ $ 2.61 $ 2.07 $ 2.42
======= ====== ======
See notes to Consolidated Financial Statements incorporated herein by reference.
SCHEDULE II (CONTINUED)
LIBERTY FINANCIAL COMPANIES, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
(IN MILLIONS)
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities:
Net income................................................ $127.6 $ 99.3 $114.8
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.................... (166.1) (112.2) (119.9)
Net change in accounts receivable--subsidiaries,
other assets and accounts payable..................... 41.9 33.0 13.7
------ ------ ------
Net cash provided by operating activities................. 3.4 20.1 18.3
------ ------ ------
Cash flows from investing activities:
Change in investments available for sale.................. 147.1 (157.7) --
Acquisitions, net of cash acquired........................ (274.2) -- (94.7)
Capital contributions to subsidiaries..................... (150.0) (131.6) (29.1)
------ ------ ------
Net cash used in investing activities..................... (277.1) (289.3) (123.8)
------ ------ ------
Cash flows from financing activities:
Change in notes payable to affiliates..................... 200.0 -- (244.0)
Change in notes receivable from subsidiaries.............. (2.6) 120.6 (13.0)
Change in notes payable................................... 8.2 0.1 446.9
Exercise of stock options................................. 9.0 5.5 7.4
Dividends, net............................................ 19.8 43.6 69.2
Redemption of preferred stock............................. (5.5) -- --
------ ------ ------
Net cash provided by financing activities................. 228.9 169.8 266.5
------ ------ ------
Increase (decrease) in cash and cash equivalents............ (44.8) (99.4) 161.0
Cash and cash equivalents at beginning of year.............. 81.0 180.4 19.4
------ ------ ------
Cash and cash equivalents at end of year.................... $ 36.2 $ 81.0 $180.4
====== ====== ======
See Notes to Consolidated Financial Statements incorporated herein by reference.
SCHEDULE III
LIBERTY FINANCIAL COMPANIES, INC.
SUPPLEMENTARY INSURANCE INFORMATION
(IN MILLIONS)
THREE YEARS ENDED DECEMBER 31, 2000
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
POLICYHOLDER ACCOUNT POLICY CONTRACT CLAIMS
DEFERRED POLICY BALANCES AND FUTURE UNEARNED AND OTHER
ACQUISITION COSTS POLICY BENEFITS PREMIUMS POLICYHOLDERS' FUNDS
December 31, 2000
Interest sensitive
products................. $547.9 $11,845.9 N/A $122.6
====== ========= ====== ======
December 31, 1999
Interest sensitive
products................. $739.2 $12,040.0 N/A $ 69.6
====== ========= ====== ======
December 31, 1998
Interest sensitive
products................. $407.6 $12,446.0 N/A $ 58.1
====== ========= ====== ======
COLUMN A COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
-------- -------- -------- -------- -------- -------- --------
INTEREST
CREDITED TO AMORTIZATION
POLICYHOLDERS OF DEFERRED
NET AND POLICY POLICY OTHER
INSURANCE INVESTMENT BENEFITS AND ACQUISITION OPERATING PREMIUMS
REVENUES INCOME CLAIMS COSTS EXPENSES WRITTEN
December 31, 2000
Interest sensitive products...... $67.8 $862.3 $544.6 $116.0 $71.8 N/A
===== ====== ====== ====== ===== ===
December 31, 1999
Interest sensitive products...... $51.2 $810.3 $530.2 $ 97.4 $55.7 N/A
===== ====== ====== ====== ===== ===
December 31, 1998
Interest sensitive products...... $38.1 $820.9 $565.1 $ 77.4 $54.8 N/A
===== ====== ====== ====== ===== ===
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 (9) 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 (9) 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 Amendment to Deferred Compensation Plan of the Company
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 (9) 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
10.20 (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
10.23 (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.
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 (10) Agreement of Amendment dated as of January 31, 2000 amending
the Pledge and Security Agreement dated as of April 12, 1999
10.30 (8) Coinsurance Agreement between Fidelity and Guaranty Life
Insurance Company and Keyport Life Insurance Company, and
first and second amendments thereto
10.31 (8) Dividend Reinvestment Plan of the Company
10.33 Form of Reinsurance Agreement between Keyport Life Insurance
Company and RGA Reinsurance Company
10.34 Draft form of Liberty Financial Companies, Inc. and
Subsidiaries Commissioned Employee Severance and Retention
Plan
EXHIBIT NUMBER DESCRIPTION
- -------------- ------------------------------------------------------------
10.35 Draft form of Liberty Financial Companies, Inc. and
Subsidiaries Non-Commissioned Employee Severance and
Retention Plan
10.36 Wanger Profit Sharing and Savings Plan
10.36.1 Amendment No. 1 to Wanger Profit Sharing and Savings Plan
10.36.2 Amendment No. 2 to Wanger Profit Sharing and Savings Plan
10.36.3 Amendment No. 3 to Wanger Profit Sharing and Savings Plan
10.37 (11) Loan Agreement dated as of September 28, 2000 between
Liberty Financial Companies, Inc. and Liberty Mutual
Insurance Company (the "Wanger Loan Agreement")
10.37.1(12) Form of Promissory Note issued pursuant to the Wanger Loan
Agreement
12 Statement re computation of ratios
21 Subsidiaries of the Company
23 Consent of Ernst & Young LLP
- ------------------------
(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 Prospectus contained in the Company's
Registration Statement on Form S-3 (Registration Number 333-20067).
(9) Incorporated by reference to the same Exhibit Number in the Company's 1998
Annual Report on Form 10-K filed March 30, 1999.
(10) Incorporated by reference to the same Exhibit Number in the Company's 1999
Annual Report on Form 10-K filed March 30, 2000.
(11) Incorporated by reference to Exhibit Number 10.1 in the Company's Quarterly
Report on Form 10-Q filed November 14, 2000.
(12) Incorporated by reference to Exhibit Number 10.2 in the Company's Quarterly
Report on Form 10-Q filed November 14, 2000.