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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[XX] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-5846
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THE LIBERTY CORPORATION
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(Exact name of Registrant as specified in its charter)
South Carolina 57-0507055
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
Post Office Box 789, Wade Hampton Boulevard, Greenville, S. C. 29602
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (864) 609-8256
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Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
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Name of Each Exchange
Title of Each Class on Which Registered
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Common Stock, no par value per share New York Stock Exchange
Rights to Purchase Series A Participating Cumulative Preferred Stock New York Stock Exchange
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. X
The aggregate market value of the voting stock held by non-affiliates
of the Registrant as of March 16, 1998:
Common Stock, No Par Value $ 966,457,052
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The number of shares outstanding of each of Registrant's classes of
common stock as of March 16, 1998:
Common Stock, No Par Value 18,608,078
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Liberty Corporation Annual Report to Shareholders for
the year ended December 31, 1997 are incorporated into Part II, Items 5, 6, 7,
and 8 by reference.
Portions of The Liberty Corporation Proxy Statement for the Annual
Meeting of Shareholders on May 5, 1998 are incorporated into Part III, Items
10, 11, 12, and 13 by reference.
This report is comprised of pages 1 through 65. The exhibit index is on
page 27.
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PART I
ITEM 1. BUSINESS
GENERAL
The Registrant, The Liberty Corporation ("Liberty" or "the Company") is a
holding company with subsidiaries operating in the life insurance, policy
administration, and television broadcasting industries.
The Company's primary insurance subsidiaries are Liberty Life Insurance
Company ("Liberty Life") and Pierce National Life Insurance Company ("Pierce
National"). In November, 1997, the Company announced that it had agreed to
sell Pierce National to Fortis, Inc.. Under the agreement Fortis will acquire
Pierce for $180 million cash, subject to certain adjustments. The sale is
expected to close in April 1998. In addition to Liberty Life and Pierce
National, Liberty Insurance Services Corporation ("Liberty Insurance Services")
is one of the nation's largest life insurance third-party administrators,
providing administrative services for over 4.5 million policies. Other
subsidiaries of the Company provide investment advisory services to the
Company's insurance subsidiaries and unaffiliated insurance companies, and
property development and management services to the Company.
The Company's television broadcasting subsidiary, Cosmos Broadcasting
Corporation ("Cosmos"), currently owns and operates eight network affiliated
television stations.
Additional information concerning Liberty's subsidiaries and divisions is
included in "Management's Discussion and Analysis" in the Company's 1997 Annual
Report to Shareholders, which is incorporated herein by reference.
STRATEGY; RECENT DEVELOPMENTS
On March 11, 1998, the Company completed a tender offer whereby it
repurchased 2.4 million shares of its outstanding common stock for $52.00 per
share. The tender offer was funded through the Company's credit facility.
As previously mentioned, during November 1997, the Company announced an
agreement to sell Pierce National for $180 million. The Company completed an
in-depth analysis of the Pierce National business and determined that it would
not be able to meet the Company's profit and sales objectives, and as a result
the decision was made to divest this business. The proceeds from the sale will
be used to repay debt under the Company's credit facility. The current
estimate of the loss on the sale is between $14 million and $18 million. On
December 31, 1997, Fortis purchased 2,660 newly issued shares of Pierce common
stock for $37.2 million. Subsequent to this stock purchase, Fortis maintained
a twenty-one percent ownership interest in the common stock of Pierce as of
December 31, 1997.
In May, 1997 Liberty completed the sale of its business rental properties
and the majority of its business park land developments to a partnership in
which the general partner is a publicly-traded real estate investment trust
("REIT"). Liberty received cash, a note receivable, and partnership units
(which are convertible into shares of the REIT) in exchange for the properties.
The Company's principal strategy is to grow internally and through
selective acquisitions, while maintaining its emphasis on cost controls. The
Company's operations are generally focused in niche markets where Liberty
believes it has the products and expertise to serve the market better than its
competitors.
Prior to 1995, the Company had an aggressive acquisition policy focused on
both its Agency and pre-need businesses. While the Company has not completed
any insurance acquisitions since 1994, Liberty will continue to consider
acquisitions that complement or fit with the Company's on-going marketing
divisions and product lines.
Management's philosophy regarding broadcasting acquisitions is to make
selective acquisitions in local markets where it can be among the dominant
television stations. On February 28, 1995, the Company completed the
acquisition of WLOX-TV in Biloxi, Mississippi, bringing to eight the total
number of television stations in Cosmos. The purchase price of $40.1 million
was funded with a combination of redeemable preferred stock, cash and a note
payable. WLOX is an ABC affiliate that carries strong local news and is the
top station in its market.
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INSURANCE OPERATIONS
LIBERTY LIFE. Liberty Life is a stock life insurance company engaged in
the business of writing a broad range of individual life insurance policies and
accident and health insurance policies. While Liberty Life is licensed in
forty- nine states, and the District of Columbia, its focus has been the
Southeast. For 1997, the largest percentages of its premium income were from
South Carolina (25%), North Carolina (18%), Louisiana (9%) and Texas and
California (each at 5%). The Company believes that Liberty Life is the largest
provider of home service business in the Carolinas.
Life insurance and annuity premiums contributed 72% of Liberty Life's total
premiums in 1997, 77% in 1996, and 84% in 1995. Accident and health insurance
premiums contributed the remainder.
Liberty Life markets its insurance products through its Agency and
Specialized Marketing divisions. At December 31, 1997, Liberty Life had
approximately 470 employees in its home office in Greenville.
AGENCY DIVISION. The Agency Division is Liberty Life's largest division,
contributing 55% of Liberty Life's premiums in 1997. Agents supporting this
division sell primarily individual life, including universal life and
interest-sensitive whole life products, as well as health insurance. As of
December 1997, the Company had approximately 1,370 agents, managers and support
staff in this division operating out of 50 district offices. These agents
periodically visit the insureds' homes and businesses to sell policies and
collect premiums. In November 1997, Liberty completed the rollout of a
hand-held, pen-based computer to its entire Agency sales force. This
technology allows the agent to go through an interactive sales presentation
with the prospective customer, provides access to policy rates, and interacts
with the home office policy database to update customer records. Ultimately,
this technology will also be used for application entry, among other things.
This state-of-art technology is expected to greatly increase the efficiencies
of Liberty's agent's in producing new policies. Liberty is de-emphasizing the
home collection component of the agent's job by encouraging premium payment
through electronic funds transfer or mail-in payment. Although the Company has
broadened this division's area of concentration beyond the Carolinas,
principally through strategic acquisitions, the Company has maintained a
regional focus for its Agency business in the Southeast.
SPECIALIZED MARKETING DIVISION. The Specialized Marketing Division
contributed 42% of Liberty Life's premiums in 1997. This division primarily
sells decreasing term life, accident and disability insurance designed to
extinguish the unpaid portion of a residential mortgage upon the death or
disability of the insured. A staff of full-time representatives and
independent brokers offer these products through more than 1,000 financial
institutions located throughout the United States. The Company supports the
marketing of these products through direct mail and phone solicitations. In
addition to the products mentioned above, this division focuses on the
development of new insurance or non-insurance products to market through direct
response or point of sale marketing channels. Liberty will continue to seek
new opportunities and new products to market through this division.
PIERCE NATIONAL. Pierce National (doing business as FamilySide) provides
life insurance products which pre-fund funeral services, referred to as
pre-need policies. Pierce National, a stock life insurance company acquired in
July 1992, is domiciled in California, but its principal executive and
administrative offices are in Greenville, South Carolina. Pre-need policies
consist primarily of ordinary life insurance policies for which the premiums
are paid in a single payment at the outset or primarily over a three, five or
ten-year period. Pierce National is currently licensed in forty-three states,
the District of Columbia, and all of the Canadian provinces and territories.
The largest percentages of premium income for 1997 came from Canada (17%),
Mississippi (10%) and California (10%). As previously mentioned, the Company
reached an agreement to sell Pierce National for $180 million. This sale is
expected to close in April 1998.
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PREMIUM BREAKDOWN. The following table sets forth the insurance
premiums and policy charges for Liberty Life's marketing and distribution
divisions and Pierce National for the years ended December 31.
<TABLE>
<CAPTION>
(In 000's) 1997 1996 1995
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Liberty Life
Home Service $135,506 $137,930 $138,714
Mortgage Protection 102,995 70,316 53,105
General Agency Marketing 4,349 4,881 5,966
Other 2,428 3,591 3,235
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245,278 216,718 201,020
Pierce National 105,414 104,653 130,350
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Total $350,692 $321,371 $331,370
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UNDERWRITING PRACTICES. Liberty Life's underwriting practices for ordinary
life insurance require medical examinations for applicants over age 60 or for
policies in excess of certain prescribed face amounts. In accordance with the
general practice in the life insurance industry, Liberty Life writes life
insurance on substandard risks at increased premium rates. Generally,
traditional life insurance for non-universal life products is written for
amounts under $5,000 and typically no medical examination is required.
Mortgage protection life insurance written through the Specialized Marketing
division is usually written without medical examination. Substantially all
pre-need policies are written for amounts under $5,000, and no medical
examination is required unless the applicant requests a preferred rate.
REINSURANCE. The Company's insurance subsidiaries use reinsurance in two
distinct ways: first, as a risk management tool in the normal course of
business and second, in isolated strategic transactions to effectively buy or
sell blocks of in force business. The Company has ceded $3.7 billion (18%) of
its $20.8 billion insurance in force to other companies; however, the Company's
insurance subsidiaries remain liable with respect to reinsurance ceded should
any reinsurer be unable to meet the obligations it has or will assume.
For the years ended December 31, 1997, 1996, and 1995 Liberty had ceded
life insurance premiums of $25.6 million, $27.3 million, and $27.8 million,
respectively. Accident and health premiums ceded made up the remainder of
ceded premiums which were $8.6 million, $9.2 million, and $6.9 million for the
years ended December 31, 1997, 1996 and 1995, respectively.
RISK MANAGEMENT REINSURANCE TRANSACTIONS. Liberty Life reinsures with
other insurance companies portions of the life insurance it writes in order to
limit its exposure on large or substandard risks. The maximum amount of life
insurance that Liberty Life will retain on any life is $300,000, plus an
additional $50,000 in the event of accidental death. This maximum is reduced
for higher ages and for special classes of risks. The maximum amount of life
insurance Pierce National will retain on any life is $50,000. Insurance in
excess of the retention limit is either automatically ceded under reinsurance
agreements or is reinsured on an individually agreed basis with other insurance
companies. Liberty Life has ceded a significant portion of its risks on
accidental death and disability coverage to other insurance companies. Liberty
Life and Pierce National also have coverage for catastrophic accidents. At
December 31, 1997, Liberty Life and Pierce National had ceded, in the normal
course of business, portions of their risks to a number of other insurance
companies.
STRATEGIC REINSURANCE TRANSACTIONS. In 1991, 80% or $3.2 billion face
amount of Liberty Life's General Agency Marketing Division net insurance in
force was coinsured with Life Reassurance Corporation ("Life Re"). The
original agreement with Life Re provided for the coinsurance of 50% of this
division's insurance in force issued after 1991. Effective July 1, 1995, the
amount coinsured on policies written after December 31, 1991, was increased to
80%. The total face value of amounts ceded to Life Re at December 31, 1997 was
$2.4 billion. Under terms of the agreement, assets supporting the business
ceded are required to be held in escrow.
In order to facilitate the 1991 acquisition through reinsurance of a block
of business from Kentucky Central Life Insurance Company, Liberty Life
coinsured 50% of its Agency traditional life insurance business with Lincoln
National Life Reinsurance Company. The Lincoln National reinsurance has been
accounted for under generally accepted accounting principles as financial
reinsurance. The reinsurance contract contains an escrow agreement that
requires
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assets equal to the reserves reinsured, as determined under statutory
accounting principles, be held in escrow for the benefit of this block of
business.
The Company uses assumption reinsurance to effectively acquire blocks of in
force business by acting as the "reinsurer" for other insurance companies. For
instance, the Company acquired the Kentucky Central and Estate Assurance blocks
in this manner.
OPERATIONS. The administrative functions of underwriting and issuing new
policies, and the ongoing servicing and claims settlement of in force policies,
are provided by Liberty Insurance Services at the home office in Greenville,
South Carolina. The Company's strategy is to consolidate the administrative
functions of its operations in order to have a unified service platform across
the business units and improve operating leverage through productivity
improvements.
Liberty Insurance Services provides administrative support services for
Liberty's approximately 2.5 million policies representing $20.8 billion of life
insurance in force, of which $3.7 billion of insurance in force has been ceded
to other companies. Approximately 155,000 policies representing $3.5 billion of
life insurance in force were issued during 1997. The Company intends to
continue its focus on reducing the unit costs of administrative services by
increasing the volume of business through acquisitions of blocks of business
similar in nature to its existing business, by internal growth in those
businesses, and by investing in technology to further improve efficiency in its
operations.
LIBERTY INSURANCE SERVICES. Liberty Insurance Services provides a wide
range of home office support services to the Company's insurance subsidiaries,
as well as for unaffiliated life and health insurance companies on a fee basis.
These services include underwriting, issuance of policies, accounting, customer
service and claims processing and adjudication and can be tailored to support
the special features of insurance products offered by other companies that
desire these services. In marketing to unaffiliated life and health insurance
companies the Company's strategy is to target (i) insurance companies that have
closed blocks of business that are expensive to administer, (ii) insurance
companies that have start-up or new product lines requiring new support levels,
(iii) small to midsize insurance companies that cannot justify large
investments in home office technology, and (iv) insurance companies acquired by
financial investors lacking experience in providing home office support.
Liberty Insurance Services believes that its economies of scale will permit its
customers to reduce their home office support costs and focus resources on
marketing their insurance products. In connection with the sale of Pierce
National Life, Liberty Insurance Services negotiated a five-year, $51 million
servicing contract whereby it will administer all of the Fortis preneed
business, including the Pierce business being sold. With the addition of this
contract, Liberty Insurance Services has approximately 4.5 million policies
under management.
INSURANCE COMPETITION AND RATINGS The Company's insurance subsidiaries
compete with numerous United States and Canadian insurance companies, some of
which have greater financial resources, broader product lines and larger
staffs. In addition, banks and savings and loan associations in some
jurisdictions compete with the Company's insurance subsidiaries for sales of
life insurance products, and the insurance subsidiaries compete with banks,
investment advisors, mutual funds and other financial entities to attract
investment funds generally.
Competition in the Agency business is largely regional or local, highly
dependent on the quality of the local management, and is less price competitive
than other insurance markets. The Agency business involves frequent contacts
by agents with their customers. Liberty emphasizes to its agents the
importance of taking advantage of these contacts to establish personal
relationships which the Company believes add stability to its Agency business.
The Company currently believes that it ranks second nationally in mortgage
protection insurance (provided through its Specialized Marketing division) with
an estimated 21% market share. Approximately 85% of the mortgage protection
market share is believed to be held by four companies and approximately 32% of
the market is believed to be held by the market leader.
Various independent companies issue ratings assessing the ability of
insurance companies to meet their policyholder and other contractual
obligations, as well as assessing the overall financial performance and
strength of companies. The most widely used ratings are those prepared and
published by A.M. Best Company, Inc. Ratings by A.M. Best range from "A++"
(Superior) to "F" (In Liquidation). In the Best Week published December 23,
1996, Liberty Life was rated "A" (Excellent). In the Best Week published
November 24, 1997, Pierce National's rating of "B++" (Very Good) was placed
under review as a result of the announcement of the sale of Pierce to Fortis.
Liberty Life also has a current
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claims-paying rating of "AA-" (Very High) by Duff & Phelps Credit Rating Co.
The rating agencies base their ratings on information provided by the insurer
and their own analysis, studies and assumptions. The ratings apply only to the
specific company rated and do not extend to The Liberty Corporation as a whole,
nor are the ratings a recommendation to buy, sell or hold securities. The
agencies can change or withdraw their published ratings at any time the agency
deems circumstances warrant a change. Should Liberty Life's or Pierce
National's rating be downgraded, sales of their products and persistency of the
existing in-force business could be adversely affected. Insurance company
ratings are generally considered to be more important in the annuity and
general agency markets, neither of which are major markets for Liberty Life or
Pierce National.
INSURANCE REGULATION. Like other insurance companies, the Company's
insurance subsidiaries are subject to regulation and supervision by the state
or other insurance department of each jurisdiction in which they are licensed
to do business. These supervisory agencies have broad administrative powers
relating to the granting and revocation of licenses to transact business, the
licensing of agents, the approval of policy forms, reserve requirements and the
form and content of required statutory basis financial statements. As to its
investments, each of the Company's insurance subsidiaries must meet the
standards and tests established by the National Association of Insurance
Commissioners (the "NAIC") and, in particular, the investment laws and
regulations of the states in which each subsidiary is domiciled. All states
and jurisdictions (including the Canadian provinces where Pierce National is
also licensed) have their own statutes and regulations, which vary in certain
respects. However, the NAIC Model Act and regulations have tended to make the
various states' regulation more uniform. The insurance companies are also
subject to laws in most states that require solvent life insurance companies to
pay guaranty fund assessments to protect the interests of policyholders of
insolvent life insurance companies.
The NAIC and state regulatory authorities require the Asset Valuation
Reserve or "AVR" and the Interest Maintenance Reserve or "IMR" to be
established as a liability on a life insurer's statutory basis financial
statements, but do not affect financial statements of the Company prepared in
accordance with generally accepted accounting principles. AVR establishes a
statutory reserve for mortgage loans, equity real estate and joint ventures, as
well as for fixed maturities and common and preferred stock. AVR generally
captures all realized and unrealized gains and losses on such assets, other
than those resulting from changes in interest rates. IMR captures the net gains
or losses that are realized upon the sale of fixed income securities (bonds,
preferred stocks, mortgage-backed securities and mortgage loans) and that
result from changes in the overall level of interest rates, and amortizes these
net realized gains or losses into income over the remaining life of each
investment sold, thus limiting the ability of an insurer to enhance statutory
surplus by taking gains on fixed income securities. The IMR and AVR
requirements have not had a material impact on the Company's insurance
subsidiaries' surplus nor the insurance subsidiaries' ability to pay dividends
to the parent company.
In recent years the NAIC has approved and recommended to the states for
adoption and implementation several regulatory initiatives designed to decrease
the risk of insolvency of insurance companies in general. These initiatives
include the implementation of a risk-based capital ("RBC") formula for
determining adequate levels of capital and surplus and further restrictions on
an insurance company's payment of dividends to its shareholders. To date,
South Carolina has not adopted the NAIC risk-based capital model act; however,
it does require prior notice to the South Carolina Commissioner of Insurance of
dividend distributions to shareholders, and permits the Commissioner to
disapprove or limit the dividend within 30 days of notice if the dividend or
distribution is deemed an unreasonable strain on surplus. The NAIC risk-based
capital model act or similar initiatives may be adopted by South Carolina or
the various states in which Liberty Life and the Company's other insurance
subsidiaries are licensed, but the ultimate content and timing of any statutes
and regulations adopted by the states cannot be determined at this time.
Under the NAIC's risk-based capital requirements, insurance companies must
calculate and report information under a risk-based capital formula in their
annual statutory financial statement. This information is intended to permit
insurance regulators to identify and require remedial action for inadequately
capitalized insurance companies, but is not designed to rank adequately
capitalized companies. The NAIC requirements provide for four levels of
potential involvement by state regulators for inadequately capitalized
insurance companies, ranging from a requirement for the insurance company to
submit a plan to improve its capital, to regulatory control of the insurance
company. The RBC ratios for the Company's insurance subsidiaries significantly
exceed the minimum capital requirements at December 31, 1997.
Another NAIC Model Act limits dividends that may be paid in any calendar
year without regulatory approval to the lesser of (i) 10% of the insurer's
statutory surplus at the prior year-end, or (ii) the statutory net gain from
operations of the
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insurer (excluding realized capital gains and losses) for the prior calendar
year. The current South Carolina statutes applicable to Liberty Life do not
conform to the NAIC Model Act (South Carolina limits dividends to the greater
of 10% of statutory surplus or gain from operations). Under current South
Carolina law, without prior approval from the South Carolina Commissioner of
Insurance, dividend payments from Liberty Life to the Company are limited to
the greater of the prior year's statutory gain from operations or 10% of the
prior year's statutory surplus. The maximum allowable dividend that can be
paid in 1998 by Liberty Life without approval from the South Carolina Insurance
Commissioner is $36.4 million. Actual dividends and distributions paid by
Liberty Life were $21.0 million in 1997, $21.0 million in 1996, and $20.0
million in 1995. Under regulations effective July 1, 1995, the South Carolina
Insurance Department must be notified of all dividends and distributions to
shareholders within five days following the declaration, and at least ten days
prior to the payment of the dividend or distribution, and will have the
authority to limit the amount of any dividends or distributions. Extraordinary
dividends, defined as distributions that, together with all other distributions
within a 12 month period, exceed the greater of the net gain from operations or
10% of statutory surplus, cannot be made without the approval of the South
Carolina Insurance Department, unless the department has not disapproved the
payment within 30 days following the notice of the declaration. The current
California statutes applicable to Pierce National limit dividend payments to
the Company to the greater of 10% of statutory surplus or the prior year's net
gain from operations (excluding realized capital gains and losses). Pierce
National paid dividends to Liberty in 1997 of $40.3 million, of which $10.3
million represented an allowable dividend under the California statutes. The
balance of $30 million represented an extraordinary dividend that was approved
by the California Insurance Commissioner. Pierce did not pay any dividends to
Liberty in 1996 and paid $2.7 million in dividends in 1995.
In accordance with the rules and practices of the NAIC and in accordance
with state law, every insurance company is generally examined once every three
years by examiners from its state of domicile and from several of the other
states where it is licensed to do business. Examinations of Liberty Life and
Pierce National for the three years ended December 31, 1994 have been completed
and the reports issued did not indicate any significant areas of concern.
The Office of the Superintendent of Financial Institutions - Canada, and
the Canadian provinces regulate and supervise the Canadian operations of Pierce
National in the same manner as the NAIC and the states. Separate financial
statements are required to meet the Canadian regulatory requirements and a
separate examination is conducted by the Canadian regulatory agencies.
The Company's insurance subsidiaries are also subject to regulation as an
insurance holding company system under statutes which have been enacted in
their states of domicile and other states in which they are licensed to do
business. Pursuant to these statutes, Liberty Life and Pierce National are
required to file an annual registration statement with the Office of the
Commissioner of Insurance and to report all material changes or transactions.
In addition, these statutes restrict the ability of any person to acquire
control (generally presumed at 10% or more) of the outstanding voting
securities of the Company without prior regulatory approval.
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BROADCASTING OPERATIONS
Cosmos currently owns and operates the following television stations, seven
of which were ranked No. 1 in their market by the November 1997 Nielsen ratings
(sign-on to sign-off).
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Station Primary Market Affiliation VHF/UHF
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WAVE-TV Louisville, Kentucky NBC VHF
WIS-TV Columbia, South Carolina NBC VHF
WSFA-TV Montgomery, Alabama NBC VHF
KPLC-TV Lake Charles, Louisiana NBC VHF
WTOL-TV Toledo, Ohio CBS VHF
KAIT-TV Jonesboro, Arkansas ABC VHF
WFIE-TV Evansville, Indiana NBC UHF
WLOX-TV Biloxi, Mississippi ABC VHF
</TABLE>
Cosmos has 830 full-time employees and 105 part-time employees, including
its cable sales operations in Aiken, SC, Columbia, SC, Florence, SC, Greenwood,
SC, Horry County, SC, Sumter, SC, Montgomery, AL and Frankfort, KY.
NETWORK AFFILIATES. Each Cosmos station is affiliated with one of the
major networks - NBC, ABC, CBS. The affiliation contracts provide that the
network will offer to the affiliated station a variety of network programs,
both sponsored and unsponsored, for which the station has the right of first
refusal against any other television station located in its community. The
station has the right to reject or accept the programs offered by the network
and also has the right to broadcast programs either produced by the station or
acquired from other sources. The major networks provide their affiliated
stations with programming and sell the programs, or commercial time during the
programs, to national advertisers. The major networks typically provide
programming for approximately 90 hours of the approximately 135 hours per week
broadcast by their affiliated stations.
The NBC affiliation contracts with each of Cosmos' NBC affiliated stations
have been continuously in effect for over forty years. Cosmos' CBS and ABC
affiliation contracts have each been continuously in effect for approximately
thirty years.
SOURCES OF COSMOS' TELEVISION OPERATING REVENUES. The following table
shows the approximate percentage of Cosmos' gross television operating revenues
by source excluding other income for the three years ended December 31, 1997:
<TABLE>
<CAPTION>
Year ended December 31 1997 1996 1995
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<S> <C> <C> <C>
Local and Regional Advertising 62% 60% 60%
National Spot Advertising 29 26 28
Network Compensation 8 8 9
Political Advertising 1 6 3
</TABLE>
Local and regional advertising is sold by each station's own sales
representatives to local and other non-national advertisers or agencies.
Generally these contracts are short-term, although occasionally longer-term
packages will be sold. National spot advertising (generally a series of spot
announcements between programs or within the station's own programs) is sold by
the station or its sales representatives directly to agencies representing
national advertisers. Most of these national sales contracts are also
short-term, often covering spot campaigns running for thirteen weeks or less.
Network compensation is paid by the network to its affiliated stations for
broadcasting network programs that include advertising sold by the network to
agencies representing national advertisers. Political advertising is generated
by national and local elections, which is by definition very cyclical.
A television station's rates are primarily determined by the estimated
number of television homes it can provide for an advertiser's message. The
estimates of the total number of television homes in the market and of the
station's share of
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those homes is based on the AC Nielsen industry-wide television rating service.
The demographic make-up of the viewing audience is equally important to
advertisers. A station's rate card for national and local advertisers takes
into account, in addition to audience delivered, such variables as the length
of the commercial announcements and the quantity purchased. The payments by a
network to an affiliated station are largely determined by the total homes
delivered and is based on the local market rating strength of the affiliate and
the audience it helps bring to the network programs.
TELEVISION BROADCASTING COMPETITION. The television broadcasting industry
competes with other leisure time activities for the time of viewers and with
all other advertising media for advertising dollars. Within its coverage area
a television station competes with other stations and with other advertising
media serving the same area. The outcome of the competition among stations for
advertising dollars in a market depends principally on share of audience,
advertising rates and the effectiveness of the sales effort.
Cosmos believes that each of its stations has a strong competitive position
in its local market, enabling it to deliver a high percentage of the local
television audience to local advertisers. Cosmos' commitment to local news
programming, combined with syndicated programming, are important elements in
maintaining Cosmos' current market positions.
Another source of competition is cable television, which brings additional
television programming, including pay cable (HBO, Showtime, Movie Channel,
etc.), into subscribers' homes in a television station's service area. Cable
television competes for the station's viewing audience and, on a more modest
scale, its advertising.
Federal law now requires that cable operators negotiate with television
operators for the right to carry a station's signal (programs) on cable
systems. Cosmos recently used this "retransmission consent" negotiation to
forge long-term partnerships with cable operators with the purpose of
developing secondary revenue streams from programs and services specifically
produced for cable. In 1994 Cosmos formed CableVantage Inc., a marketing
company designed to assist local cable operators in the sale of commercial time
available in cable network programs.
Subscription Television, an over-the-air pay television service, and
Multipoint Distribution Service, a microwave- distributed pay television
service, also compete for television audiences. In addition, licenses are now
being granted for Multichannel Multipoint Distribution Service. None of these
services has yet significantly fractionalized the audiences of commercial
television stations.
Two other television broadcast services are providing consumers with
additional technical delivery/programming opportunities. Low power television,
sometimes referred to as "neighborhood TV," is authorized to operate in a
limited coverage area. Authorizations are being granted by the Federal
Communication Commission ("FCC") on a lottery basis. Direct Broadcast
Satellite, which transmits television signals from satellite transponders to
parabolic home antennae, is now being actively marketed.
DIGITAL TELEVISION. Digital television is expected to become increasingly
available to consumers over the next several years. During 1997, the FCC
outlined the rollout plan for digital television, which is expected to bring
digital television signals to over 50 million homes in the top 30 television
markets by the year 2000. All other markets must provide digital broadcasts by
May, 2002. The rollout of digital television has created much debate from
television operators as they must assess the cost to upgrade their current
equipment to transmit the digital signal, when to begin the upgrade and when to
begin the subsequent broadcasting of the digital signal. There is much
uncertainty surrounding this because (i.) much of the new technology and
hardware is experimental and untested, and many operators may be inclined to
postpone the conversions as long as possible to allow refinement of this new
technology, and (ii.) the television sets required to view the digital signal
are expected to initially be cost prohibitive for most viewers to purchase.
Liberty is currently assessing the impact of the conversion to digital
television, and plans, to the extent possible, to integrate as much of its
upgrades as possible into its scheduled capital expenditure plan that would be
undertaken without regard to digital television.
FEDERAL REGULATION OF BROADCASTING. Cosmos' broadcasting operations are
subject to the jurisdiction of the FCC under the Communications Act. The
Communications Act empowers the FCC, among other things, to issue, revoke or
modify broadcasting licenses; to assign frequency bands; to determine the
location of stations; to regulate the apparatus used by stations; to establish
areas to be served; to adopt such regulations as may be necessary to carry out
the provisions
9
<PAGE> 10
of the Communications Act and to impose certain penalties for violation of such
regulations. The Communications Act prohibits the transfer of a license or the
transfer of control or other change in control of a licensee without prior
approval of the FCC. The Hipp family is considered by the FCC to have de facto
control over Cosmos, and any action that would change such control would
require prior approval of the FCC.
The Telecommunications Act signed into law in 1996 (the "1996 Act") changed
many existing regulations concerning, among other things, the ownership of
television stations. Under previous regulations governing multiple ownership,
a license to operate a television station generally would not be granted to any
person (or persons under common control) if such person directly or indirectly
held a significant interest in more than 12 television stations or less than 12
television stations if their audience coverage exceeded 25% of total United
States households. The 1996 Act allows for unlimited ownership of stations as
long as the audience coverage does not exceed 35% of total households.
Previous FCC regulations also limited ownership of television stations by those
having interests in cable television systems and daily newspapers serving the
same service area as the television stations. The 1996 Act dropped the
station/cable same market ownership prohibition. The 1996 Act also lengthened
the term for which television broadcasting licenses may be granted from a
maximum term of five years to a maximum term of eight years. In the absence of
adverse findings by the FCC as to the licensee's qualification, licenses are
usually renewed without hearing by the FCC for additional eight year terms.
Cosmos' renewal applications have always been granted without hearing for the
full term. The loosening of the ownership provisions, as well as the other
provisions included in the 1996 Act, are not expected to have any immediate
impact on the operations of Cosmos.
There are additional FCC Regulations and Policies, and regulations and
policies of other federal agencies, principally the Federal Trade Commission,
regulating network/affiliate relations, political broadcasts, children's
programming, advertising practices, equal employment opportunity, carriage of
television signals by CATV systems, application and reporting procedures and
other areas affecting the business and operations of television stations.
10
<PAGE> 11
EXECUTIVE OFFICERS
The following is a list of the Executive Officers of the Registrant
indicating their age and certain biographical data.
W. HAYNE HIPP, Age 58
Chairman of the Board of Liberty since May, 1995
Chairman of the Board of Cosmos since May, 1995
President and Chief Executive Officer of Liberty since September, 1981
Chairman of the Board of Liberty Life from January, 1979 - February, 1988;
September, 1989 - December 31, 1997
Chairman of the Board of Cosmos - May , 1989 - February, 1992
JENNIE M. JOHNSON, Age 50
President of Pierce National Life Insurance Company since August, 1995
Vice President, Administration of Liberty from February, 1994 to August, 1995
Vice President, Planning of Liberty from February, 1986 to December, 1994
KENNETH W. JONES, Age 40
Corporate Controller of Liberty since May, 1997
Assistant Controller of Liberty from September, 1994 to May, 1997
Treasurer of Liberty Life since May, 1997
JAMES M. KEELOR, Age 55
President of Cosmos since February, 1992
Vice President, Operations, of Cosmos from December, 1989 to February, 1992
RONALD F. LOEWEN, Age 50
President of Liberty Life since January, 1997
General Manager of WIS-TV from April, 1990 to December, 1996
MARTHA G. WILLIAMS, Age 55
Vice President, General Counsel & Secretary of Liberty since January, 1982
Vice President, General Counsel & Secretary of Liberty Life since January,
1982
Secretary and Counsel of Cosmos since February, 1982
11
<PAGE> 12
OTHER BUSINESS
In addition to the operating subsidiaries, the Company has other minor
organizations. These include the Company's administrative staff, an investment
advisory company, a property development & management company and
transportation operations.
INDUSTRY SEGMENT DATA
Information concerning the Company's industry segments is contained in
Selected Financial Data on page 27 of The Liberty Corporation Annual Report to
Shareholders and is filed as Exhibit 13 on page 30 of this report and is
incorporated in this Item 1 by reference.
ITEM 2. PROPERTIES
MAIN OFFICES. The main office of the Company, Liberty Life, Pierce
National, Liberty Insurance Services, and Cosmos is located on a 30-acre tract
in Greenville, SC, and consists of three buildings totaling approximately
360,000 square feet plus parking. The main office facilities are owned by the
Company and Liberty Life. Liberty Life leases branch office space in various
cities. Leases are normally made for terms of one to ten years.
Cosmos owns its television broadcast studios, office buildings and
transmitter sites in Columbia, SC; Montgomery, AL; Toledo, OH; Louisville, KY;
Evansville, IN; Jonesboro, AR; Lake Charles, LA; and Biloxi, Mississippi.
ITEM 3. LEGAL PROCEEDINGS
In January 1996, a lawsuit was filed by the Company against a software
development company alleging breach of contract in connection with an agreement
to develop a state-of-art software system to administer the Company's insurance
operations. The suit seeks to recover amounts paid to the software developer
and other costs incurred by the Company in the attempt to develop the system.
In 1997, the software developer filed a counterclaim against the Company
alleging breach of contract. Management, after consultation with legal
counsel, believes this counterclaim is without merit and is a response to the
suit filed by the Company. The Company intends to contest the counterclaim
vigorously. The Company believes its lawsuit is meritorious; however, no
estimated recovery is included in the accompanying financial statements.
In December 1995, a lawsuit was filed against the Company alleging breach
of contract. The lawsuit relates to a transaction in which the Company was
unsuccessful in acquiring certain entities partially owned by the plaintiff.
Management, after consultation with legal counsel, believes the lawsuit is
without merit and intends to contest the suit vigorously.
Other than the suits mentioned above, the Company is not currently engaged
in legal proceedings of material consequence other than ordinary routine
litigation incidental to its business. Any proceedings reported in prior
filings have been settled or otherwise satisfied.
12
<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY
STOCKHOLDER MATTERS
Information concerning the market for the Company's Common Stock and
related stockholder matters is contained on the inside back cover of The
Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on
page 28 of this report and is incorporated in this Item 5 by reference.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data for the Company is contained on page 27 of The
Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on
page 29 of this report and is incorporated in this Item 6 by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations is contained on pages 28-36 of The Liberty Corporation Annual Report
to Shareholders and is filed as Exhibit 13 on pages 30-39 of this report and is
incorporated in this Item 7 by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
The Company's Consolidated Financial Statements and Report of Independent
Auditors are contained on pages 6-26 of The Liberty Corporation Annual Report
to Shareholders and is filed as Exhibit 13 on pages 40-61 of this report and
are incorporated in this Item 8 by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning Directors of the Company is contained in The Liberty
Corporation Proxy Statement for the May 5, 1998 Annual Meeting of Shareholders
and is incorporated in this Item 10 by reference.
Information concerning Executive Officers of the Company is submitted in a
separate section of this report in Part I, Item 1 on page 11 and is
incorporated in this Item 10 by reference.
13
<PAGE> 14
ITEM 11. EXECUTIVE COMPENSATION
Information concerning Executive Compensation and transactions is
contained in The Liberty Corporation Proxy Statement for the May 5, 1998 Annual
Meeting of Shareholders and is incorporated in this Item 11 by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning Security Ownership of Certain Beneficial Owners and
Management is contained in The Liberty Corporation Proxy Statement for the May
5, 1998 Annual Meeting of Shareholders and is incorporated in this Item 12 by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning Certain Relationships and Related Transactions is
contained in The Liberty Corporation Proxy Statement for the May 5, 1998 Annual
Meeting of Shareholders and is incorporated in this Item 13 by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) (1) AND (2). LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
The following consolidated financial statements of The Liberty Corporation
and Subsidiaries are included in the Company's Annual Report to Shareholders
for the year ended December 31, 1997, filed as Exhibit 13 to this report and
incorporated in Item 8 by reference:
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - For the three years ended December
31, 1997
Consolidated Statements of Cash Flows - For the three years ended
December 31, 1997
Consolidated Statements of Shareholders' Equity - For the three years
ended December 31, 1997
Notes to Consolidated Financial Statements - December 31, 1997
Report of Independent Auditors
The following consolidated financial statement schedules of The
Liberty Corporation and Subsidiaries are included in Item 14(d):
I- Summary of Investments
II- Condensed Financial Statements of The Liberty Corporation
(Parent Company)
III- Supplementary Insurance Information
IV - Reinsurance
V - Valuation and Qualifying Accounts and Reserves
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission, but which are
excluded from this report, are not required under the related
instructions or are inapplicable, and therefore have been omitted.
14
<PAGE> 15
(A)(3). LIST OF EXHIBITS
3.1 Restated Articles of Incorporation, as amended through May 6, 1997
(filed with the Registrant's Quarterly Report on Form 10Q/A for
the period ended March 31, 1997 and incorporated herein by
reference)
3.2 Bylaws, as amended through November 5, 1996
4.1 See Articles 4, 5, 7 and 9 of the Company's Restated Articles of
Incorporation (filed as Exhibit 3.1) and Articles I, II and VI of
the Company's Bylaws (filed as Exhibit 3.2).
4.2 See the Form of Rights Agreement dated as of August 7, 1990
between The Liberty Corporation and The Bank of New York, as
Rights Agent, which includes as Exhibit B thereto the form of
Right Certificate (filed as Exhibits 1 and 2 to the Registrant's
Form 8-A, dated August 10, 1990, and incorporated herein by
reference) with respect to the Rights to purchase Series A
Participating Cumulative Preferred Stock.
4.3 See Credit Agreement dated March 21, 1995 (filed as Exhibit 10 to
the Registrant's Quarterly Report on Form 10Q for the quarter
ended June 30, 1995 and incorporated herein by reference).
10.1 See Credit Agreement dated March 21, 1995 (filed as Exhibit 4.3).
10.2 The Liberty Corporation Performance Incentive Compensation
Program, as amended and restated on February 4, 1997, filed as
Exhibit B to the Registrant's Proxy Statement dated March 27,
1997, and incorporated herein by reference.
11. The Liberty Corporation and Subsidiaries Consolidated Earnings Per
Share Computation (incorporated herein by reference to Note 11 of
the "Notes to Consolidated Financial Statements" on page 22 of The
Liberty Corporation Annual Report to Shareholders for the year
ended December 31, 1997) filed on page 56 of this report.
13. Portions of The Liberty Corporation Annual Report to Shareholders
for the year ended December 31, 1997: Market for the Registrant's
Common Stock and Related Security Stockholder Matters Selected
Financial Data
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Statements and Supplementary Information:
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - For the three years ended
December 31, 1997
Consolidated Statements of Cash Flows - For the three years
ended December 31, 1997
Consolidated Statements of Shareholders' Equity - For the three
years ended December 31, 1997
Notes to Consolidated Financial Statements - December 31, 1997
Report of Independent Auditors
21. The Liberty Corporation and Subsidiaries, List of Subsidiaries
23. Consent of Independent Auditors
24. Powers of Attorney applicable for certain signatures of members of
the Board of Directors in Registrant's10-K filed for the years
ended December 31, 1983, 1985, 1989, 1994, 1995, 1996, and 1997.
27. Financial Data Schedule (Electronic Filing Only)
15
<PAGE> 16
(B). REPORTS ON FORM 8-K
The following reports on Form 8-K were filed after September 30,
1997:
(1) A Current Report on Form 8-K dated November 13, 1997 was filed
with respect to the agreement to sell Pierce National Life
Insurance Company to Fortis, Inc. for $180 million cash.
(2) A Current Report on Form 8-K dated February 2, 1998 was filed
with respect to the news release announcing the fourth quarter
1997 and 1997 annual results of The Liberty Corporation
(3) A Current Report on Form 8-K/A dated November 13, 1997 was
filed with respect to the restatement and amendment of the Pro
Forma Condensed Financial Statements of The Liberty
Corporation and Subsidiaries originally filed with the Current
Report on Form 8-K dated November 13, 1997
(C). EXHIBITS FILED WITH THIS REPORT
11. The Liberty Corporation and Subsidiaries Consolidated Earnings Per
Share Computation (incorporated herein by reference to Note 11 of
the "Notes to Consolidated Financial Statements" on page 22 of The
Liberty Corporation Annual Report to Shareholders for the year
ended December 31, 1997).
13. Portions of The Liberty Corporation Annual Report to Shareholders
for the year ended December 31, 1997: Market for the Registrant's
Common Stock and Related Security Stockholder Matters Selected
Financial Data Management's Discussion and Analysis of Financial
Condition and Results of Operations Financial Statements and
Supplementary Information:
Consolidated Balance Sheets - December 31, 1997 and 1996
Consolidated Statements of Income - For the three years ended
December 31, 1997 Consolidated Statements of Cash Flows - For
the three years ended December 31, 1997 Consolidated Statements
of Shareholders' Equity - For the three years ended December 31,
1997
Notes to Consolidated Financial Statements - December 31, 1997
Report of Independent Auditors
21. The Liberty Corporation and Subsidiaries, List of Subsidiaries
23. Consent of Independent Auditors
24. Powers of Attorney applicable for certain signatures of members of
the Board of Directors in Registrant's 10-K filed for the year
ended December 31, 1997.
27. Financial Data Schedule (Electronic Filing Only)
16
<PAGE> 17
(D). CONSOLIDATED FINANCIAL STATEMENT SCHEDULES FILED WITH THIS REPORT
I- Summary of Investments - December 31, 1997
II- Condensed Financial Statements of The Liberty Corporation
(Parent Company) December 31, 1997 and 1996
III- Supplementary Insurance Information - For the Three Years
Ended December 31, 1997
IV- Reinsurance - For the Three Years Ended December 31, 1997
V- Valuation and Qualifying Accounts and Reserves - For the
Three Years Ended December 31, 1997
17
<PAGE> 18
Schedule I
THE LIBERTY CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
DECEMBER 31, 1997
(In 000's)
<TABLE>
<CAPTION>
Amount at Which
Shown on
Type of Investment Cost Value Balance Sheet
- -------------------------------------------------------------------------- --------- ---------------
<S> <C> <C> <C>
Fixed maturity securities, available for sale
Bonds:
United States Government and government agencies and
authorities $ 393,459 $ 414,767 $ 414,767
States, municipalities, and political subdivisions --- --- ---
Foreign governments 7,537 7,563 7,563
Foreign corporate and other 104,607 112,259 112,259
Public utilities 138,977 151,819 151,819
Convertibles and bonds with warrants attached --- --- ---
All other corporate bonds 903,406 946,218 946,218
Redeemable preferred stocks 39,601 41,262 41,262
---------- ---------- ----------
Total 1,587,587 1,673,888 1,673,888
---------- ========== ----------
Equity securities, available for sale
Common stocks:
Public utilities --- ---
Banks, trusts and insurance companies $ 3,289 $ 8,997 $ 8,997
Industrial, miscellaneous, and all other 42,952 54,443 54,443
Nonredeemable preferred stocks 9,751 11,128 11,128
---------- ---------- ----------
Total 55,992 $ 74,568 74,568
---------- ========== ----------
Mortgage loans on real estate 244,821 244,821
Investment real estate 49,169 49,169
Policy loans 100,322 100,322
Other long-term investments 18,459 18,459
Short-term investments 250 250
---------- ----------
Total investments $2,056,600 $2,161,477
========== ==========
</TABLE>
18
<PAGE> 19
Schedule II
THE LIBERTY CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1997 and 1996
(In $000's, except share data)
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ----------- ----------
<S> <C> <C>
Cash $ 5,015 $ 1,450
Fixed maturity securities 36,045 598
Equity securities 30,033 2
Loans, notes and other receivables 10,372 7,890
Investment properties, at cost less accumulated depreciation of
$1,319 in 1997 and $10,118 in 1996 23,955 79,941
Other long-term investments 6,167 6,139
Buildings and equipment, at cost less accumulated depreciation of
$13,868 in 1997 and $11,919 in 1996 18,077 19,066
Investment in affiliated companies* 683,472 657,194
Intercompany debt and advances* 94,173 96,921
Income taxes recoverable 6,360 10,823
Deferred income tax benefits (liabilities) (5,744) 1,026
Other assets 7,908 8,973
----------- ----------
Total Assets $ 915,833 $ 890,023
=========== ==========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
----------------------------------------------------------------
Liabilities:
Notes, mortgages and other debt $ 189,214 $ 243,221
Accounts payable and accrued expenses 13,830 16,826
Other liabilities 605 221
----------- ----------
Total Liabilities 203,649 260,268
Redeemable Preferred Stock:
1994-A Series, $35.00 redemption value, 504,168 and 668,207
shares issued and outstanding in 1997 and 1996, respectively 17,646 23,387
1994-B Series, $37.50 redemption value, 525,948 and 592,334
shares issued and outstanding in 1997 and 1996, respectively 19,723 22,212
----------- ----------
Total Redeemable Preferred Stock 37,369 45,599
Shareholders' Equity:
Common stock
Authorized - 50,000,000 shares, no par value
Issued and outstanding - 20,712,686 in 1997 and 20,214,738 in 1996 182,994 163,443
Convertible Preferred Stock, 1995-A Series,
599,985 shares issued and outstanding 20,999 20,999
Unearned stock compensation (10,872) (7,168)
Unrealized appreciation on fixed maturity securities
available for sale and equity securities of subsidiaries 61,515 39,726
Cumulative foreign currency translation adjustment 335 (204)
Retained earnings 419,844 367,360
----------- ----------
Total Shareholders' Equity 674,815 584,156
----------- ----------
Total Liabilities, Redeemable Preferred Stock and Shareholders'
Equity $ 915,833 $ 890,023
=========== ==========
</TABLE>
*Eliminated in consolidation.
See notes to condensed financial statements.
19
<PAGE> 20
Schedule II
THE LIBERTY CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(In $000's)
<TABLE>
<CAPTION>
1997 1996 1995
---------- ----------- -----------
<S> <C> <C> <C>
REVENUES
Dividends from subsidiaries* $ 74,814 $ 33,250 $ 45,331
Interest-unaffiliated 561 676 1,151
Intercompany interest* 8,157 8,519 8,303
Realized investment gains (losses) 5,504 (5,407) (3,195)
Other 18,318 27,123 30,059
-------- -------- --------
Total Revenues 107,354 64,161 81,649
EXPENSES
Salaries and wages 17,507 18,240 9,803
Interest-unaffiliated 13,021 15,007 14,867
Intercompany interest* 2,193 2,471 4,072
Taxes and licenses 2,069 2,250 1,508
Depreciation and amortization 7,373 8,645 5,275
Other 6,298 10,621 20,874
-------- -------- --------
Total Expenses 48,461 57,234 56,399
Income before income taxes 58,893 6,927 25,250
Income tax benefits (5,746) (9,786) (7,359)
-------- -------- --------
Income before earnings of subsidiaries 64,639 16,713 32,609
Earnings of subsidiaries
net of dividends paid to parent* 7,385 21,230 27,928
-------- -------- --------
NET INCOME $ 72,024** $ 37,943*** $ 60,537***
======== ======== ========
</TABLE>
* Eliminated in consolidation.
** Differs from consolidated net income by $2,927 due to gains recognized on a
consolidated basis previously recognized by subsidiaries on intercompany
transactions. Gains were deferred on a consolidated basis until completion
of the earnings process.
*** Differs from consolidated net income by $603 and $1,184 in 1996 and 1995,
respectively, due to gains deferred on a consolidated basis until
completion of the earnings process.
See notes to condensed financial statements.
20
<PAGE> 21
Schedule II
THE LIBERTY CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(In $000's)
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 72,024 $ 37,943 $ 60,537
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,373 8,645 5,275
Provision for deferred income taxes 1,556 (1,143) 2,740
Earnings from subsidiary operations, net of
dividends paid to parent (7,385) (21,230) (27,928)
Non-cash dividends paid to parent (39,370) --- ---
Gain on disposal of assets (2,011) (3,172) (3,231)
Realized investment (gains) losses (5,504) 5,407 3,195
Change in operating assets and liabilities:
Decrease (increase) in intercompany debt and
advances* 2,748 (79) (27,434)
(Increase) decrease in accounts and notes
receivable (2,482) 2,063 (1,209)
(Decrease) increase in accounts payable and
accrued expenses (2,996) 5,189 2,478
Decrease (increase) in other assets 1,065 892 (1,250)
Increase (decrease) in other liabilities,
and accrued income taxes 4,847 1,164 (5,927)
Other 53 (2,083) 1,144
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 29,918 33,596 8,390
INVESTING ACTIVITIES
Reduction in investment in subsidiaries* --- 4,048
Investment securities sold 349
Purchase of investment properties (7,563) (22,556) (34,177)
Sale of investment properties 49,601 13,982 31,997
Net cash paid on purchase of broadcasting
business --- --- (5,638)
Other 923 1,270 (9,264)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES 43,310 (7,304) (13,034)
FINANCING ACTIVITIES
Proceeds from borrowings 2,505,000 2,957,704 1,901,001
Principal payments on debt (2,559,007) (2,966,087) (1,888,820)
Dividends paid (19,540) (18,366) (16,814)
Stock issued for employee benefit and performance
incentive compensation programs 3,884 1,441 2,908
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (69,663) (25,308) (1,725)
INCREASE (DECREASE) IN CASH 3,565 984 (6,369)
Cash at beginning of year 1,450 466 6,835
----------- ----------- -----------
CASH AT END OF YEAR $ 5,015 $ 1,450 $ 466
=========== =========== ===========
</TABLE>
*Eliminated in consolidation.
See notes to condensed financial statements.
21
<PAGE> 22
Schedule II
THE LIBERTY CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. NOTES, MORTGAGES AND OTHER DEBT
The general debt obligations at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Average
(In 000's) Interest Rate Amount
--------- ------------- ---------
<S> <C> <C>
Notes due to banks 6.2% $188,000
Mortgage loans on investment property 8.0 1,214
--------
$189,214
========
</TABLE>
On March 21, 1995, the Parent Company completed the
restructuring of its $325 million revolving credit facility into a new
$375 million, multi-tranche credit facility which will mature on
various dates beginning in March 1999. Borrowings under the new
facility were used to refinance indebtedness under the $325 million
facility, as well as to provide funds to meet working capital
requirements. During 1997 the Company terminated the convertible loan
commitment and reduced the amount available under the revolving
facility by $50 million. See Note 5 of The Liberty Corporation and
Subsidiaries Consolidated Financial Statements provides additional
information as to this agreement. The maturities of the general debt
obligations at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
(In 000's) Amount
---------- --------
<S> <C>
1998 $41,214
1999 148,000
2000 ---
2001 ---
2002 ---
Thereafter ---
--------
$189,214
========
</TABLE>
2. COMMITMENTS AND CONTINGENT LIABILITIES
The Parent Company has guaranteed a $7 million letter of
credit for an unaffiliated marketing company. As of December 31,
1997, $20 thousand was outstanding under the letter of credit. In
connection with the sale of the Company's business rental property and
business park land developments during May, 1997, the Company has
guaranteed approximately $37 million of debt of the Purchaser of the
properties.
3. DIVIDENDS TO PARENT COMPANY
During 1997, the Parent Company received dividends from its
subsidiaries of approximately $74.8 million. Of this total,
approximately $39.4 million was in the form of securities that were
transferred to the Parent Company.
4. RETAINED EARNINGS
As of December 31, 1997 and 1996, retained earnings of
$419,844,000 and $367,360,000 respectively, in The Liberty Corporation
(Parent Company) financial statements differs from The Liberty
Corporation and Subsidiaries consolidated financial statements. The
difference of $368,000 and $3,295,000 at December 31, 1997 and 1996,
respectively, relates to the elimination of gains on intercompany
transactions on a consolidated basis.
22
<PAGE> 23
Schedule III
THE LIBERTY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(In $000's)
<TABLE>
<CAPTION>
Deferred Future Policy Other Policy
Policy Cost of Benefits, Claims &
Acquisition Business Losses, Claims Unearned Benefits
Segment Costs Acquired and Loss Expenses Premiums Payable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1997
- -----------------
Life/Health Insurance $275,615 $62,226 $1,886,722 $4,064 $65,145
December 31, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
- -----------------
Life/Health Insurance $262,182 $70,764 $1,848,762 $4,411 $59,938
December 31, 1995
- -----------------
Life/Health Insurance $265,188 $86,925 $1,807,339 $4,078 $51,442
</TABLE>
<TABLE>
<CAPTION>
Amortization
of Deferred
Benefits Acquisition Accident &
Net Claims, Losses Costs and Other Health
Premium Investment & Settlement Cost of Business Operating Premiums
Segment Revenue Income Benefits Acquired Expenses Written
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1997
----
Life/Health Insurance $350,692 $155,007 $227,927 $45,564 $146,206 $78,714
1996
----
Life/Health Insurance $321,371 $150,413 $218,751 $73,967 $140,294 $50,523
1995
----
Life/Health Insurance $331,370 $144,483 $236,774 $43,780 $122,400 $33,867
</TABLE>
23
<PAGE> 24
Schedule IV
THE LIBERTY CORPORATION AND SUBSIDIARIES
REINSURANCE
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(In $000's)
<TABLE>
<CAPTION>
Percentage of
Ceded to Amount Amount
Gross Other Assumed From Net Assumed to
Amount Companies Companies Amount Net
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1997
----------------------------
Life insurance in force $ 20,787,736 $ 3,698,912 $ 17,191 $ 17,106,015 0.1%
==============================================================
Insurance premiums and policy charges:
Life, annuity and other considerations $ 297,632 $ 25,575 $ 315 $ 272,372 0.1%
Accident and health 86,378 8,616 558 78,320 0.7%
--------------------------------------------------------------
TOTAL $ 384,010 $ 34,191 $ 873 $ 350,692
==============================================================
Year ended December 31, 1996
----------------------------
Life insurance in force $ 20,696,527 $ 4,087,097 $ 13,099 $ 16,622,529 0.1%
==============================================================
Insurance premiums and policy charges:
Life, annuity and other considerations $ 298,327 $ 27,293 $ 234 $ 271,268 0.1%
Accident and health 58,333 9,205 975 50,103 1.9%
--------------------------------------------------------------
TOTAL $ 356,660 $ 36,498 $ 1,209 $ 321,371
==============================================================
Year ended December 31, 1995
----------------------------
Life insurance in force $ 21,334,019 $ 4,554,569 $ 17,578 $ 16,797,028 0.1%
==============================================================
Insurance premiums and policy charges:
Life, annuity and other considerations $ 325,571 $ 27,843 $ 169 $ 297,897 0.1%
Accident and health 39,226 6,898 1,145 33,473 3.4%
--------------------------------------------------------------
TOTAL $ 364,797 $ 34,741 $ 1,314 $ 331,370
==============================================================
</TABLE>
24
<PAGE> 25
Schedule V
THE LIBERTY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
(In 000's)
<TABLE>
<CAPTION>
Additions
---------------------------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Deducted From Asset Accounts of Period Expenses Accounts Deductions of Period
---------------------------- ---------- ----------- ----------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1997
Accounts receivable - 227(b)
reserve for bad debts $ 2,310 $ 429 $ --- $ 1,071(a) $ 1,441
--------- ----------- ------------ ------------- --------------
Notes and other loans receivable -
discounts $ --- $ --- $ --- $ --- $ ---
--------- ----------- ------------ ------------- --------------
Investment properties -
valuation reserves $ --- $ --- $ --- $ --- $ ---
--------- ----------- ------------ ------------- --------------
Year Ended December 31, 1996
Accounts receivable - 20(b)
reserve for bad debts $ 1,975 $ 567 $ 101 $ 313(a) $ 2,310
--------- ----------- ------------ ------------- --------------
Notes and other loans receivable -
discounts $ --- $ --- $ --- $ --- $ ---
--------- ----------- ------------ ------------- --------------
Investment properties -
valuation reserves $ --- $ --- $ --- $ --- $ ---
--------- ----------- ------------ ------------- --------------
Year Ended December 31, 1995
Accounts receivable - 334(b)
reserve for bad debts $ 1,493 $ 858 $ 48 $ 90(a) $ 1,975
--------- ----------- ------------ ------------- --------------
Notes and other loans receivable -
discounts $ --- $ --- $ --- $ --- $ ---
--------- ----------- ------------ ------------- --------------
Investment properties -
valuation reserves $ --- $ --- $ --- $ --- $ ---
--------- ----------- ------------ ------------- --------------
</TABLE>
Notes:
(a) Uncollectible accounts written off, net of recoveries.
(b) Reversal of reserves no longer required.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned hereunto duly
authorized, as of the 30th day of March, 1998
THE LIBERTY CORPORATION By: /s/ Hayne Hipp
- ----------------------- -------------------------
Registrant Hayne Hipp
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the registrant and in the capacities indicated, as of the 30th day of March,
1998.
<TABLE>
<S> <C>
By: /s/ Ken W. Jones *By: /s/ Buck Mickel
----------------- ---------------
Ken W. Jones Buck Mickel
Corporate Controller Director
*By: /s/ Rufus C. Barkley, Jr. *By: /s/ John H. Mullin III
----------------------------- ----------------------
Rufus C. Barkley, Jr. John H. Mullin III
Director Director
*By: /s/ Edward E. Crutchfield *By: /s/ Benjamin F. Payton
------------------------- ----------------------
Edward E. Crutchfield Benjamin F. Payton
Director Director
*By: /s/ John R. Farmer *By: /s/ J. Thurston Roach
------------------ ---------------------
John R. Farmer J. Thurston Roach
Director Director
By: /s/ Hayne Hipp *By: /s/ Eugene E. Stone, IV
-------------- -----------------------
Hayne Hipp Eugene E. Stone, IV
Director Director
*By: /s/ W. W. Johnson *By: /s/ William B. Timmerman
----------------- ------------------------
W. W. Johnson William B. Timmerman
Director Director
*By: /s/ William O. McCoy *By: /s/ Martha G. Williams
-------------------- ----------------------
William O. McCoy *Martha G. Williams, as
Director Special Attorney in Fact
</TABLE>
26
<PAGE> 27
Annual Report on Form 10-K
The Liberty Corporation
December 31, 1997
Index to Exhibits
<TABLE>
<CAPTION>
Exhibits Page Number
------------ -------------
<S> <C> <C>
11. The Liberty Corporation and Subsidiaries Consolidated Earnings Per Share 56
Computation (incorporated herein by reference to Note 11 of the "Notes to
Consolidated Financial Statements" on page 22 of The Liberty Corporation
Annual Report to Shareholders for the year ended December 31, 1997).
13. Portions of The Liberty Corporation Annual Report to Shareholders for the year
ended December 31, 1997:
Market for the Registrant's Common Stock and Related Security Stockholder 28
Matters
Selected Financial Data 29
Management's Discussion and Analysis of Financial Condition and Results of 30-39
Operations
Financial Statements and Supplementary Information:
Consolidated Balance Sheets - December 31, 1997 and 1996 40-41
Consolidated Statements of Income - For the three years ended December 31, 1997 42
Consolidated Statements of Cash Flows - For the three years ended December 31, 43
1997
Consolidated Shareholders' Equity - For the three years ended December 31, 1997 44
Notes to Consolidated Financial Statements - December 31, 1997 45-61
Report of Independent Auditors 62
21. The Liberty Corporation and Subsidiaries, List of Significant Subsidiaries 63
23. Consent of Independent Auditors 64
24. Powers of Attorney applicable for certain signatures of members of the Board of
Directors in Registrant's 10-K filed for the year ended December 31, 1997. 65
27. Financial Data Schedule (for SEC use only).
</TABLE>
27
<PAGE> 1
EXHIBIT 13
STOCK DATA
The Liberty Corporation's Common Stock is listed on the New York Stock Exchange.
Its symbol is LC. As of December 31, 1997, 1,251 shareholders of record in 40
states, the District of Columbia, Canada and Australia held the 20,712,686
Common Stock shares outstanding. Quarterly high and low stock prices and
dividends per share as reported by the Wall Street Journal were:
<TABLE>
<CAPTION>
Quarterly
Market Price Per Share Dividend Per
High Low Share
---------------- ----------------- ----------------
1997
- -------------------------------
<S> <C> <C> <C>
Fourth Quarter 47 5/16 42 9/16 .20
Third Quarter 45 3/4 40 1/4 .20
Second Quarter 42 38 3/8 .20
First Quarter 43 3/8 37 3/8 .185
<CAPTION>
1996
- -------------------------------
<S> <C> <C> <C>
Fourth Quarter 41 1/4 32 1/4 .185
Third Quarter 35 7/8 30 1/8 .185
Second Quarter 33 3/8 30 7/8 .185
First Quarter 36 33 .17
<CAPTION>
1995
- -------------------------------
<S> <C> <C> <C>
Fourth Quarter 34 31 1/4 .17
Third Quarter 33 3/4 27 5/8 .17
Second Quarter 28 1/4 25 3/4 .17
First Quarter 27 1/2 24 3/4 .155
</TABLE>
The Company expects to continue its policy of paying regular cash dividends,
although there is no assurance as to future dividends because they are dependent
on future earnings, capital requirements and financial condition. Also, the
payment of dividends is subject to the restrictions described in Notes 5 and 9
of the Consolidated Financial Statements.
CO-REGISTRAR AND CO-TRANSFER AGENTS
- -------------------------------------------------------------------------------
Wachovia Bank, N.A. The Bank of New York
Winston-Salem, North Carolina 101 Barclay Street
1-800-633-4236 New York, New York 10286
1-800-524-4458
Written shareholder correspondence and
requests for transfer should be sent to:
Wachovia Shareholder Services
P.O. Box 8217
Boston, Massachusetts 02266-8217
For a Copy of the 10-K or other information, contact:
The Liberty Corporation Shareholder Relations
Box 789
Greenville, SC 29602
Telephone (864) 609-8256
Stock Exchange Listing:
New York Stock Exchange
Symbol: LC
Annual Meeting
The Liberty Corporation will hold its annual meeting on Tuesday, May 5, 1998, at
10:30 a.m. in The Liberty Corporation Headquarters, Greenville, South Carolina.
All Shareholders are invited to attend.
28
<PAGE> 2
SELECTED FINANCIAL DATA The Liberty Corporation and Subsidiaries
December 31, 1997
<TABLE>
<CAPTION>
(In 000's, except per share data) 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues
Insurance $ 509,093 $ 482,500 $ 486,980 $ 439,451 $ 384,132 $ 305,934
Broadcasting 137,898 137,336 119,529 97,381 87,984 89,989
Parent & Minor Subsidiaries 22,978 17,008 19,090 19,600 16,089 20,301
Adjustments & Eliminations (9,713) (17,747) (19,918) (16,071) (15,260) (13,468)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Revenues * $ 660,256 $ 619,097 $ 605,681 $ 540,361 $ 472,945 $ 402,756
- -----------------------------------------------------------------------------------------------------------------------------------
Income (Loss) Before Income Taxes &
Cumulative Effect of Accounting Changes
Insurance $ 89,183 $ 50,009 $ 83,483 $ 31,590 $ 71,518 $ 53,962
Broadcasting 33,866 33,739 27,127 21,701 16,180 16,859
Parent & Minor Subsidiaries (15,921) (28,686) (19,994) (14,423) (12,846) (13,690)
Adjustments & Eliminations 4,449 1,437 (1,821) -- 2,472 4,768
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Income Before Income
Taxes & Cumulative Effect of
Accounting Changes $ 111,577 $ 56,499 $ 88,795 $ 38,868 $ 77,324 $ 61,899
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)
Insurance $ 60,473 $ 34,196 $ 56,582 $ 21,803 $ 33,459 $ 35,369
Broadcasting 21,726 20,284 16,590 12,919 12,217 10,262
Parent & Minor Subsidiaries (10,175) (18,117) (12,635) (8,544) (8,141) (8,153)
Adjustments & Eliminations 2,927 977 (1,184) -- 1,612 3,407
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 74,951 $ 37,340 $ 59,353 $ 26,178 $ 39,147 $ 40,885
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings Per Diluted Share ** $ 3.34 $ 1.66 $ 2.72 $ 1.26 $ 2.01 $ 2.51
- -----------------------------------------------------------------------------------------------------------------------------------
Change in Net Unrealized Investment
Gains (Losses) $ 21,789 $ (18,260) $ 111,095 $ (58,286) $ 1,276 $ (78)
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends Per Common Share $ .785 $ 0.725 $ 0.665 $ 0.62 $ 0.56 $ 0.515
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization
Insurance $ 3,614 $ 3,815 $ 4,515 $ 5,125 $ 3,286 $ 3,424
Broadcasting 9,884 9,927 9,244 6,276 6,566 6,848
Parent & Minor Subsidiaries 7,372 8,645 5,275 4,618 3,670 4,628
- -----------------------------------------------------------------------------------------------------------------------------------
Total Depreciation and Amortization $ 20,870 $ 22,387 $ 19,034 $ 16,019 $ 13,522 $ 14,900
- -----------------------------------------------------------------------------------------------------------------------------------
Capital Expenditures
Insurance $3,387 $ 4,391 $ 4,413 $ 2,270 $ 5,814 $ 3,618
Broadcasting 5,752 6,030 5,863 3,900 2,168 2,513
Parent & Minor Subsidiaries 999 470 3,012 3,446 7,483 698
- -----------------------------------------------------------------------------------------------------------------------------------
Total Capital Expenditures $ 10,138 $ 10,891 $ 13,288 $ 9,616 $ 15,465 $ 6,829
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Insurance $ 2,905,726 $2,785,468 $2,769,619 $ 2,494,264 $ 2,057,126 $ 1,937,908
Broadcasting 167,948 169,477 168,672 98,705 101,982 110,849
Parent & Minor Subsidiaries 915,226 878,182 873,933 666,319 581,406 565,135
Adjustments & Eliminations (804,142) (772,362) (777,928) (592,024) (553,481) (539,014)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets $ 3,184,758 $3,060,765 $3,034,296 $ 2,667,264 $ 2,187,033 $ 2,074,878
- -----------------------------------------------------------------------------------------------------------------------------------
Notes, Mortgages and Other Debts $ 191,914 $ 247,861 $ 258,444 $ 231,647 $ 149,489 $ 176,632
- -----------------------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stock $ 37,369 $ 45,599 $ 45,667 $ 45,816 --- ---
- -----------------------------------------------------------------------------------------------------------------------------------
Consolidated Shareholders' Equity $ 674,447 $ 580,861 $ 575,762 $ 395,589 $ 433,845 $ 389,188
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* See Note 16 to the Consolidated Financial Statements related to the 1995
acquisition.
** The earnings per share amounts prior to 1997 have been re-stated as
required to comply with Statement of Financial Accounting Standards No.
128, "Earnings Per Share". See Note 11 to the Consolidated Financial
Statements for further discussion of SFAS 128.
29
<PAGE> 3
- -------------------------------------------------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
The Liberty Corporation and Subsidiaries
The Liberty Corporation is a holding company with operations in insurance
and broadcasting. Liberty ("the Company") markets its insurance products through
its two insurance subsidiaries, Liberty Life Insurance Company and Pierce
National Life Insurance Company (doing business and marketing products under the
brand name "FamilySide"). Additionally, Liberty is one of the nation's largest
life insurance third-party administrators, providing administrative services for
over 4.5 million policies through Liberty Insurance Services Corporation. The
Company's broadcasting subsidiary, Cosmos Broadcasting, consists of eight
network affiliated stations in the Southeast and Midwest. Five stations are
affiliated with NBC, two with ABC, and one with CBS.
SIGNIFICANT TRANSACTIONS
On May 14, 1997, Liberty completed the sale of its business rental property
and the majority of its business park land development projects to a partnership
in which the general partner is a publicly-traded real estate investment trust
("REIT"). Liberty received cash, a note receivable, and partnership units (which
are convertible into shares of the REIT) in exchange for the properties. The
properties sold were held by both Liberty Life and the parent company, and had a
book value of approximately $71.2 million at the sale date. The total
consideration received on the sale of the real estate was approximately $79.8
million including the note receivable and the partnership units of the REIT. The
cash proceeds of approximately $35 million from the sale were used to repay
debt. Concurrent with the decision to sell its business rental property and
business park land developments Liberty also de-emphasized its residential real
estate operations. Future investments in residential real estate operations are
expected to be limited to the amount necessary to complete on-going residential
projects and the existing portfolio will be reduced as projects currently under
development are sold. For financial reporting purposes all residential
properties have been classified as held for disposal and are reported at the
lower of cost or the fair market value less cost to sell. Liberty has recognized
realized investment losses of approximately $6.6 million on its residential
properties as a result of writing them down to net realizable value. The total
net realized gain on the real estate transactions (including expenses associated
with the sale and the residential write-downs) was approximately $1.2 million.
On November 13, 1997, the Company announced that it had agreed to sell its
wholly-owned subsidiary, Pierce National Life Insurance Company, to Fortis,
Inc.. Under the agreement Fortis will acquire Pierce for $180 million cash,
subject to certain adjustments, payable at closing. In connection with the sale
of Pierce, the Company entered into a multi-year $51 million administrative
services contract with Fortis, Inc. in which Liberty will provide back office
administrative services for the pre-need insurance operations of Fortis. During
December 1997, Fortis purchased newly issued shares of Pierce National for $37.2
million in cash, resulting in Fortis owning approximately 21% of the outstanding
stock of Pierce at December 31, 1997. The company anticipates recognizing a loss
on the sale of Pierce of approximately $14 million to $18 million. The sale is
expected to close in the first quarter of 1998 pending final regulatory
approvals.
On February 10, 1998, the Company announced a tender offer whereby the
Company planned to repurchase up to 2 million shares of its outstanding common
stock pursuant to a "Dutch Auction" self-tender offer. The offer closed on March
11, 1998 and the Company repurchased 2.4 million shares of its common stock
(including an additional 400,000 as a result of exercising its option to
purchase an additional 2% of its outstanding common shares) for $52.00 per share
under the offer. The stock purchase was funded from the Company's current credit
facility.
The combined effect of these transactions is expected to be slightly
dilutive to earnings for 1998.
SUMMARY OF CONSOLIDATED
RESULTS OF OPERATIONS
Consolidated net income for 1997 was $75.0 million, an increase of $37.6
million from the $37.3 million reported for 1996. The amounts reported for 1996
included a special charge of $26.9 million related principally to losses on
unprofitable insurance products.
<TABLE>
<CAPTION>
(In 000s) 1997 1996 1995
- ------------------------- ----------- ----------- ------------
<S> <C> <C> <C>
Revenues $660,256 $619,097 $605,681
- ------------------------- ----------- ----------- ------------
Income before income
taxes $111,577 $ 56,499 $ 88,795
Income taxes 36,626 19,159 29,442
- ------------------------- ----------- ----------- ------------
Net income $ 74,951 $ 37,340 $ 59,353
- ------------------------- ----------- ----------- ------------
</TABLE>
30
<PAGE> 4
Adjusting for the special charges of $26.9 million in 1996, net income was
$64.3 million, resulting in an increase in 1997 of $10.7 million (17%) over the
adjusted 1996 earnings. The increase for 1997 was primarily the result of
earnings growth of $2.1 million in the insurance operations (which included
approximately $9.3 million of realized losses associated with the sale of the
commercial real estate owned by Liberty Life and certain residential writedowns
as previously mentioned), $1.4 million in Cosmos Broadcasting, with the
remainder primarily from investment gains in the parent company associated with
the sale of the Company's commercial real estate.
The special charges for 1996 resulted from a detailed study of the
profitability of all of Liberty's insurance products. The study identified a
small group of products whose mortality and expense experience was significantly
worse than assumed when the products were sold. Approximately $22 million of the
special charges were provisions for losses related to these products. In
addition to the product-related charges, the Company wrote-off previously
deferred costs associated with acquiring and modifying an administrative system
for the Company's pre-need business based on a decision to move to a new
administrative platform for pre-need. All of the charges represented non-cash
items, and had no material impact on the insurance companies' statutory
financial condition.
Consolidated net income for 1996 was $37.3 million ($64.3 million excluding
the special charges) and compares with $59.4 million earned in 1995. The
adjusted 1996 increase over 1995 was primarily the result of earnings growth of
$3.7 million in Cosmos Broadcasting.
Consolidated 1997 revenues of $660.3 million were up 7% compared with the
$619.1 million reported in 1996. A $26.6 million increase in insurance
operations and a $14.0 million increase in the parent company contributed to the
increase. Liberty Life's revenue increase of $24.9 million drove the insurance
operations and was due to significant premium growth in the Specialized
Marketing Division. The FamilySide pre-need operations reported an increase of
$2.3 million. The growth in the parent company was related to approximately
$10.5 million of net gains realized on the sale of its business rental property
and the majority of its business park land development projects.
Consolidated 1996 revenues of $619.1 million were up $13.4 million (2%) over
the $605.7 million reported in 1995. A $17.8 million increase in broadcasting
operations was partially offset by a $4.5 million decline in insurance revenues.
Contributing to the decline in insurance operations revenues was a decrease of
$23.9 million in the FamilySide pre-need operations as actions taken in mid-1995
to increase the profitability of the product portfolio had a detrimental impact
on 1996 revenues.
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128") which changes the requirements for earnings
per share disclosure. The new standard requires presentation of basic earnings
per share and diluted earnings per share. Basic earnings per share excludes all
potentially dilutive securities from the calculation and is calculated by
dividing income available to common shareholders by the weighted average number
of common shares outstanding. Diluted earnings per share reflects the potential
dilution that could occur if all securities or other contracts to issue common
stock were exercised or converted into common stock. Further discussion of
earnings per share is contained in Note 11 to the Consolidated Financial
Statements.
BUSINESS SEGMENTS
- -------------------------------------------------------------------------------
Chart 1
Consolidated Income from Operations (in millions)
Data
<TABLE>
<S> <C>
1997 $70.9
1996 $66.0
1995 $60.8
1994 $52.9
1993 $45.4
1992 $37.1
</TABLE>
- -------------------------------------------------------------------------------
Liberty reports the results of its business operations in two segments:
Insurance and Broadcasting. The insurance segment consists of Liberty's
insurance operations, which markets life and health insurance through its three
primary distribution systems, Agency, Specialized Marketing, and FamilySide. The
broadcasting segment consists of Cosmos Broadcasting, which owns and operates
eight network-affiliated television stations in the Southeast and Midwest.
Activities of Corporate and other include financing and real estate operations.
In order to make more meaningful comparisons, the segment data excludes the
effect of realized investment gains and losses and special charges.
31
<PAGE> 5
A reconciliation of the segment operations to net income is as follows:
<TABLE>
(In 000s) 1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Segment Operating Earnings:
Insurance $62,947 $56,508 $54,789
Broadcasting 21,726 20,284 16,590
Corporate and other (13,764) (10,760) (10,546)
- ----------------------------------------------------------
Total operating earnings 70,909 66,032 60,833
- ----------------------------------------------------------
Net realized investment
gains (losses) 4,042 (1,748) (1,480)
Special charges --- (26,944) ---
- ----------------------------------------------------------
Net income $74,951 $37,340 $59,353
- ----------------------------------------------------------
Diluted Earnings per Share:
Operating earnings $ 3.16 $ 2.98 $ 2.79
Net realized investment
gains (losses) .18 (0.09) (0.07)
Special charges --- (1.23) ---
- ----------------------------------------------------------
Diluted Earnings per Share $ 3.34 $ 1.66 $ 2.72
- ----------------------------------------------------------
</TABLE>
INSURANCE RESULTS OF OPERATIONS
Operating earnings from insurance operations for 1997 were $62.9 million, an
increase of 11% over the $56.5 million reported in 1996. Liberty Life's
operating earnings increased $2.7 million to $44.8 million in 1997. Liberty
Life's Specialized Marketing division continued to experience strong premium and
profit growth primarily from one product line. This division reported a $32.7
million increase in premiums and a $4.9 million (110%) increase in operating
earnings over 1996. The Specialized Marketing product line historically has
contributed a relatively small portion of Liberty Life's earnings but over the
past three years it has shown substantial growth. The Agency division of Liberty
Life reported earnings that were level with the prior year. The FamilySide
pre-need operating earnings of $18.0 million in 1997 represented a 29% increase
compared with 1996. The increase resulted from a modest increase in premium
revenues and a $3.9 million improvement in net investment income.
- -------------------------------------------------------------------------------
Chart 2
Insurance Operations
Income from Operations (in millions)
Data
<TABLE>
<S> <C>
1997 $62.9
1996 $56.5
1995 $54.8
1994 $46.4
1993 $41.4
1992 $35.7
</TABLE>
- -------------------------------------------------------------------------------
Operating earnings from insurance operations for 1996 were $56.5 million, an
increase of 3% over the $54.8 million reported in 1995. Liberty Life's operating
earnings increased $1.4 million to $42.0 million in 1996. Strong premium and
profit growth from an accidental death product in Liberty Life's Specialized
Marketing division was partially offset as the Agency division reported lower
profits due primarily to higher deferred policy acquisition cost amortization
resulting from higher lapse experience. The FamilySide pre-need operating
earnings of $14.0 million in 1996 represented a 3% increase compared with 1995.
The increase in 1996 earnings came notwithstanding a 20% decline in premiums in
1996 compared with 1995. Several actions taken in 1995 and 1996 to consolidate
the operations and improve the profitability of several prior year acquisitions
combined to have a negative impact on premium revenues in 1996.
Insurance Operating Earnings (in 000s)
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------
<S> <C> <C> <C>
Revenues (exclusive of realized
investment gains and losses)
Insurance premiums and
policy charges $350,692 $321,671 $331,370
Net investment income 155,007 150,349 144,483
Service contract revenues 7,121 7,751 9,025
- ------------------------------------------------------------------
Total revenues 512,820 479,771 484,878
Policy benefits 227,927 218,901 236,774
Commissions 78,939 66,146 54,583
General insurance expenses 67,480 64,326 68,246
Amortization of deferred
acquisition costs and
cost of business 45,564 47,142 43,697
acquired
Other --- 21 114
- ------------------------------------------------------------------
Income from operations
before income taxes 92,910 83,235 81,464
Income taxes 29,964 26,727 26,675
- ------------------------------------------------------------------
Income from operations $ 62,946 $ 56,508 $ 54,789
- ------------------------------------------------------------------
</TABLE>
32
<PAGE> 6
Insurance Operations Revenues *
(in millions)
Data
<TABLE>
<S> <C>
1997 512.8
1996 479.8
1995 484.9
1994 451.3
1993 369.8
1992 306.7
</TABLE>
* Excluding realized investment gains and losses
Revenues from insurance operations increased 7% to $512.8 million in 1997.
Liberty Life reported an increase in operating revenues of $29.2 million, almost
all of which was generated in the Specialized Marketing division. FamilySide
reported an increase in operating revenues of $4.4 million, primarily from
higher investment income.
For 1996 revenues from insurance operations were $479.8 million, a decrease
of $5.1 million compared with 1995. Liberty Life had a $17.5 million increase on
the strength of the growth in Specialized Marketing premiums. Offsetting the
growth in Liberty Life was a $21.3 million reduction in FamilySide operating
revenues as premiums declined for the reasons previously discussed.
Pie Charts
Insurance Premiums and Policy Charges
<TABLE>
<S> <C>
1997
Agency 39%
FamilySide Pre-need 30%
Specialized Marketing 29%
Other 2%
1996
Agency 43%
FamilySide Pre-need 32%
Specialized Marketing 22%
Other 3%
</TABLE>
Policy benefits as a percent of premium were 65% in 1997, compared with 68%
in 1996 and 71% in 1995. The decline in the ratio from 1996 to 1997 and from
1995 to 1996 was more a function of a change in the mix of business than an
actual decline in mortality. The growth of Specialized Marketing premiums has
the effect of reducing the overall benefit to premium ratio. The death benefit
on the product that is providing the growth in Specialized Marketing is fully
reinsured and there is no mortality cost associated with the product. The
FamilySide products are primarily limited-pay or single pay products that have
higher benefit to premium ratios than other Liberty products. Adjusting for the
fluctuation in ratio caused by the change in mix of business, the Liberty Life
benefit-to-premium ratio was 70% in 1997 compared with 68% in 1996, and the
benefit-to-premium ratio for FamilySide was 93% and 91% for 1997 and 1996,
respectively. Overall, the benefit-to-premium ratio for 1997 was within the
expected levels, considering that claims are inherently variable and will
fluctuate, particularly when measured over a short period of time.
The commission-to-premium ratio was 23% in 1997, compared with 21% and 16%
in 1996 and 1995, respectively. Similar to the benefit-to-premium ratio, the
increase for 1997 over 1996 and for 1996 over 1995 was caused primarily by a
change in the mix of business due to the growth of the Specialized Marketing
accidental death product. The product is marketed by a third party marketing
group. Payments to the group include the traditional commissions as well as
compensation for certain general and administrative functions performed by the
marketing group. For financial reporting purposes all payments to the marketing
group are classified as commissions.
General insurance expenses increased $3.2 million in 1997 from the amounts
reported in 1996. The majority of this increase occurred in Liberty Life where
the Company recognized charges to increase reserves on a self-insured health
plan and charges related to a system conversion. Excluding Liberty Insurance
Services expenses from all years, the expense-to-premium ratio was 17% for 1997,
compared with 18% for 1996 and 1995.
Amortization of deferred acquisition costs and cost of business acquired
decreased $1.6 million from 1996. The amortization-to-premium ratio was 13% in
1997, compared with 15% and 13% in 1996 and 1995, respectively. The primary
variable in the amortization expense from year to year is policy persistency, or
lapses. Lapse experience in 1997 in Liberty Life's Agency division was slightly
below the prior year. Lapse experience in 1996 was higher than the previous two
years resulting in higher levels of amortization expense in 1996 compared with
1995. During 1996 FamilySide recorded a one-time adjustment related to a master
file conversion that resulted in higher amortization expense, and accounted for
the majority of the decrease in 1997 from the prior year. Specialized Marketing
lapses are influenced by, among other factors, the level of mortgage loan
refinancing activity. Mortgage loan interest rates have been gradually
decreasing over the last couple of years and the trend has continued into early
1998. Assuming the low interest rates begin to result in a large number of
refinancings, there is a risk that the Specialized Marketing lapses could
increase as a result of the loans on which this protection is carried being
refinanced; however, there has not been any marked increase in the level of
Specialized Marketing lapses to date.
33
<PAGE> 7
BROADCASTING RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(In 000s) 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Gross broadcasting revenues $137,898 $137,336 $119,529
Agency commissions 19,005 19,433 16,378
- -------------------------------------------------------------
Net broadcasting revenues 118,893 117,903 103,151
Broadcasting expenses 76,679 75,534 67,568
- -------------------------------------------------------------
Income from operations
before interest and 42,214 42,369 35,583
taxes
Interest expense 8,348 8,630 8,456
- -------------------------------------------------------------
Income from operations
before income taxes 33,866 33,739 27,127
- -------------------------------------------------------------
Income taxes 12,140 13,455 10,537
- -------------------------------------------------------------
Income from operations $ 21,726 $ 20,284 $ 16,590
- -------------------------------------------------------------
</TABLE>
Gross broadcasting revenues for 1997 were $137.9 million compared with $137.3
million in 1996. Although 1997 was expected to be a down year in the revenue
cycle due to the lack of major political races and Olympic Games, Cosmos managed
to report increases in all revenue categories that more than offset a decline of
over $7.0 million in political revenues from the prior year. Cosmos major
sources of revenue growth were national and local advertising due to the
continued strength in the economy, as well as revenue from its cable operations.
Cable advertising sales, a business Cosmos entered in 1994, produced revenue of
$7.5 million in 1997, compared with $6.3 million in 1996 and $5.1 million in
1995.
Gross broadcasting revenues for 1996 were $137.3 million, an increase of
$17.8 million (15%) from 1995. All revenue categories increased in 1996, with
political revenues more than doubling to $8.1 million as Cosmos capitalized on
the strength on its stations in its local markets to capture a significant
portion of the political dollars spent. The Summer Olympics also provided
incremental revenue as 5 of the 8 Cosmos stations are NBC affiliates.
Broadcasting expenses rose only 2% in 1997 compared with the 1996 levels.
This compares with a 12% increase in 1996 over the 1995 levels. A portion of the
expense increase in 1996 came from the cost of the extensive coverage of the
Olympics. Cosmos also benefited from a favorable $1.3 million adjustment to
income tax expense during 1997.
- -------------------------------------------------------------------------------
Broadcasting Operations
Income from Operations (in millions)
<TABLE>
<S> <C>
1997 $21.7
1996 $20.3
1995 $16.6
1994 $12.9
1993 $ 9.7
1992 $10.3
</TABLE>
- -------------------------------------------------------------------------------
An additional measure of broadcasting performance is operating cash flow,
defined as operating earnings before depreciation and amortization, interest,
taxes and corporate expenses. Operating cash flow, and the related efficiency
ratio (operating cash flow divided by revenues net of agency commissions) are
measurements of broadcasting operating margins. For the year broadcasting cash
flow was $51.9 million compared to $52.5 million in 1996 and $44.9 million in
1995. The efficiency ratio was 44% in 1997, compared with 45% in 1996 and 43% in
1995.
- -------------------------------------------------------------------------------
Broadcasting Operations
Cash Flow (in millions)
<TABLE>
<S> <C>
1997 $51.9
1996 $52.5
1995 $44.9
1994 $33.0
1993 $27.8
1992 $28.2
</TABLE>
- -------------------------------------------------------------------------------
The Company closed the acquisition of WLOX-TV on February 28, 1995. The
purchase price of $40.1 million was funded with a combination of 599,985 shares
of 1995-A Series convertible preferred stock with a stated value of $35 per
share; cash of $5.6 million; and a note payable for $13.5 million. The Company
continues to look for attractive opportunities within the broadcasting industry
for future acquisitions. Recognizing that the value of broadcast properties is
very high in the current market, Cosmos will selectively evaluate acquisition
opportunities that fit our goal of operating stations that are the premier
provider of news and programming in our markets.
CORPORATE AND OTHER
Corporate and other includes general corporate activities such as the
overall management, legal and finance operations, debt service on debt not
allocated to segments, intercompany eliminations and
34
<PAGE> 8
the operations of Liberty Properties Group and Liberty Capital Advisors. The
increased loss in Corporate and Other was due to higher expense levels in the
parent company and lower earnings in the remaining real estate operations. There
was no significant change in the financial results in this area for 1996
compared with 1995.
IMPACT OF YEAR 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send premium
notices, or engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its systems will function properly with respect
to dates in the year 2000 and thereafter. The Company believes that with
modifications to existing software and conversions to new software, the Year
2000 issue will not pose significant operational problems for its computer
systems.
The Company has initiated formal communications with all of its significant
suppliers and vendors to determine the extent to which the Company's interface
systems are vulnerable to those third parties' failure to remediate their own
Year 2000 issues. The Company's total Year 2000 project costs and estimates to
complete include the estimated costs and time associated with the impact of
third party Year 2000 issues based on information presently available. However,
there can be no guarantee that the systems of other companies on which the
Company's systems rely will be timely converted and would not have an adverse
effect on the Company's systems.
The Company has begun the process of reprogramming, replacing and testing
software for Year 2000 modifications. The Company anticipates being
substantially complete with the Year 2000 project by December 31, 1998. The
Company has implemented several major systems projects during the last three
years that were not specifically performed to remediate Year 2000 issues.
However, during the course of those projects, systems have been modified to
ensure that they are Year 2000 compliant. The total cost of the projects
undertaken beginning in 1995 for which a component of the project, or the entire
project, had to do with remediating the Year 2000 problem is estimated to be
approximately $17 million and is being funded through operating cash flows. Of
the total, approximately $2.3 million will be expensed as incurred, with the
remainder to be capitalized as it relates primarily to upgrading or replacing
systems for business reasons other than the Year 2000. To date the Company has
incurred approximately $9.3 million dollars of costs ($8.7 million capitalized
and $0.6 million expensed).
INVESTMENTS
As of December 31, 1997, Liberty's consolidated investment portfolio was
carried at $2.2 billion compared with $2.1 billion at the end of 1996.
Approximately 77% of consolidated invested assets were in fixed maturity
securities (bonds and redeemable preferred stocks), 11% were in mortgage loans,
5% in policy loans, with the balance consisting of equity securities (4%), real
estate (2%), and other long-term investments (1%).
The overall average credit rating of fixed maturity securities as of December
31, 1997 was AA-. Less than investment grade securities comprised 3.2% of the
fixed maturity portfolio at December 31, 1997, compared with 2.6% at December
31, 1996.
- -------------------------------------------------------------------------------
Bond Portfolio Quality Rating
<TABLE>
<S> <C>
AAA 46.2%
AA 10.4%
A 19.5%
BBB 20.7%
Below BBB 3.2%
</TABLE>
- -------------------------------------------------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities" requires that all debt and
equity securities be classified into one of three categories -- held to
maturity, available for sale, or trading. As of December 31, 1997 and 1996, all
securities have been classified as available for sale and are carried at fair
value.
SFAS 115 requires that available for sale securities be carried at fair
value, with unrealized gains and losses, net of adjustment for deferred income
taxes and deferred acquisition costs related to universal life products,
reported directly in shareholders' equity. The fair value of Liberty's fixed
maturity portfolio, and the related adjustment to shareholders' equity, is
significantly affected by changes in the overall interest rate environment.
During 1997 and 1996 interest rates have been relatively stable. In 1997, there
was an increase in equity resulting from an increase in the fair value of the
portfolio of $21.8 million, whereas during 1996 shareholders' equity decreased
$18.3 million as a result of changes in fair value of security holdings. The
1997 and 1996 results were in marked contrast to the significant fluctuations
reported in 1995, when, as interest rates fell throughout the year,
shareholders' equity increased $111.1 million, reflecting the change in the fair
value of the portfolio. While the volatility experienced in the last two years
was not as great as that experienced in 1995, it is likely that there
35
<PAGE> 9
will continue to be significant fluctuations in shareholders' equity as a result
of carrying fixed maturity securities at market value.
Fixed Maturity Securities
Ratio of Fair Value to Amortized Cost Chart
<TABLE>
<S> <C>
1997 105.4%
1996 103.6%
1995 106.1%
1994 95.7%
1993 107.4%
1992 107.9%
</TABLE>
Although Liberty's entire fixed maturity and equity security portfolios have
been classified as available for sale, Liberty follows a value-oriented, as
opposed to a trading-oriented, investment philosophy concerning its securities
portfolios. Accordingly, turnover in the portfolios has historically been low
and has related primarily to restructuring portfolios acquired through
acquisitions or to manage Liberty's tax position. Gains trading, which Liberty
believes is short-sighted, is not consistent with its investment philosophy of
longer term value-oriented investing. Throughout 1997 and continuing into 1998,
yields were at historically low levels and the yield curve is relatively flat.
In this environment, in order to generate incremental returns above market
yields without sacrificing credit quality, it may be necessary to more actively
trade securities.
Approximately 40% of Liberty's $1.7 billion fixed maturity portfolio at
December 31, 1997, was composed of mortgage-backed securities. This compares
with approximately 45% at year-end 1996. Certain mortgage-backed securities are
subject to significant prepayment risk or extension risk due to changes in
interest rates. In periods of declining interest rates mortgages may be repaid
more rapidly than scheduled as borrowers refinance higher rate mortgages to take
advantage of the lower current rates. As a result, holders of mortgage-backed
securities may receive large prepayments on their investments that cannot be
reinvested at interest rates comparable to the rates on the prepaid mortgages.
In a rising interest rate environment refinancings are significantly curtailed
and the payments to the holders of the securities decline, limiting the ability
of the holder to reinvest at the higher interest rates. Mortgage-backed
pass-through securities and sequential collateralized mortgage obligations
("CMO's"), which comprised 19% of the book value of Liberty's mortgage-backed
securities at December 31, 1997, and 17% at year-end 1996, are sensitive to
prepayment or extension risk. The remaining 81% of Liberty's mortgage-backed
investment portfolio at December 31, 1997, consisted of planned amortization
class ("PAC") instruments. This compares to 83% at December 31, 1996. These
investments are designed to amortize in a more predictable manner by shifting
the primary prepayment and extension risk of the underlying collateral to
investors in other tranches of the CMO. PAC's are tranches of CMO's specifically
designed to protect against prepayment or extension risk. In periods of
declining interest rates, prepayments are first applied to the non-PAC tranches
of the CMO, creating improved call protection for the PAC tranches. Only after
all non-PAC tranches have been paid off are prepayments applied to the PAC
tranche. In periods of increasing interest rates, prepayments are first applied
to the PAC tranche, thus reducing extension risk for PACs. As a result, PACs
have a more stable cash flow than most other mortgage securities because they
have better call protection and less extension risk.
Mortgage loans of $244.8 million comprised 11% of the consolidated investment
portfolio at December 31, 1997. This compares to mortgage loans of $230.9
million, or 11%, of the consolidated investment portfolio at December 31, 1996.
Substantially all of these mortgage loans are commercial mortgages with a
loan-to-value ratio not exceeding 75% when made. Approximately 53% of these
loans at December 31, 1997, are concentrated in North and South Carolina; and
92% are in the states of North Carolina, South Carolina, Virginia, Florida,
Georgia, Tennessee and Louisiana. Mortgage loan delinquencies, defined as
payments 60 or more days past due, have historically been low and were 1.0% at
the end of 1997 compared to the latest available industry rate of 1.3%.
As of December 31, 1997 and 1996, investment real estate totaled $49.2 million
and $132.7 million, representing 2% and 6%, respectively, of the consolidated
investment portfolio. As previously mentioned, the decline is due to the sale of
the Company's business rental property and the majority of its business park
land development projects during the second quarter of 1997. The majority of the
remaining residential property is located in South Carolina and Georgia.
Liberty has experienced pre-tax impairments on investment assets of $7.2
million, $4.3 million and $9.5 million for the years ended December 31, 1997,
1996, and 1995, respectively. The high level of impairments in 1997 was due to
approximately $6.6 million of writedowns associated with the remaining
residential properties which are being carried at the lower of cost or fair
market value less costs to sell, and write-downs taken on an oil and gas
investment. The high level of write-downs in 1995 was due primarily to
write-downs taken on an oil and gas investment. While the level of impairments
is not predictable, management does not expect impairments to have a significant
impact on Liberty's results of operations or liquidity.
36
<PAGE> 10
LIABILITIES, REDEEMABLE PREFERRED STOCK AND
SHAREHOLDERS' EQUITY
In March 1995, Liberty entered into a $375 million multi-tranche credit
facility. The facility consisted of a $225 million revolving credit facility
maturing in 1999; a $100 million seven year term loan facility; and a $50
million facility substantially identical to the revolving facility, which was
convertible into terms substantially identical to the term facility anytime
prior to March 1997. In March 1997, the Company terminated the $50 million
convertible loan commitment and reduced the amount available under the revolving
credit agreement by $50 million, thereby reducing the total amount available
under the facility to $275 million consisting of the $100 million term loan
facility and the $175 million revolving facility. In August 1997, the Company
repaid the term portion of its previous credit facility, using a combination of
funds available under the revolving portion of the facility and short term
borrowings from various lending institutions. Additionally, the Company repaid
approximately $35.0 million under the revolving facility using the cash proceeds
from the sale of its business rental property and the majority of its business
park land development projects. The current credit facility contains various
restrictive covenants typical of a credit facility agreement of this size and
nature. These restrictions primarily pertain to levels of indebtedness,
limitations on payment of dividends, limitations on the quality and types of
investments, and capital expenditures. Additionally, Liberty must also comply
with several financial covenant restrictions under the revolving credit
agreement including defined ratios of consolidated debt to cash flow,
consolidated debt to consolidated total capital, and fixed charges coverage.
In January 1998, the Company entered into a short term loan agreement for
$140 million whereby the Company may borrow any amount up to $140 million to use
for financing the stock repurchase plan as previously discussed, or for other
general operating purposes. Any amount borrowed under this agreement matures and
is to be paid in full on March 31, 1998.
In February 1998, Liberty initiated the process of refinancing its current
remaining facility into a new $300 million credit facility, with an option to
borrow up to an additional $150 million for a total commitment of $450 million.
The new revolving credit facility is expected to mature five years from the date
of closing of the facility.
The sale of Pierce National Life is expected to close during the first
quarter of 1998. The Company will use a portion of the proceeds from the sale to
repay debt under the credit facility.
During March 1998, the Company borrowed approximately $125 million under the
facility to fund the repurchase of 2.4 million shares of its common stock
pursuant to the stock tender transaction previously discussed.
Debt to Capital Ratio
Excluding Unrealized Investment Gains and Losses
<TABLE>
<S> <C>
1997 22.8%
1996 29.7%
1995 31.4%
1994 31.9%
1993 25.9%
1992 31.4%
</TABLE>
Liberty has entered into interest rate swaps and caps in an attempt to
minimize the impact of a potential significant rise in short-term interest rates
on Liberty's outstanding variable-rate debt. See Note 5 to the Consolidated
Financial Statements for additional discussion of these contracts.
In 1994, Liberty issued 668,207 shares of Series 1994-A Voting Cumulative
Preferred Stock having a total redemption value of $23.4 million, or $35.00 per
share, in connection with the acquisition of State National Capital Corporation
and 598,656 shares of Series 1994-B Voting Cumulative Preferred Stock having a
total redemption value of $22.4 million, or $37.50 per share, in connection with
the acquisition of American Funeral Assurance Company. The shares have
preference in liquidation and each share is entitled to one vote on any matters
submitted to a vote of the shareholders of the Company. Both the Company and the
holders of the preferred stock have the right to redeem any or all of the shares
from time to time beginning five years and one month after the date of issue in
exchange for cash or shares of the Company's common stock. There is no sinking
fund for the redemption of either series of preferred stock. Both the 1994-A and
1994-B series of preferred stock are considered redeemable preferred stock and
are classified outside permanent equity.
In 1995, Liberty issued 599,985 shares of Series 1995-A Voting Cumulative
Convertible Preferred Stock, having a total redemption value of $21.0 million,
or $35.00 per share, in connection with the acquisition of WLOX-TV. The Company
has the right to redeem any or all of the shares from time to time at any time
beginning five years and one month after the date of issue in exchange for cash,
common stock, or a combination of both. Generally, the amount of consideration
on the 1995-A Series will be equivalent to $35.00 per share plus the amount of
any accumulated and unpaid dividends. There is no sinking fund for the
redemption of the preferred stock. These shares are considered common stock
equivalents for financial reporting purposes.
37
<PAGE> 11
The National Association of Insurance Commissioners (the "NAIC") has
Risk-Based Capital ("RBC") requirements for life/health insurance companies to
evaluate the adequacy of statutory capital and surplus in relation to investment
and insurance risks such as asset quality, mortality and morbidity, asset and
liability matching, and other business factors. The RBC formula is used by
states as an early warning tool to identify companies that potentially are
inadequately capitalized for the purpose of initiating regulatory action. In
addition, the formula defines minimum capital standards that supplement the
current system of low fixed minimum capital and surplus requirements on a
state-by-state basis. The RBC ratios for the insurance subsidiaries
significantly exceed the minimum capital requirements at December 31, 1997.
CASH FLOWS
The parent company's short-term cash needs consist primarily of: (1) working
capital requirements, (2) interest on corporate debt, (3) dividends to
shareholders and (4) funds for real estate investments. The parent company's
primary long-term cash need is the repayment of corporate debt. The parent
company depends primarily on dividends, debt service payments and consolidated
tax return benefits paid to it by its subsidiaries to meet its short-term and
long-term cash needs. Historically, Liberty's primary businesses - insurance and
broadcasting - have provided sufficient liquidity to fund their operations and
the operations of the parent company. Liberty receives funds from its insurance
subsidiaries primarily in the form of dividends. Dividends from each insurance
subsidiary are restricted under applicable state law. Annual dividends in excess
of maximum amounts prescribed by state statutes ("extraordinary dividends") may
not be paid without the approval of the insurance commissioner of each state in
which an insurance subsidiary is domiciled. See Note 9 to the Consolidated
Financial Statements.
On a consolidated basis, Liberty's net cash flow from operating activities
was $61.8 million for 1997 compared with $74.2 million for 1996 and $87.4
million for 1995. Liberty's net cash provided by investing activities was $2.8
million for 1997 compared with net cash used of $88.9 million in 1996 and $133.6
million in 1995. The sources of net cash provided in 1997 was the sale of the
commercial real estate as described previously, and the sale of Pierce National
Stock to Fortis, Inc.. For financial reporting, notes receivable of
approximately $17.3 million and partnership units of the REIT received as
consideration for the real estate are non-cash items and are not reported in the
Statement of Cash Flows. The net cash used in investing activities in 1996 and
1995 was primarily to fund the purchase of investment securities. Cash flow from
financing activities fluctuates primarily based on the level of borrowings or
debt repayment. In 1997 cash flow used in financing activities was $39.6
million, compared with cash provided by financing activities of $7.7 million and
$38.4 million in 1996 and 1995, respectively. The Company used cash proceeds of
approximately $35 million from the sale of real estate to repay debt in 1997.
Debt repayments exceed borrowing proceeds by $55.9 million in 1997 and by $12.3
million in 1996. In 1995 proceeds from borrowings exceeded debt repayments by
$11.4 million. As a result of its activities, Liberty had a net increase in cash
of $25.0 million in 1997, a decrease in cash of $7.0 million in 1996 and a $7.7
million decrease in 1995.
Liberty believes that its current level of cash and future cash flows from
operations is sufficient to meet the needs of its business and to satisfy its
debt service. If suitable opportunities arise for additional acquisitions,
Liberty plans to draw on its revolving credit facility or use Common Stock or
Preferred Stock as payment of all or part of the consideration for such
acquisitions; or Liberty may seek additional funds in the equity or debt
markets. As previously mentioned, during the first quarter of 1998 the Company
used a substantial amount of the proceeds from the sale of Pierce National to
repurchase common stock. Under Liberty's credit facility, there exists no
restriction on acquisition funding; however, consolidated debt is limited to a
maximum of $385 million and the total debt to capital ratio is limited to 35%.
At December 31, 1997 outstanding debt totaled $191.9 million and the debt to
capital ratio was 22.8%.
Management believes liquidity risk of the insurance operations is minimized
by investment strategies that stress high quality assets and an integrated
asset/liability matching process. Investments are primarily in intermediate to
long-term maturities in order to match the long-term nature of insurance
liabilities. Liberty has a relatively small block of universal life products
that are interest-sensitive. Liberty actively manages the rates credited on
these policies to maintain an acceptable spread between the earned and credited
rate. In addition, Liberty has an integrated asset/liability matching process to
minimize the liquidity risk that is associated with interest-sensitive products.
Accordingly, most long-term investments are held to maturity and interim market
fluctuations present no significant liquidity problems. Liberty's only use of
derivative financial instruments is to minimize the exposure on its variable
rate debt.
Most states have laws requiring solvent life insurance companies to pay
guaranty fund assessments to protect the interests of policyholders of insolvent
life insurance companies. Due to the recent increase in the number of companies
that are under regulatory supervision, there is expected to be an increase in
assessments by state guaranty funds. Under present law, most assessments can be
recovered through a credit against future premium taxes. Liberty has reviewed
its exposure to potential assessments, and the effect on its financial position
and results of operations is not expected to be material.
Other Company commitments are shown in Note 8 to the Consolidated Financial
Statements. Further discussion of investments and valuation is contained in
Notes 1, 2 and 17 to the Consolidated Financial Statements.
38
FORWARD LOOKING INFORMATION
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for forward looking statements. Certain information contained herein or in any
other written or oral statements made by, or on behalf of the Company, are or
may be viewed as forward looking. Although the Company has used appropriate care
in developing any such forward looking information, forward looking information
involves risks and uncertainties that could significantly impact actual results.
These risks and uncertainties include, but are not limited to, the following:
changes in general economic conditions, including the performance of financial
markets and interest rates; competitive, regulatory, or tax changes that affect
the cost of or demand for the Company's products; and adverse litigation
results. The Company undertakes no obligation to publicly update or revise any
forward looking statements, whether as a result of new information, future
developments, or otherwise.
39
<PAGE> 12
CONSOLIDATED BALANCE SHEETS
THE LIBERTY CORPORATION AND SUBSIDIARIES
(In 000's)
<TABLE>
<CAPTION>
At December 31 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities
Available for sale, at market, cost of $1,587,587 in 1997 and $1,465,213 in 1996 $1,673,888 $1,517,539
Equity securities, primarily at market, cost of $55,992 in 1997, $61,431 in 1996 74,568 75,591
Mortgage loans 244,821 230,910
Investment real estate, at cost less accumulated depreciation $10,742 in 1997, 49,169 132,696
$13,619 in 1996
Policy loans 100,322 98,816
Other long-term investments 18,459 22,470
Short-term investments 250 250
- --------------------------------------------------------------------------------------------------------------------------
Total Investments 2,161,477 2,078,272
- --------------------------------------------------------------------------------------------------------------------------
Cash 61,786 36,774
Accrued investment income 21,723 20,817
Receivables net of bad debt reserves, $1,441 in 1997, $2,310 in 1996 69,433 64,074
Receivable from reinsurers 278,165 277,578
Deferred acquisition costs 275,615 262,182
Cost of business acquired 62,226 70,764
Buildings and equipment, at cost, less accumulated depreciation $114,473 in 1997, 74,338 79,808
$106,513 in 1996
Intangibles related to television operations, at cost, net of amortization $29,168 in 90,080 93,979
1997, $25,269 in 1996
Goodwill related to insurance acquisitions, at cost, net of amortization $10,929 in 33,950 35,608
1997, $9,315 in 1996
Other assets 55,965 40,909
- --------------------------------------------------------------------------------------------------------------------------
Total Assets $3,184,758 $3,060,765
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
40
<PAGE> 13
<TABLE>
<CAPTION>
At December 31 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities:
Future policy benefits $1,890,786 $1,853,173
Claims and benefits payable 36,991 31,450
Policyholder funds 28,154 28,488
- -------------------------------------------------------------------------------------------------------------------------
1,955,931 1,913,111
Notes and mortgages payable 191,914 147,861
Long-term debt --- 100,000
Accrued income taxes 3,282 5,163
Deferred income taxes 173,562 163,139
Accounts payable and accrued expenses 106,191 101,209
Other liabilities 4,902 3,822
Minority interest 37,160 ---
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities 2,472,942 2,434,305
- -------------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stock:
1994-A Series, $35.00 redemption value, 504,168 and 668,207 shares issued and
outstanding in 1997 and 1996, respectively 17,646 23,387
1994-B Series, $37.50 redemption value, 525,948 and 592,334 shares issued and
outstanding in 1997 and 1996, respectively 19,723 22,212
- -------------------------------------------------------------------------------------------------------------------------
Total Redeemable Preferred Stock 37,369 45,599
- -------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock
Authorized - 50,000,000 shares, no par value
Issued and outstanding - 20,712,686 shares in 1997, 20,214,738 shares in 1996 182,994 163,443
Convertible preferred stock 1995-A Series, 599,985 shares issued and outstanding 20,999 20,999
Preferred stock
Authorized - 10,000,000 shares
Issued and outstanding - 1,630,101 shares in 1997, 1,860,526 shares in 1996
Unearned stock compensation (10,872) (7,168)
Unrealized appreciation on fixed maturity securities available for sale and equity
securities 61,515 39,726
Cumulative foreign currency translation adjustment 335 (204)
Retained earnings 419,476 364,065
- -------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 674,447 580,861
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity $3,184,758 $3,060,765
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
41
<PAGE> 14
CONSOLIDATED STATEMENTS OF INCOME
THE LIBERTY CORPORATION AND SUBSIDIARIES
(In $000's, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31 1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Insurance premiums and policy charges $350,692 $321,371 $331,370
Broadcasting revenues 137,898 137,336 119,529
Net investment income 158,319 155,221 148,670
Service contract revenues 7,121 7,751 9,025
Realized investment gains (losses) 6,226 (2,582) (2,913)
- -------------------------------------------------------------------------------------------------------------------------
Total revenues 660,256 619,097 605,681
- -------------------------------------------------------------------------------------------------------------------------
EXPENSES
Policyholder benefits 227,927 218,751 236,774
Insurance commissions 78,939 66,483 54,583
General insurance expenses 67,270 73,790 67,703
Amortization of deferred acquisition costs and cost of business
acquired 45,564 73,967 43,780
Broadcasting expenses 95,588 94,867 83,849
Interest expense 13,209 15,139 15,047
Other expenses 20,182 19,601 15,150
- -------------------------------------------------------------------------------------------------------------------------
Total expenses 548,679 562,598 516,886
- -------------------------------------------------------------------------------------------------------------------------
Income before income taxes 111,577 56,499 88,795
Provision for income taxes 36,626 19,159 29,442
- -------------------------------------------------------------------------------------------------------------------------
Net income $ 74,951 $ 37,340 $ 59,353
- -------------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
- -------------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 3.50 $ 1.67 $ 2.80
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 3.34 $ 1.66 $ 2.72
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
42
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE LIBERTY CORPORATION AND SUBSIDIARIES
(In 000's)
<TABLE>
<CAPTION>
For the Years Ended December 31 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 74,951 $ 37,340 $ 59,353
Adjustments to reconcile net income to net cash provided by
operating activities:
Increase in policy liabilities 7,390 5,545 18,845
Increase (decrease) in accounts payable and accrued expenses 2,571 14,050 (3,964)
Increase in receivables (6,600) (4,645) (3,311)
Amortization of deferred acquisition costs and cost of business
acquired 45,564 73,967 43,780
Policy acquisition costs deferred (55,312) (51,122) (54,522)
Realized investment (gains) losses (6,226) 2,582 2,913
Gain on sale of operating assets (2,011) (3,172) (3,231)
Depreciation and amortization 20,870 22,387 19,034
Amortization of bond premium and discount (7,575) (5,835) (7,485)
Provision for deferred income taxes 1,613 (8,905) 6,225
All other operating activities, net (13,394) (7,957) 9,803
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 61,841 74,235 87,440
- ------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment securities sold - Available for sale 128,513 181,572 155,670
Investment securities matured or redeemed by issuer:
Available for sale 100,031 75,369 32,913
Held to maturity --- --- 35,494
Cost of investment securities acquired - Available for sale (288,053) (322,633) (329,918)
Mortgage loans made (50,067) (38,845) (32,905)
Mortgage loan repayments 35,535 21,111 22,712
Purchase of investment properties, buildings and equipment (21,552) (43,926) (62,955)
Sale of investment properties, buildings and equipment 63,164 37,858 49,103
Purchases of short-term investments (42,423) (73,602) (43,607)
Sales of short-term investments 42,423 73,352 50,871
Cash received on issuance of Pierce National Life common stock 37,160 --- ---
Net cash paid on purchase of television station --- --- (5,140)
All other investment activities, net (1,940) 823 (5,828)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES
2,791 (88,921) (133,590)
- ------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 2,505,000 2,957,704 1,901,901
Principal payments on debt (2,560,947) (2,970,011) (1,890,521)
Dividends paid (19,540) (18,366) (16,814)
Stock issued for employee benefit and compensation programs 3,884 1,441 2,909
Return of policyholders' account balances (38,949) (35,966) (32,637)
Receipts credited to policyholders' account balances 70,932 72,917 73,653
- ------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(39,620) 7,719 38,491
- ------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH 25,012 (6,967) (7,659)
Cash at beginning of year 36,774 43,741 51,400
- ------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 61,786 $ 36,774 $ 43,741
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
43
<PAGE> 16
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THE LIBERTY CORPORATION AND SUBSIDIARIES
(Amounts in 000's except per share data)
<TABLE>
<CAPTION>
UNEARNED UNREALIZED CUMULATIVE
COMMON CONVERTIBLE STOCK SECURITY FOREIGN
SHARES COMMON PREFERRED COMPEN- APPRECIATION CURRENCY RETAINED
OUTSTANDING STOCK STOCK SATION (DEPRECIATION) TRANSLATION EARNINGS TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1995 19,841 $ 152,956 --- $ (5,319) $ (53,109) $(1,491) $302,552 $395,589
Net income 59,353 59,353
Net unrealized investment gains 111,095 111,095
Dividends - Common Stock -
$0.665 per share (13,283) (13,283)
Dividends - Redeemable Preferred
Stock - $2.10 per share (2,658) (2,658)
Dividends - Convertible
Preferred Stock - $1.4583 per (873) (873)
share
Foreign currency translation
adjustment 492 492
Stock issued for employee
benefit and performance
incentive compensation 216 5,631 (731) 4,900
programs
Stock issued as part of the
purchase price of 20,999 20,999
acquisitions
Stock issued for conversion of
redeemable preferred stock 4 148 148
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 20,061 158,735 20,999 (6,050) 57,986 (999) 345,091 575,762
Net income 37,340 37,340
Net unrealized investment losses (18,260) (18,260)
Dividends - Common Stock -
$0.725 per share (14,666) (14,666)
Dividends - Redeemable Preferred
Stock - $2.10 per share (2,652) (2,652)
Dividends - Convertible
Preferred Stock - $1.75 per (1,048) (1,048)
share
Foreign currency translation
adjustment 795 795
Stock issued for employee
benefit and performance
incentive compensation 152 4,641 (1,118) 3,523
programs
Stock issued for conversion of
redeemable preferred stock 2 67 67
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 20,215 163,443 20,999 (7,168) 39,726 (204) 364,065 580,861
Net income 74,951 74,951
Net unrealized investment gains 21,789 1,789
Dividends - Common Stock -
$0.785 per share (15,957) (15,957)
Dividends - Redeemable Preferred
Stock - $2.10 per share (2,535) (2,535)
Dividends - Convertible Preferred
Stock - $1.75 per share (1,048) (1,048)
Foreign currency translation
adjustment 539 539
Stock issued for employee
benefit
and performance incentive 268 11,320 (3,704) 7,616
compensation programs
Stock issued for conversion of
redeemable preferred stock 230 8,231 8,231
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 20,713 $182,994 $20,999 $(10,872) $61,515 $ 335 $419,476 $674,447
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
44
<PAGE> 17
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements of The Liberty Corporation and Subsidiaries (the Company) include the
accounts of the Company after elimination of all significant intercompany
balances and transactions. The primary subsidiaries of the Company are Liberty
Life Insurance Company, Pierce National Life Insurance Company (doing business
as FamilySide) and Liberty Insurance Services Corporation (collectively referred
to as the insurance operations) and Cosmos Broadcasting Corporation.
ORGANIZATION - The Company's operations include the sale and service of life
insurance products in the United States and Canada and television broadcasting
operations in the United States. The insurance operations are licensed to do
business in 49 states plus the District of Columbia and all Canadian provinces
and territories. While the majority of the Company's assets and revenues are
generated from its insurance operations, the Company also is a major television
group broadcaster, owning and operating eight network affiliated television
stations throughout the southeastern and midwestern states. Information on the
Company's operations by segment is included on page 27 of this report (see Note
18).
USE OF ESTIMATES AND ASSUMPTIONS - Financial statements prepared in
accordance with generally accepted accounting principles require management to
make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes to the consolidated
financial statements. Actual results could differ from those estimates and
assumptions.
INSURANCE PREMIUMS AND POLICY CHARGES - Revenues for traditional life
insurance and accident and health insurance are recognized over the premium
paying period as they become due. For limited payment whole life products, the
excess of the premiums received over the portion of the premiums required to
provide for benefits and expenses is deferred and recognized in income over the
anticipated life of the policy. For universal life products, revenues consist of
policy charges for the cost of insurance, administration of the policies and
surrender charges during the period. Policy issue fees are deferred and
recognized in income over the life of the policies in relation to the incidence
of expected gross profits.
POLICYHOLDER BENEFITS - Benefits for traditional life insurance and accident
and health insurance products include claims paid during the period, accrual for
claims reported but not yet paid, accrual for claims incurred but not reported
based on historical claims experience modified for expected future trends, and
changes in the liability for future policy benefits. Benefits for universal life
products are the amount of claims paid in excess of the policy value accrued to
the benefit of the policyholder plus interest credited on account values.
FUTURE POLICY BENEFITS include insurance reserves and policy maintenance
expenses for traditional life insurance and accident and health insurance.
Future policy benefits are associated with earned premiums so as to recognize
profits over the premium paying period. This association is accomplished by
recognizing the liabilities for insurance reserves on a net level premium method
based on assumptions deemed appropriate at the date of issue (or as of the date
of acquisition for acquired blocks of business) as to future investment yield,
mortality, morbidity, withdrawals and maintenance expenses and including margins
for adverse deviations. Interest assumptions are based on Company experience.
Mortality, morbidity, and withdrawal assumptions are based on recognized
actuarial tables or Company experience, as appropriate. Accident and health
reserves consist principally of unearned premiums and claims reserves, including
provisions for incurred but unreported claims.
Insurance reserves for universal life products are determined following the
retrospective deposit method and consist of policy values that accrue to the
benefit of the policyholder, unreduced by surrender charges.
DEFERRED ACQUISITION COSTS - Acquisition costs incurred by the Company in the
process of acquiring new business are deferred and amortized to income as
discussed below. Costs deferred consist primarily of commissions and certain
policy underwriting, issue and agency expenses that vary with and are primarily
related to production of new business.
COST OF BUSINESS ACQUIRED is the value assigned the insurance inforce of
acquired insurance companies at the date of acquisition.
For traditional insurance products, the amortization of deferred acquisition
costs and the cost of business acquired is recognized in proportion to the ratio
of annual premium revenue to the total anticipated premium revenue, which gives
effect to actual terminations. Deferred acquisition costs and the cost of
business acquired are amortized over the premium paying period (not to exceed 30
years) of the related policies. Anticipated premium revenue is determined using
assumptions consistent with those utilized in the determination of liabilities
for insurance reserves.
For universal life products, the deferred acquisition costs are amortized in
relation to the incidence of expected gross profits over the life of the
policies (not to exceed 30 years). Gross profits are equal to revenues, as
defined previously, plus investment income (including applicable realized
investments gains and losses) less expenses. Expenses include interest credited
to policy account balances, policy administration expenses, and expected benefit
payments in excess of policy account balances.
INVESTMENTS - The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" effective January 1, 1994. SFAS No. 115 requires that all debt and
equity securities be classified into one of three categories -- held to
maturity, available for sale, or trading. The Company currently has no
securities classified as held to maturity or trading. Prior to the adoption of
SFAS No. 115, all fixed maturity securities were carried at amortized cost. On
November 15, 1995, the Financial Accounting Standards Board issued a Special
Report, "A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities". In accordance with the provisions in
that Special Report, on
45
<PAGE> 18
December 31, 1995, the Company chose to reclassify all securities previously
classified as held to maturity to available for sale. The market value and
amortized cost of the securities transferred were $307,100,000 and $281,691,000,
respectively, at December 31, 1995. As a result of the transfer, shareholders'
equity was increased $14,645,000 (net of deferred income taxes and adjustment to
deferred acquisition costs related to universal life products) to reflect the
unrealized gain on securities previously carried at cost.
Investments are reported on the following basis:
- - Fixed maturities classified as available-for-sale are stated at fair value
with unrealized gains and losses, after adjustment for deferred income taxes
and deferred acquisition costs related to universal life products, reported
directly in shareholders' equity. Fair values for fixed maturity securities
are based on quoted market prices, where available. For fixed maturity
securities not actively traded, fair values are estimated using values
obtained from independent pricing services or, in the case of private
placements, are estimated by discounting expected future cash flows using a
current market rate applicable to the yield, credit quality, and maturity of
the investments.
- - Equity securities (common stocks and nonredeemable preferred stocks) are all
considered available for sale and are carried at fair value. The fair values
for equity securities are based on quoted market prices.
- - Mortgage loans on real estate are carried at amortized cost, less an
allowance for credit losses and provisions for impaired value, where
appropriate.
- - Investment real estate is carried at cost less accumulated depreciation and
provisions for impaired value where appropriate. Depreciation over the
estimated useful lives of the properties is determined principally using the
straight-line method.
- - Policy loans are carried at cost.
- - Other long-term investments are carried at cost which includes provisions
for impaired value where appropriate. Included in other long-term
investments are investments in venture capital funds and oil and gas
properties.
- - Short-term investments are carried at cost which approximates fair value.
UNREALIZED INVESTMENT GAINS AND LOSSES on investments carried at fair value,
net of deferred taxes and adjustment for deferred acquisition costs related to
universal life products, are recorded directly in shareholders' equity.
REALIZED INVESTMENT GAINS AND LOSSES are recognized using the specific
identification method to determine the cost of investments sold. Gains or losses
on the sale of real estate held for investment are included in realized
investment gains (losses), in accordance with Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" which is discussed below. Gains and losses
on the sale of real estate acquired for development and resale are included in
net investment income. Realized gains and losses include write-downs for
impaired values of investment assets. The Company establishes impairments on
individual, specific assets at the time the Company judges the assets to have
been impaired and this impairment can be estimated (see Note 2).
BUILDINGS AND EQUIPMENT are recorded at cost. Depreciation over the
estimated useful lives of the properties is determined principally using the
straight-line method.
INTANGIBLE ASSETS arose in the acquisition of certain television stations.
Amounts not being amortized ($4,071,000) represent the excess of the total cost
over the underlying value of the tangible and amortizable intangible assets
acquired prior to 1970. Amounts being amortized are expensed principally over
forty years.
GOODWILL arose in the acquisition of insurance companies and is being
amortized over lives ranging from twenty to forty years.
FOREIGN CURRENCY TRANSLATION has been accounted for in accordance with SFAS
No. 52, "Foreign Currency Translation." The assets and liabilities of the
Canadian operations of FamilySide are translated into U.S. dollars at the rate
of exchange in effect at the respective balance sheet date. Net exchange gains
and losses resulting from translation are included as a separate component of
shareholders' equity. Revenues and expenses are translated at average exchange
rates for the year. Gains and losses from foreign currency transactions are
included in net income.
INTEREST RATE CAPS AND SWAPS are used to limit the impact of changing
interest rates on the Company's debt, which is all floating rate (see Note 5).
The net interest effect of the swap transaction is reported as an adjustment to
interest expense as incurred. Interest rate caps are occasionally used to
protect a portion of the remaining debt against significant increases in
interest rates. Premiums paid for the interest rate caps are being amortized to
interest expense over the terms of the caps.
INCOME TAXES are computed using the liability method required by Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes". Under
SFAS 109, deferred tax assets and liabilities are determined based on the
differences between financial reporting and tax basis of assets and liabilities
and are measured using the enacted tax rates and law that will be in effect when
the differences are expected to reverse.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 114, "Accounting by
Creditors for Impairments of a Loan" and Statement of Financial Accounting
Standards No. 118, "Accounting by Creditors for Impairments of a Loan--Income
Recognition and Disclosures" were adopted by the Company effective January 1,
1995. Under the standards, the Company provides for estimated credit losses
related to the mortgage loans where it is probable that all amounts due
according to the contractual terms of the mortgage agreement will not be
collected. This provision for credit losses is based on discounting the expected
cash flows from the loan using the loan's initial effective interest rate, or
the fair value of the collateral for certain collateral dependent loans. The
initial adoption of the standards resulted in recording an allowance for credit
losses of $507,000 ($330,000 after-tax), which was included as a component of
realized investment gains (losses) in the consolidated statement of income.
46
<PAGE> 19
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" was
adopted by the Company effective January 1, 1996. This statement prescribes
accounting standards for the impairment of long-lived assets, certain
identifiable intangibles, and goodwill that are used in the business, as well as
establishing accounting standards for long-lived assets and certain identifiable
intangibles to be disposed of. Under the provisions of the statement, certain of
the Company's investment real estate assets were required to be valued at fair
value, rather than net realizable value as previously required. The adoption of
this standard resulted in a $1,800,000 charge which was reported as a component
of realized investment gains and losses.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123, "Accounting for
Stock-Based Compensation" was adopted by the Company on January 1, 1996. This
statement requires companies to measure the fair value of employee stock options
at the date granted and expense the estimated fair value of grants or,
alternatively, disclose the pro forma impact on net income and earnings per
share of the grants in the notes to the financial statements. The Company has
adopted SFAS 123 by disclosing the pro forma net income and earnings per share
impact. The pro forma amounts are not materially different from the actual
amounts reported (see Note 10).
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 128, "Earnings Per Share"
was adopted by the Company on December 31, 1997. This statement replaces
Accounting Principles Board Opinion No. 15, "Earnings Per Share" ("APB 15") by
making the requirements for earnings per share information more consistent with
international accounting standards. SFAS 128 replaces the presentation of
primary earnings per share with basic earnings per share, which is a simpler
calculation that assumes no dilution for common stock equivalents. Basic
earnings per share is calculated by dividing net income available to common
shareholders by the weighted average number of common shares outstanding for the
period. In addition to basic earnings per share, diluted earnings per share must
also be presented, which is calculated similar to fully diluted earnings per
share as calculated under APB 15. The adoption of this standard did not result
in material differences in the earnings per share as previously reported (see
Note 11).
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 130, "Reporting
Comprehensive Income" was issued by the Financial Accounting Standards Board in
June, 1997. This statement will require companies to report and display
comprehensive income and its components as part of the general financial
statements. The most significant items which will affect the Company's
comprehensive income are the change in unrealized security gains and losses and
the change in the foreign currency translation adjustment, both items of which
have historically been reported only as a component of shareholders' equity. The
Company will adopt this standard January 1, 1998.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") was issued by
the Financial Accounting Standards Board in June, 1997. This statement, which is
effective for years beginning after December 15, 1997, establishes standards for
the way that public companies report information about operating segments in
annual financial statements and requires that companies report selected
information about operating segments in interim financial reports. The financial
information to be reported includes segment profit or loss, certain revenue and
expense items, and segment assets and reconciliations to corresponding amounts
in the general purpose financial statements. It also establishes requirements
for related disclosures about products and services, geographic areas, and major
customers. The Company has not completed its review of Statement 131, but the
adoption of Statement 131 will not affect results of operations or financial
position, but will affect the disclosure of segment information. The Company
will adopt this standard retroactively in 1998.
RECLASSIFICATIONS have been made in the 1996 and 1995 Consolidated Financial
Statements to conform to the 1997 presentation.
47
<PAGE> 20
2. INVESTMENTS
Amortized cost and estimated fair values of investments in available for
sale securities at December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1997 (In 000s) Cost Gains Losses Value
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Fixed maturity securities
US government
obligations $ 15,248 $ 571 $ 12 $ 15,807
States and
political
subdivisions
--- --- --- ---
Foreign
Government 7,537 48 22 7,563
Foreign
Corporate
and Other 104,607 8,210 558 112,259
Corporate
securities 847,826 47,886 1,897 893,815
Mortgage-backed
securities 612,369 32,213 138 644,444
- ----------------------------------------------------------------------------
Total 1,587,587 88,928 2,627 1,673,888
Equity 55,992 21,326 2,750 74,568
securities
- ----------------------------------------------------------------------------
Total $1,643,579 $110,254 $ 5,377 $1,748,456
- ----------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1996 (In 000s) Cost Gains Losses Value
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE FOR SALE:
Fixed maturity securities
US
government $ 14,795 $ 255 $ 83 $ 14,967
obligations
States and
political
subdivisions 50 1 --- 51
Foreign
Government 7,080 184 3 7,261
Foreign
Corporate 98,669 6,452 488 104,633
and Other
Corporate
securities 697,521 27,665 5,130 720,056
Mortgage-backed 647,098 24,924 1,451 670,571
securities
- ----------------------------------------------------------------------------
Total 1,465,213 59,481 7,155 1,517,539
Equity securities 61,431 17,074 2,914 75,591
- ----------------------------------------------------------------------------
Total $1,526,644 $76,555 $10,069 $1,593,130
- ----------------------------------------------------------------------------
</TABLE>
Realized gains (losses) and the change in unrealized gains (losses) on the
Company's fixed maturities and equity securities are summarized as follows:
<TABLE>
<CAPTION>
Total Gains
Fixed Equity (Losses) on
(In 000s) Maturities Securities Investments
- --------------------------------------------------------------
1997
<S> <C> <C> <C>
Realized investment
gains (losses) $ (150) $ 8,755 $ 8,605
Change in unrealized
investment gains
(losses) 33,975 4,416 38,391
- -------------------------------------------------------------
Combined $ 33,825 $ 13,171 $ 46,996
- -------------------------------------------------------------
1996
Realized investment
gains (losses) $ (2,864) $ 10,160 $ 7,296
Change in unrealized
investment gains
(losses) (31,389) 289 (31,100)
- -------------------------------------------------------------
Combined $ (34,253) $ 10,449 $ (23,804)
- -------------------------------------------------------------
1995
Realized investment
gains (losses) $ (2,347) $ 8,071 $ 5,724
Change in unrealized
investment gains 136,197 13,779 149,976
(losses)
- -------------------------------------------------------------
Combined $ 133,850 $ 21,850 $ 155,700
- -------------------------------------------------------------
</TABLE>
The schedule below details consolidated investment income and related
investment expenses for the years ended December 31.
<TABLE>
<CAPTION>
(In 000s) 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
Interest on
Bonds $123,932 $113,016 $107,825
Mortgage loans 21,191 19,858 18,247
Policy loans 4,981 4,932 4,872
Short-term 708 600 752
investments
Dividends on
Preferred stocks 4,543 6,196 6,624
Common stocks 574 1,050 1,180
Investment property 4,121 9,712 9,238
rentals
Net gain on investment
real estate held for
development 3,838 6,518 6,947
Other investment income 6,705 5,643 3,269
- ------------------------------------------------------------
Total investment income 170,593 167,525 158,954
Investment expenses 12,274 12,304 10,284
- ------------------------------------------------------------
Net investment income $158,319 $155,221 $148,670
- ------------------------------------------------------------
</TABLE>
Proceeds from sales of fixed maturities and the related gross realized gains
nd losses for the three years ended December 31 are shown below. The amounts
hown below do not include those related to unscheduled redemptions or
repayments, nor do they reflect any impairments taken during the years
resented.
<TABLE>
<CAPTION>
(In 000s) 1997 1996 1995
- ------------------------------------------------------------
<S> <C> <C> <C>
Proceeds from sales $83,978 $157,425 $111,260
Gross realized gains 315 1,088 1,750
Gross realized losses (1,489) (4,832) (3,910)
</TABLE>
48
<PAGE> 21
The following investment assets were non-income producing for the twelve months
ended December 31, 1997:
<TABLE>
<CAPTION>
Balance Sheet
(In 000s) Amount
- ------------------------------------------------------------
<S> <C>
Investment real estate $ 6,997
Other long-term investments 18,924
Mortgage loans 27
- ------------------------------------------------------------
Total $ 25,948
- ------------------------------------------------------------
</TABLE>
For the year ended December 31, 1997, the Company incurred realized losses of
$7,228,000 due to impairment of assets included in the year-end investment
portfolio.
Cumulative provisions for impairments on the total investment portfolio by
asset category at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Cumulative Provision
(In 000s) for Impairments
- -------------------------------------------------------------
<S> <C>
Mortgage loans $ 2,190
Investment real estate 8,610
Other long-term investments 15,080
Fixed maturities 1,709
- -------------------------------------------------------------
Total $ 27,589
- -------------------------------------------------------------
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December
31, 1997, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Fair
(In 000s) Cost Value
- --------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 24,591 $ 24,904
Due after one year through five years 226,616 242,289
Due after five years through ten 320,949 339,579
years
Due after ten years 403,062 422,672
- --------------------------------------------------------------
975,218 1,029,444
Mortgage-backed securities primarily
maturing in five to twenty-five years 612,369 644,444
- --------------------------------------------------------------
Total $1,587,587 $1,673,888
- --------------------------------------------------------------
</TABLE>
3. REINSURANCE AGREEMENTS
The Company uses reinsurance as a risk management tool in the normal course
of business and in isolated, strategic assumption transactions to effectively
buy or sell blocks of in force business. The reinsurance contracts do not
relieve the Company from its contract with its policyholders, and it remains
liable should any reinsurer be unable to meet its obligations. At December 31,
1997, $3.7 billion (18%) of the Company's total $20.8 billion gross insurance in
force was ceded to other companies. In the accompanying financial statements,
insurance premiums and policy charges, policyholder benefits and deferred
acquisition costs are reported net of reinsurance ceded with policy liabilities
being reported gross of reinsurance ceded.
Amounts paid or deemed to be paid for reinsurance contracts are recorded as
reinsurance receivables. The cost of reinsurance related to long-duration
contracts is accounted for over the life of the underlying reinsured policies
using assumptions consistent with those used to account for the underlying
policies.
In 1991 Liberty Life entered into an agreement with Life Reassurance
Corporation (Life Re) to coinsure the Company's General Agency Division's
universal life policies in force. The initial agreement provided for 80%
coinsurance on policies in force at December 31, 1991, and 50% coinsurance on
policies issued subsequent to such date. Effective July 1, 1995, the amount
coinsured on policies written after December 31, 1991, was increased to 80%.
Under the terms of the agreement, assets supporting the business ceded are
required to be held in escrow. At December 31, 1997, Liberty Life's interest in
the assets held in escrow consisted of investments with an amortized cost of
$63.3 million and a fair value of $66.5 million. Comparable book and fair value
at December 31, 1996 was $58.5 million and $59.9 million, respectively. These
investments had an average rating of AA+. The total face value of insurance
ceded to Life Re at December 31, 1997, was $2.4 billion and the Company has
recorded a receivable related to this transaction from Life Re of $254.4 million
as of December 31, 1997. Currently, Life Re has an A.M. Best rating of A+.
During 1997 and 1996, Liberty Life had ceded premiums and policy charges of
$17.1 million and $18.6 million, respectively, under the agreement.
Effective September 30, 1991, Liberty Life entered into an agreement to
coinsure 50% of its Home Service line of business. Under generally accepted
accounting principles this agreement has been treated as financial reinsurance,
and no reserve reduction had been taken for the business ceded. The reinsurance
contract contains an escrow agreement that requires assets equal to the reserves
reinsured, as determined under statutory accounting principles, be held in
escrow for the benefit of this block of business. At December 31, 1997, the
amortized cost and fair value of the invested assets held in escrow was $235.9
million and $253.7 million, respectively.
The insurance subsidiaries also reinsure with other insurance companies
portions of the life insurance they write in order to limit exposure on large or
substandard risks. Due to this broad allocation of reinsurance with several
insurance companies, there exists no significant concentration of credit risk.
The maximum amount of life insurance that Liberty Life will retain on any life
is $300,000, plus an additional $50,000 in the event of accidental death. This
maximum is reduced for higher ages and for special classes of risks. The maximum
amount of life insurance that FamilySide will retain on any life is $50,000.
Insurance in excess of the retention limits is either automatically ceded under
reinsurance agreements or is reinsured on an individually agreed basis with
other insurance companies.
49
<PAGE> 22
The effect of reinsurance on premiums and policy charges and benefits was as
follows for the years ending December 31:
<TABLE>
<CAPTION>
(In 000s) 1997 1996 1995
- ---------------------------------------------------------------
<S> <C> <C> <C>
Direct premiums and
policy charges $384,010 $356,660 $364,797
Reinsurance assumed 873 1,209 1,314
Reinsurance ceded (34,191) (36,498) (34,741)
- ---------------------------------------------------------------
Net premiums and
policy charges $350,692 $321,371 $331,370
- ---------------------------------------------------------------
Gross benefits $257,685 $243,584 $249,861
Reinsurance recoveries (29,758) (24,833) (13,087)
- ---------------------------------------------------------------
Net benefits $227,927 $218,751 $236,774
- ---------------------------------------------------------------
</TABLE>
4. DEFERRED ACQUISITION COSTS, COST OF BUSINESS ACQUIRED AND FUTURE POLICY
BENEFITS
A summary of the changes in deferred acquisition costs is as follows:
<TABLE>
<CAPTION>
(In 000s) 1997 1996 1995
- -------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $262,182 $265,188 $259,799
Deferred during the year 55,312 51,122 54,522
Amortized during the year (37,069) (57,812) (32,594)
Adjustment related to
unrealized investment
(gains) losses (4,508) 3,712 (10,327)
Insurance in force ceded --- --- (6,331)
Foreign currency (302) (28) 119
translation
- -------------------------------------------------------------
Ending balance $275,615 $262,182 $265,188
- -------------------------------------------------------------
</TABLE>
Included in amortization for 1996 is $20.1 million of costs determined not to
be recoverable from future premiums on certain lines of business. Actual
experience on these lines of business was significantly less favorable than what
was projected at the time the policies were sold.
A summary of the changes in costs of business acquired through acquisitions
is as follows:
<TABLE>
<CAPTION>
(In 000s) 1997 1996 1995
- --------------------------------------------------------------
<S> <C> <C> <C>
Beginning balance $70,764 $86,925 $98,056
Interest accrued 5,070 5,860 6,621
Foreign currency 55
adjustment (43) (6)
Amortized during the year (17,807)
(13,565) (22,015)
- --------------------------------------------------------------
Ending balance $62,226 $70,764 $86,925
- --------------------------------------------------------------
</TABLE>
The Company accounts for these costs in a manner consistent with deferred
acquisition costs. The Company's interest rate used to amortize these costs is
7.77% for a majority of the asset. Periodically, the Company performs tests to
determine that the cost of business acquired remains recoverable from future
premiums from the business acquired. During 1996 the Company determined that
actual experience was materially different than what was assumed at the time of
acquisition for certain blocks of acquired business. Accordingly, $6.1 million
of cost of business acquired was determined not to be recoverable based on the
expected present value of the future cash flows from the business. The charge
was included in amortization expense. There were no similar charges in either
1997 or 1995.
Under current assumptions, amortization of cost of business acquired, prior
to consideration of accrued interest implicit in the calculation of the
amortization, for the next five years is expected to be as follows:
<TABLE>
<CAPTION>
(In 000s) Amortization
- --------------------------------------------- -----------------
<S> <C>
1998 $12,464
1999 10,093
2000 9,006
2001 7,938
2002 7,587
</TABLE>
The liabilities for traditional life insurance and accident and health
insurance policy benefits and expenses are computed using a net level premium
method, including assumptions based on the Company's experience, modified as
necessary to reflect anticipated trends and to include provisions for possible
unfavorable deviations. Reserve interest assumptions are graded and range from
3.5% to 9.5%. Such liabilities are, for some plans, graded to equal statutory
values or cash values at or prior to maturity. The weighted average assumed
investment yield for all traditional life and accident and health policy
reserves was 6.7% for 1997 and 6.6% for both 1996 and 1995. Benefit reserves for
traditional life insurance policies include certain deferred profits on
limited-payment policies that are being recognized in income over the policy
term. Policy benefit claims are charged to expense in the period that the claims
are incurred.
Benefit reserves for universal life insurance and investment products are
computed under a retrospective deposit method and represent policy account
balances before applicable surrender charges. Policy benefits and claims that
are charged to expense include benefit claims incurred in the period in excess
of related policy account balances. Interest crediting rates for universal life
and investment products range from 4.0% to 6.45% in 1997, 4.0% to 6.75% in 1996,
and 5.5% to 6.8% in 1995.
Participating business accounts for approximately 1% of the Company's life
insurance in force and premium income. The dividend to be paid is determined
annually by the Board of Directors.
50
<PAGE> 23
5. DEBT
The debt obligations at December 31 are as follows:
<TABLE>
<CAPTION>
Interest
(In 000s) Rate 1997 1996
----------------------------------------------------------
<S> <C> <C> <C>
Borrowings under
revolving credit
agreement and lines
of credit 6.2% $188,000 $140,000
Long-term debt --- --- 100,000
Mortgage loans on
investment property 8.0% 1,214 3,703
Other --- 2,700 4,158
----------------------------------------------------------
Total $191,914 $247,861
----------------------------------------------------------
</TABLE>
The mortgage loans are secured by property with a net carrying value of $10.9
million at December 31, 1997.
Maturities of the debt obligations at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Maturities (In 000s) Amount
------------------------------------------------------------
<S> <C>
1998 $ 41,914
1999 148,700
2000 650
2001 650
2002 ---
Thereafter ---
------------------------------------------------------------
Total $191,914
------------------------------------------------------------
</TABLE>
On March 21, 1995, the Company refinanced its then-existing $325,000,000
revolving credit facility into a new $375,000,000, multi-tranche credit
facility. The facility consisted of a $225,000,000 three-year revolving credit
facility; a $100,000,000 seven-year term loan facility; and a $50,000,000
facility substantially identical to the revolving facility, which was
convertible into terms substantially identical to the term facility within two
years of the closing date of the loan. The revolving portion of the loan matures
in 1999, and the term portion was scheduled to be repaid in twenty quarterly
installments of $5,000,000 commencing June 1997, and ending in March 2002.
In March 1997, the Company terminated the $50,000,000 convertible loan
commitment and reduced the amount available under the revolving facility by
$50,000,000, thereby reducing the total facility by $100,000,000. In August
1997, the Company repaid the term portion of the facility using a combination of
funds available under the revolving portion of the facility and short term
borrowings from various lending institutions. Additionally, the Company repaid
approximately $35,000,000 of debt under the revolving facility during 1997 using
the cash proceeds from the sale of its business rental property and the majority
of its business park land development projects.
The Company's borrowings against the revolving credit facility were
$148,000,000 at December 31, 1997. During 1997, the maximum amount outstanding
on the revolving facility amounted to approximately $152,000,000 with an average
balance outstanding of approximately $128,000,000 and an average weighted
interest rate of 5.88%. In addition to the revolving facility, the Company also
uses several lines of credit to manage day-to-day cash flow. The outstanding
amount and total amount available under lines of credit at December 31, 1997 was
$40,000,000. The average balance outstanding on available lines of credit was
approximately $26,000,000 during 1997, with a maximum borrowing of $67,000,000
and an average weighted interest rate of 6.19%.
The Company has the option to solicit money market interest quotes from the
bank group for borrowings under the revolving credit facility. The revolving
credit agreement also provides for borrowing at interest rates based on a
formula that incorporates the use of the London Interbank Offered Rate ("LIBOR")
plus an interest rate margin. A facility fee is charged on the facility based on
the $175,000,000 total commitment. The facility fee and the interest rate margin
for the revolving credit facility are all based upon the ratio of consolidated
debt to cash flow, as defined in the credit agreement.
The credit agreement contains various restrictive covenants typical of a
credit facility of this size and nature. These restrictions primarily pertain to
levels of indebtedness, limitations on payment of dividends, limitations on the
quality and types of investments, and capital expenditures. Additionally, the
Company must also comply with several financial covenant restrictions under the
revolving credit agreement, including defined ratios of consolidated debt to
cash flow, consolidated debt to consolidated total capital, and fixed charges
coverage. As of December 31, 1997, the Company was in compliance with all
covenants under its debt agreement.
In January 1998, the Company entered into a short term loan agreement for
$140,000,000 whereby the Company may borrow any amount up to $140,000,000 to use
for financing the repurchase of shares of common stock of for other general
operating purposes. Any amount borrowed under this agreement will mature and is
payable in full on March 31, 1998.
In February 1998, the Company initiated the process of refinancing its
current credit facility. It is expected that the new facility will be a
committed $300,000,000 revolving facility, with an option to borrow up to an
additional $150,000,000. It is expected that the new facility will mature five
years from the closing date.
The Company has entered into interest rate swap and cap agreements as a means
of managing its interest rate exposure on its floating rate debt. The interest
rate swap effectively fixes the interest rate on $85,000,000 of floating rate
debt as of December 31, 1997 at 5.965% plus the interest rate margin and will
expire in March, 2002. The agreement is a contract to exchange fixed and
floating interest rate payments periodically over the life of the agreement
without the exchange of the underlying notional amounts. The Company will pay
the counterparty interest at 5.965%, and the counterparty will pay the Company
interest at a variable rate based on the 3-month LIBOR rate. The notional
principal amount under the agreement will be reduced by $5,000,000 per quarter.
The interest differential to be paid or received on interest rate swaps is
accrued and included in interest expense for financial reporting purposes. The
agreement is with a major financial institution and the
51
<PAGE> 24
Company's credit exposure is limited to the value of the interest-rate swap that
has, or may become favorable to the Company.
The Company has occasionally entered into interest rate caps in an attempt to
minimize the impact of a potential significant rise in short-term interest rates
on the Company's outstanding floating rate debt. As of December 31, 1997, the
Company had no outstanding caps. The Company is generally required to pay an
up-front fee related to these instruments at inception of the contract, which is
amortized straight-line over the term of each contract.
Interest paid, net of amounts capitalized, amounted to approximately
$13,576,000, $18,102,000, and $14,021,000 in 1997, 1996, and 1995, respectively.
Interest capitalized amounted to $1,071,000, $2,367,000, and $2,303,000 in 1997,
1996, and 1995, respectively.
6. MINORITY INTEREST
On November 13, 1997, the Company announced an agreement to sell Pierce
National Life Insurance Company ("Pierce") to Fortis, Inc. for $180,000,000
cash. The transaction is expected to close in April 1998, subject to regulatory
approvals. The current estimate of the loss on the sale is between $14 million
and $18 million. On December 31, 1997, Fortis purchased 2,660 newly issued
shares of Pierce common stock for $37,160,000 in cash. Subsequent to this stock
purchase, Fortis, Inc. maintained a twenty-one percent ownership interest in the
common stock of Pierce as of December 31, 1997. For financial reporting
purposes, Fortis' interest in Pierce is included in the financial statements as
minority interest.
7. REDEEMABLE PREFERRED STOCK
On February 24, 1994, the Company issued 598,656 shares of Series 1994-B
Voting Cumulative Preferred Stock having a total redemption value of
$22,449,000, or $37.50 per share, in connection with the acquisition of American
Funeral Assurance Company. Additionally, on April 1, 1994, the Company issued
668,207 shares of Series 1994-A Voting Cumulative Preferred Stock having a total
redemption value of $23,387,000, or $35.00 per share, in connection with the
acquisition of State National Capital Corporation. The shares have preference in
liquidation, and each share is entitled to one vote on any matters submitted to
a vote of the shareholders of the Company. In accordance with the financial
reporting requirements of the Securities and Exchange Commission, the preferred
stock has been classified outside of permanent equity as Redeemable Preferred
Stock.
Both the Company and the holders of the preferred stock have the right to
redeem any or all of the shares from time to time beginning five years and one
month after the date of issue in exchange for cash or shares of the Company's
common stock. The Company will determine the form of all redemptions, which will
consist of cash, common stock, or a combination of both. Generally, the amount
of consideration on the 1994-A Series will be equivalent to $35.00 per share
plus the amount of any accumulated and unpaid dividends; and for the 1994-B
Series will be equivalent to $37.50 per share plus the amount of any accumulated
and unpaid dividends. In addition, each share of the 1994-A Series and 1994-B
Series is convertible, at the option of the shareholder, at any time into one
share of the Company's common stock (plus a corresponding attached right to
acquire a share of the Company's Series A Participating Cumulative Preferred
Stock). As of December 31, 1997, 164,039 shares of the 1994-A Series and 72,708
shares of the 1994-B Series have been converted by the shareholders. There is no
sinking fund for the redemption of either series of preferred stock.
Dividends shall be paid on the 1994-A Series at the rate of 6% per annum and
on the 1994-B Series at the rate of 5.6% per annum. Dividends accrue daily, are
cumulative, and are payable quarterly. Both the 1994-A Series and the 1994-B
Series are on a parity in rank with all other series of preferred stock of the
Company whether or not such series exist now or are created in the future, with
respect to payment of all dividends and distributions, unless a series of
preferred stock expressly provides that it is junior or senior to the 1994-A and
1994-B Series. No dividends or distributions on the Company's common stock shall
be declared or paid until all accumulated and unpaid dividends on the 1994-A
Series and 1994-B Series have been declared and set aside for payment.
8. COMMITMENTS AND CONTINGENCIES
In January 1996, a lawsuit was filed by the Company against a software
development company alleging breach of contract in connection with an agreement
to develop a state-of-art software system to administer the Company's insurance
operations. The suit seeks to recover amounts paid to the software developer and
other costs incurred by the Company in the attempt to develop the system. In
1997 the software developer filed a counterclaim against the Company alleging
breach of contract. Management, after consultation with legal counsel, believes
this counterclaim is without merit and is a response to the suit filed by the
Company. The Company intends to contest the counterclaim vigorously. The Company
believes its lawsuit is meritorious; however, no estimated recovery is included
in the accompanying financial statements.
In December 1995, a lawsuit was filed against the Company alleging breach of
contract. The lawsuit relates to a transaction in which the Company was
unsuccessful in acquiring certain entities partially owned by the plaintiff.
Management, after consultation with legal counsel, believes the lawsuit is
without merit and intends to contest the suit vigorously.
The Company and its subsidiaries are also defendants in various lawsuits
arising primarily from claims made under insurance policies. Where applicable,
these lawsuits are considered in establishing the Company's policy liabilities.
It is the opinion of management and legal counsel that the settlement of these
actions will not have a material effect on the financial position or results of
operations of the Company.
In connection with the sale of the Company's business rental property and
business park land development projects during May 1997, the Company has
guaranteed approximately $37 million of debt of the purchaser of the properties.
52
<PAGE> 25
The Company has lease agreements, primarily for branch offices, data
processing and telephone equipment, which expire on various dates through 2007,
none of which are material capital leases. Most of these agreements have
optional renewal provisions covering additional periods of one to ten years. All
leases were made in the ordinary course of business and contain no significant
restrictions or obligations. Future commitments under operating leases are not
material. Annual rental expense amounted to approximately $6,275,000,
$5,601,000, and $5,825,000 in 1997, 1996, and 1995, respectively.
Most states have laws requiring solvent life insurance companies to pay
guaranty fund assessments to protect the interests of policyholders of insolvent
life insurance companies. Due to the recent increase in the number of companies
that are under regulatory supervision, there is expected to be an increase in
assessments by state guaranty funds. Under present law, most assessments can be
recovered through a credit against future premium taxes. The Company has
reviewed its exposure to potential assessments, and the effect on its financial
position and results of operations is not expected to be material.
At December 31, 1997, the Company had commitments for additional investments
and other items totaling $54,061,000.
9. SHAREHOLDERS' EQUITY
On February 28, 1995, the Company issued 599,985 shares of Series 1995-A
Voting Cumulative Convertible Preferred Stock having a total redemption value of
$20,999,475 or $35.00 per share in connection with the acquisition of WLOX-TV.
The shares have preference in liquidation, and each share is entitled to one
vote on any matters submitted to a vote of the shareholders of the Company. Each
share of preferred stock is convertible at the option of the holder into one
share of common stock. The Company has the right to redeem any or all of the
shares from time to time at any time beginning five years and one month after
the date of issue in exchange for cash, common stock, or a combination of both.
Generally, the amount of consideration on the 1995-A Series will be equivalent
to $35.00 per share plus the amount of any accumulated and unpaid dividends.
There is no sinking fund for the redemption of the preferred stock.
Dividends shall be paid on the preferred stock at the rate of 5% per annum.
Dividends accrue daily, are cumulative, and are payable quarterly. The 1995-A
Series preferred stock is on a parity in rank with all other series of preferred
stock of the Company whether or not such series exist now or are created in the
future, with respect to payment of all dividends and distributions, unless a
series of preferred stock expressly provides that it is junior or senior to the
1995-A Series. No dividends or distributions on the Company's common stock shall
be declared or paid until all accumulated and unpaid dividends on the 1995-A
Series have been declared and set aside for payment.
The Company has adopted a Shareholder Rights Plan and declared a dividend of
one preferred stock purchase right for each outstanding share of common stock.
Upon becoming exercisable, each right entitles the holder to purchase for a
price of $150.00 one one-hundredth of a share of Series A Participating
Cumulative Preferred Stock. All of the rights may be redeemed by the Company at
a price of $.01 per right until ten business days (or such later date as the
Board of Directors determines) after the public announcement that a person or
group has acquired beneficial ownership of 20 percent or more of the outstanding
common shares ("Acquiring Person"). Upon existence of an Acquiring Person, the
Company may redeem the rights only with the concurrence of a majority of the
directors not affiliated with the Acquiring Person. The rights, which do not
have voting power and are not entitled to dividends, expire on August 7, 2000.
The rights are not exercisable until ten business days after the public
announcement that a person has become an Acquiring Person or after the
commencement of a tender offer or exchange offer if, upon consummation, such
person or group would become an Acquiring Person. If, after the rights become
exercisable, the Company becomes involved in a merger or certain other major
corporate transactions, each right will entitle its holder, other than the
Acquiring Person, to receive common shares with a deemed market value of twice
such exercise price. There are 10,000,000 shares of preferred stock, no par
value per share authorized for issuance. At December 31, 1997, there were
1,630,101 shares of preferred stock outstanding (see Note 7 for discussion of
Redeemable Preferred Stock), and 140,000 shares of preferred stock were reserved
for issuance in connection with the Shareholder Rights Plan.
Shareholders' equity as determined under generally accepted accounting
principles of the Company's insurance operations was $724,639,000 and
$669,411,000 at December 31, 1997 and 1996, respectively. The comparable amounts
as determined under statutory accounting practices were $212,513,000 and
$183,506,000 at December 31, 1997 and 1996, respectively. The amount that
retained earnings exceed statutory unassigned surplus ($449,817,000) is
restricted and, therefore, not available for dividends. Without regulatory
approval, dividends are generally limited to prior year statutory gain from
operations.
The components of the balance sheet caption unrealized appreciation on fixed
maturity securities available for sale and equity securities in shareholders'
equity as of December 31 are as follows:
<TABLE>
<CAPTION>
(In 000s) 1997 1996
- --------------------------------------------------------------
<S> <C> <C>
Carrying value of securities $1,748,456 $1,593,130
Amortized cost of securities 1,643,579 1,526,644
- --------------------------------------------------------------
Net unrealized appreciation 104,877 66,486
Adjustment to deferred acquisition
costs (8,745) (4,236)
Deferred income taxes (34,617) (22,524)
- --------------------------------------------------------------
Total $ 61,515 $ 39,726
- --------------------------------------------------------------
</TABLE>
On February 10, 1998, the Company announced a stock tender offer whereby the
Company planned to repurchase up to 2,000,000 shares of its common stock
pursuant to a "Dutch Auction" self tender offer. The offer closed on March 11,
1998 and the Company repurchased 2,400,000 shares of its common stock (including
an additional 400,000 shares as a result of exercising its option to purchase an
additional 2% of its outstanding common shares) for $52.00 per share under the
offer.
53
<PAGE> 26
10. STOCK OWNERSHIP AND STOCK OPTION PLANS
The Company has a Performance Incentive Compensation Program (the "Program")
which provides that the Compensation Committee of the Board of Directors may
grant: (a) incentive stock options within the meaning of Section 422 of the
Internal Revenue Code; (b) non-qualified stock options; (c) performance units;
(d) awards of restricted shares of the Company's common stock; (e) awards of
unrestricted shares of the Company's common stock; (f) phantom stock units; (g)
or any combination of the foregoing to outside directors, officers and key
employees. Only common stock, not to exceed 4,300,000 shares, may be delivered
under the Program; and shares so delivered will be made available from the
authorized but unissued shares or from shares reacquired by the Company,
including shares purchased in the open market. The aggregate number of shares
that may be acquired by any participant in the Program is limited to a maximum
of 400,000 stock options during a single calendar year and a maximum of 100,000
shares of other stock-based awards during a single calendar year. As of December
31, 1997, 90 outside directors, officers and employees were participants in the
Program.
Restricted shares awarded to participants under the Program generally vest in
equal annual installments, generally over the five-year period commencing on the
date the shares are awarded. Vesting of restricted shares may be contingent on
the achievement of certain performance goals as established by the Compensation
Committee at the time of the grant. Non-vested shares may not be assigned,
transferred, pledged or otherwise encumbered or disposed of. During the
applicable restriction period, the Company retains possession of the
certificates for the restricted shares with executed stock powers attached.
Participants are entitled to dividends and voting rights with respect to the
restricted shares.
Stock options under the Program are issued at at least 100% of the market
price on the date of grant, are vested over such period of time, which may not
be less than one year, as may be established by the Compensation Committee, and
expire no more than ten years after the grant. Of the incentive stock options
outstanding, 25,500 were exercisable at December 31, 1996; and 51,165 were
exercisable at December 31, 1995. Of the non-qualified options outstanding,
349,609 were exercisable at December 31, 1997; 323,900 were exercisable at
December 31, 1996; and 290,480 were exercisable at December 31, 1995. The
options expire on various dates beginning July 1, 1998, and ending July 2, 2007.
The Company has adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). In accordance with the
provisions of SFAS 123, the Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related interpretations in accounting for its plans and does not recognize
compensation expense for its stock-based compensation plans other than for
awards of restricted shares. Expense is recognized over the vesting period of
the restricted shares, and totaled $2,330,000, $2,143,000, and $1,714,000 for
the years ended December 31, 1997, 1996 and 1995, respectively. Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of the grant, no compensation
expense is recognized. Pro forma information regarding net income and earnings
per share is required by SFAS 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted average
assumptions for 1997, 1996 and 1995, respectively: risk free interest rates of
6.3%, 6.6% and 6.2%; dividend yields of 2%; volatility factors of the expected
market price of the Company's common stock of .16 for each period; and a
weighted average expected life of 7 years for each period. The weighted average
fair value of options granted for the three years ending December 31, 1997, 1996
and 1995, respectively was $10.65, $8.39 and $6.73.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
For purposes of pro forma disclosures the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information is as follows:
<TABLE>
<CAPTION>
IN $000S, EXCEPT PER SHARE AMOUNTS 1997 1996 1995
- --------------------------------------------------------------------
<S> <C> <C> <C>
Net Income:
As Reported $74,951 $37,340 $59,353
Pro forma $74,554 $37,201 $59,309
Basic Earnings per Share:
As Reported $ 3.50 $ 1.67 $ 2.80
Pro forma $ 3.48 $ 1.66 $ 2.80
Diluted Earnings per Share:
As Reported $ 3.34 $ 1.66 $ 2.72
Pro forma $ 3.32 $ 1.65 $ 2.72
</TABLE>
54
<PAGE> 27
Because SFAS 123 is applicable only to options granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1999.
The following schedule summarizes activity in the Program during the three
years ending December 31, 1997.
<TABLE>
<CAPTION>
Restricted Shares Incentive Stock Options Non-Qualified Stock Options
- -------------------------------------------------------------------------------------------------------------------------
Number of Market Price Number of Average Number of Average
Shares at Date Given Options Exercise Price Options Exercise Price
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding 1/1/95 262,634 81,465 $18.31 540,600 $23.97
Awarded 108,915 26.35 --- 56,500 26.80
Vested (80,679) 24.98
Exercised (30,300) 17.98 (37,900) 21.20
Forfeited (15,826) 26.84 --- (46,000) 23.37
- -------------------------------------------------------------------------------------------------------------------------
Outstanding 12/31/95 275,044 51,165 $18.50 513,200 $24.54
Awarded 109,375 32.09 --- 129,945 32.97
Vested (83,564) 25.51
Exercised (25,665) 18.50 (37,800) 21.81
Forfeited (9,600) 25.86 --- (9,100) 23.20
- -------------------------------------------------------------------------------------------------------------------------
Outstanding 12/31/96 291,255 25,500 $18.50 596,245 $26.52
Awarded 209,340 40.63 340,600 40.63
Vested (66,399) 28.18
Exercised (25,500) 18.50 (78,900) 25.03
Forfeited (90,223) 27.39 (15,135) 30.24
- -------------------------------------------------------------------------------------------------------------------------
Outstanding 12/31/97 343,973 --- --- 842,810 $32.29
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable stock options:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIVE EXERCISE PRICE NUMBER EXERCISABLE EXERCOSE PRICE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$16.25-$26.00 316,500 4.3 years $23.73 262,180 $23.29
$29.38-$40.63 526,310 8.7 37.44 87,429 31.20
- -------------------------------------------------------------------------------------------------------------------------
842,810 7.1 $32.29 349,609 $25.27
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1997, there were 1,239,244 shares of the Company's stock
reserved for future grants under the Program.
55
<PAGE> 28
11. EARNINGS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"). SFAS 128 replaces Accounting Principles Board
Opinion No. 15, "Earnings Per Share" ("APB 15") and requires disclosure of basic
earnings per share and diluted earnings per share. Basic earnings per share
excludes all potentially dilutive securities from the calculation and is
calculated by dividing net income available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. The diluted earnings per share computation is computed
similarly to the fully diluted earnings per share calculation under APB 15. The
following tables reconcile the numerators and denominators for the basic and
diluted earnings per share calculations for the years ended December 31, 1997,
1996 and 1995:
<TABLE>
<CAPTION>
($000s) For the year ended 1997
Per-
Income Shares Share
(Numerator) (Denominator) Amount
----------------------------------
<S> <C> <C> <C>
Net income $74,951
Less: Preferred stock (3,583)
dividends
-----------
BASIC EPS
Income available to common
shareholders 71,368 20,406 $3.50
=======
Effect of Dilutive
Securities:
Stock Options --- 220
Redeemable preferred stock 2,535 1,208
Convertible preferred stock 1,048 600
---------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $74,951 22,434 $3.34
==================================
</TABLE>
<TABLE>
<CAPTION>
($000s) For the year ended 1996
Per-
Income Shares Share
(Numerator) (Denominator) Amount
----------------------------------
<S> <C> <C> <C>
Net income $37,340
Less: Preferred stock (3,700)
dividends
----------------------------------
BASIC EPS
Income available to common
shareholders 33,640 20,150 $1.67
=======
Effect of Dilutive
Securities:
Stock Options --- 153
Redeemable preferred stock --- ---
Convertible preferred stock --- ---
----------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $33,640 20,303 $1.66
==================================
</TABLE>
<TABLE>
<CAPTION>
For the year ended 1995
($000s)
Per-
Income Shares Share
(Numerator) (Denominator) Amount
----------------------------------
<S> <C> <C> <C>
Net income $59,353
Less: Preferred stock (3,531)
dividends
-----------
BASIC EPS
Income available to common
shareholders 55,822 19,951 $2.80
=======
Effect of Dilutive
Securities:
Stock Options --- 119
Redeemable preferred stock 2,658 1,265
Convertible preferred stock 873 502
--------------------
DILUTED EPS
Income available to common
shareholders plus assumed
conversions $59,353 21,837 $2.72
=================================
</TABLE>
In March, 1998, the Company completed a tender offer program whereby it
repurchased 2,400,000 shares of the outstanding common stock of the Company. The
impact of this transaction if it had occurred prior to December 31, 1997, would
be to reduce the number of shares outstanding and increase the earnings per
share for the year ended December 31, 1997.
56
<PAGE> 29
12. EMPLOYEE BENEFITS
The Company has several postretirement plans that provide medical and life
insurance benefits for qualified retired employees. The postretirement medical
plans are generally contributory with retiree contributions adjusted annually to
limit employer contributions to predetermined amounts. The postretirement life
plans provide free insurance coverage up to a maximum of $5,000 for retirees
prior to January 1, 1993, of the Company with the exception of Cosmos, whose
retirees are insured with an outside company.
Net periodic postretirement benefit cost was $1,378,000, $1,494,000, and
$1,506,000 for the years ended December 31, 1997, 1996, and 1995, respectively,
and included the following components:
<TABLE>
<CAPTION>
- --------------------------------------------------------------
(In $000s) 1997 1996 1995
- --------------------------------------------------------------
Medical Life Medical Life Medical Life
- --------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service $ 143 $ -- $ 162 $ $ 140 $ --
cost --
Interest 936 299 1,042 290 1,082 284
cost
- --------------------------------------------------------------
Net
periodic
postretire-
ment
benefit $1,079 $299 $1,204 $290 $1,222 $284
cost
- --------------------------------------------------------------
</TABLE>
The following schedule reconciles the status of the Company's plans with the
unfunded postretirement benefit obligation included in its balance sheets at
December 31:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------
(In $000s) Medical Life Medical Life
- --------------------------------------------------------------
<S> <C> <C> <C> <C>
Retirees $12,052 $4,221 $11,374 $4,121
Fully eligible
active plan 820 60 802 ---
participants
Other active plan
participants 928 57 936 ---
- --------------------------------------------------------------
Accumulated
postretirement
benefit 13,800 4,338 13,112 4,121
obligation
Unrecognized net
gain (loss) 712 (471) 1,657 (347)
- --------------------------------------------------------------
Accrued
postretirement
benefit $14,512 $3,867 $14,769 $3,774
obligation
- --------------------------------------------------------------
</TABLE>
At December 31, 1997, the weighted-average annual assumed rate of increase in
the per capita cost of covered medical benefits is 8.5% for 1998, and is assumed
to decrease to 8% in 1999, then decrease 1% per year to 5.5% in 2002 and
thereafter. At December 31, 1996, the health care cost trend rate assumption was
9.0% for 1997 and the rate graded down by 0.5% per year to 8% in 1999, then
decreased 1% per year to 5.5% in 2002 and thereafter. A 1% increase in the per
capita cost of health care benefits results in a $929,000 increase in the
accrued postretirement benefit obligation and an $85,000 increase in
postretirement benefit expense. The assumed weighted average discount rate used
in determining the accrued postretirement medical and life benefit obligation
was 7.5% at both December 31, 1997 and 1996.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". This standard revises the
disclosure requirements currently required by adding certain required
disclosures and eliminating others. This standard is effective for fiscal years
beginning after December 15, 1997 and is not expected to significantly change
the disclosures made by the Company.
The Company has a retirement and savings plan for substantially all of its
employees. The plan has features of both a profit sharing plan and a voluntary
Thrift Plan qualified under Section 401(k) of the Internal Revenue Code. The
profit sharing component of the Plan allows for contributions to be made to the
Plan at the discretion of the Board of Directors. Contributions for this
component of the Plan were $4,853,000, $4,959,000, and $5,067,000 in 1997, 1996,
and 1995, respectively. The 401(k) component of the Plan allows employees to
contribute to the Plan and the Company will make a matching contribution of up
to 3% of the employees compensation. The Company's matching contribution
percentage may be changed at the discretion of each participating subsidiary's
Board of Directors. The Company's contributions for this component of the Plan
were $2,379,000, $2,218,000, and $2,102,000 in 1997, 1996, and 1995,
respectively.
57
<PAGE> 30
13. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
(In 000s) 1997 1996 1995
- ----------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $34,595 $25,717 $21,761
State and local 418 2,347 1,456
- ---------------------------------------------------------
Total current 35,013 28,064 23,217
Deferred:
Federal 1,923 (8,460) 6,226
State and local (310) (445) (1)
- ---------------------------------------------------------
Total deferred 1,613 (8,905) 6,225
- ---------------------------------------------------------
Total tax provision 36,626 $19,159 $29,442
- ---------------------------------------------------------
</TABLE>
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax liabilities and assets as of December 31, 1997 and
1996, are as follows:
<TABLE>
<CAPTION>
(In 000s) 1997 1996
- ----------------------------------------------------------
<S> <C> <C>
Insurance operations deferred tax
liabilities:
Deferred acquisition costs $ 84,862 $ 86,469
Policy liabilities 20,325 22,177
Market discount on investments 11,476 11,869
Tax over book partnership losses 1,118 1,249
Unrealized investment gains
recognized in equity 34,617 22,524
Non-insurance companies deferred
tax liabilities:
Book over tax basis in acquired
television station 13,884 19,973
Book over tax basis in
investment property transferred to 5,310 ---
partnership
Unrealized investment gains
recognized in equity 1,517 ---
Tax over book depreciation 5,161 7,024
Tax over book amortization 3,593 4,086
Other 1,953 ---
- ----------------------------------------------------------
Total deferred tax liabilities 183,816 175,371
- ----------------------------------------------------------
Insurance operations deferred
tax assets:
Employee benefit accruals 6,048 6,128
Other --- 597
Non-insurance companies deferred
tax assets:
Net operating loss carryover 358 358
Book over tax partnership losses 3,848 2,838
Other --- 2,311
- ----------------------------------------------------------
Total deferred tax assets 10,254 12,232
- ----------------------------------------------------------
Net deferred tax liability $ 173,562 $163,139
- ----------------------------------------------------------
</TABLE>
At December 31, 1997 and 1996, the Company had unrealized gains from securities
classified as available for sale and equity securities of $104,877,000 and
$66,486,000, respectively, for which a deferred tax liability has been
established.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
<TABLE>
<CAPTION>
(In 000s) 1997 1996 1995
- -----------------------------------------------------------
<S> <C> <C> <C>
Federal income tax rate 35% 35% 35%
Rate applied to pre-tax
income $39,052 $19,775 $31,078
Tax exempt interest and
dividends (1,036) (1,166) (1,384)
State and local income
taxes 248 1,233 948
Other (1,638) (683) (1,200)
- -----------------------------------------------------------
Provision for income taxes $36,626 $19,159 $29,442
- -----------------------------------------------------------
</TABLE>
The Company has net operating loss carryforwards of $1,023,000 at December 31,
1997 and 1996, which will expire between the years 2006 and 2009. The
utilization of these carryforwards are subject to special rules which provide
that these loss carryforwards can only be utilized through earnings from the
non-life insurance companies.
Income taxes paid were approximately $35,644,000, $30,047,000, and $21,199,000
in 1997, 1996, and 1995, respectively.
Under prior tax law, a portion of the life insurance subsidiaries' earnings was
not taxed when earned. Such accumulated income ("policyholders' surplus")
amounts to approximately $65,293,000 at December 31, 1983 and, under the Tax
Reform Act of 1984, was frozen at that amount. That amount is not taxable unless
it is distributed to the Company or unless it exceeds certain limitations under
the Internal Revenue Code. The Company does not intend to take actions nor does
it expect any events to occur that would cause tax to be payable on
policyholders' surplus; therefore, no income tax provision on that amount has
been made in the accompanying financial statements. However, if such taxes were
assessed, the amount of the taxes payable would be approximately $22,853,000.
58
<PAGE> 31
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations for each of the years ended December 31, 1997
and 1996, are as follows:
<TABLE>
<CAPTION>
Quarter Ended
- ----------------------------------------------------------------------------------------------------------------------
1997 (In 000s except per share amounts) March 31 June 30 Sept. 30 Dec. 31
- ----------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Revenues $159,917 $170,454 $166,684 $163,201
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 24,122 $ 31,850 $ 0,994 $ 24,611
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 15,867 $ 20,398 $ 20,229 $ 18,457
- ----------------------------------------------------------------------------------------------------------------------
Basic Earnings per common share $ 0.74 $ 0.96 $ 0.94 $ 0.86
- ----------------------------------------------------------------------------------------------------------------------
Diluted Earnings per common share $ 0.71 $ 0.92 $ 0.90 $ 0.81
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
- ----------------------------------------------------------------------------------------------------------------------
1996 (In 000s except per share amounts) March 31 June 30 Sept. 30 Dec. 31
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $146,708 $152,352 $156,469 $163,568
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 20,660 $ 24,465 $(16,231) $ 27,605
- ----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 14,055 $ 16,300 $(10,820) $ 17,805
- ----------------------------------------------------------------------------------------------------------------------
Basic Earnings (loss) per common share $ 0.65 $ 0.76 $ (0.58) $ 0.84
- ----------------------------------------------------------------------------------------------------------------------
Diluted Earnings (loss) per common share $ 0.64 $ 0.74 $ (0.58) $ 0.80
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
During the third quarter of 1996, and concurrent with a realignment of the
Company's management structure, the Company completed a detailed study of its
insurance product lines, including products currently being marketed as well as
those previously sold by the Company's subsidiaries (including recently acquired
companies). This study identified several specific products, marketing programs,
underwriting and service methods that were inconsistent with the Company's
current strategies and profit objectives. Based on this analysis, the Company
took a $26.9 million after-tax charge, which principally represented the
write-off of deferred acquisition costs where recovery was no longer assured due
to actual experience on these products being worse than originally assumed. In
addition to the product-related charges, the Company wrote-off previously
deferred costs associated with acquiring and modifying an administrative system
for the Company's pre-need business. With the realignment previously mentioned,
a decision was made to move to a new administrative platform for pre-need. All
of the charges represented non-cash items, and had no material impact on the
insurance companies' statutory financial condition.
15. STATUTORY RESULTS OF OPERATIONS
Statutory net income of the Insurance Group for each of the years ended
December 31, 1997, 1996, and 1995 was $53.0 million, $42.8 million, and $32.4
million, respectively.
16. ACQUISITIONS
In February 1995, the Company completed the acquisition of WLOX television
located in Biloxi, Mississippi. WLOX-TV is affiliated with the ABC television
network. This acquisition was accounted for as a purchase, and the results of
operations of WLOX have been included in the accompanying consolidated financial
statements since the date of acquisition. The purchase price of $40.1 million
was funded through a combination of proceeds from the Company's credit facility
totaling $5.6 million, a new class of convertible preferred stock totaling $21.0
million (see Note 9), and notes payable totaling $13.5 million.
59
<PAGE> 32
17. FAIR VALUES OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments"
requires the disclosure of the estimated fair value of all financial
instruments, including both assets and liabilities unless specifically exempted.
The following methods were used to estimate the fair values of the Company's
financial instruments.
- - Cash and short-term investments: The carrying amounts reported in the
balance sheet for these instruments approximate their fair values.
- - Investment securities: Fair values for fixed maturity securities are based
on quoted market prices, where available. For fixed maturity securities not
actively traded, fair values are estimated using values obtained from
independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market
rate applicable to the yield, credit quality, and maturity of the
investments. The fair values for equity securities are based on quoted
market prices.
- - Mortgage loans and policy loans: The fair values for mortgage loans and
policy loans are estimated using discounted cash flow analyses, using
interest rates currently being offered for similar loans to borrowers with
similar credit ratings. Loans with similar characteristics are aggregated
for purposes of the calculations.
- - Other long-term investments: Other long-term investments consist primarily
of venture capital investments and investments in oil and gas producing
property. The Company determined that it was not practicable to estimate the
fair values of its venture capital investments because of a lack of primary
and secondary market prices and the inability to estimate fair values
without incurring excessive costs. The Company's investment in venture
capital totaled $18,924,000 and $20,376,000 at December 31, 1997 and 1996,
respectively.
- - Policy liabilities: Fair values for the Company's liabilities under
investment-type insurance contracts that are not subject to policyholder
mortality or morbidity risk are estimated using discounted cash flow
calculations, based on interest rates currently being offered for similar
contracts with remaining maturities consistent with those for the contracts
being valued.
- - Short and long-term debt: Substantially all of the Company's short and
long-term debt is floating rate debt. Accordingly, the carrying amount
approximates its fair value.
- - Other liabilities: Fair values on film contract obligations related to the
Company's broadcasting operations were determined by discounting future cash
flows using current fixed borrowing rates for similar types of borrowing
arrangements.
- - Interest Rate Swap: Fair value of the interest rate swap is based on an
estimate provided by the financial institution which is the counterparty to
the swap, and was determined by discounting the value of estimated future
cash flows.
60
<PAGE> 33
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
- --------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
(in 000s) Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturity securities available for sale $1,673,888 $1,673,888 $1,517,539 $1,517,539
Equity securities 74,568 74,568 75,591 75,591
Mortgage loans 244,821 250,889 230,910 230,166
Policy loans 100,322 97,960 98,816 94,451
Other long-term investments 18,459 18,459 22,470 22,470
Short-term investments and cash 62,036 62,036 37,024 37,024
Interest rate swap --- --- --- 505
LIABILITIES
Investment-type insurance contracts 79,317 75,450 76,573 72,437
Notes, mortgages and other debt 191,914 191,914 147,861 147,861
Long-term debt --- --- 100,000 100,000
Film contract obligations included in other liabilities 9,738 8,765 8,154 7,382
Interest rate swap --- 87 --- ---
</TABLE>
SFAS No. 107 excludes insurance contract liabilities, except for
investment-type contracts, from the definition of financial instruments.
However, the fair value of the liabilities under all insurance contracts is
taken into consideration in the overall management of interest rate risk.
Because of the exclusion of the majority of the Company's insurance contracts as
well as other non-financial assets and liabilities from fair value disclosure,
care should be taken in deriving conclusions about the Company's financial
position based on the fair value information presented above.
18. BUSINESS SEGMENT INFORMATION
The Company is actively engaged through its subsidiaries in two major
business segments: insurance and broadcasting. Sales between the various
subsidiaries of the Company are not material and are eliminated. Information for
these segments is contained in the Selected Financial Data on page 27 and, with
respect to the years 1995 through 1997, is incorporated by reference.
61
<PAGE> 34
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
The consolidated financial statements included in this Annual Report
have been prepared by management which is responsible for the integrity and fair
presentation of the financial data and related disclosures. The consolidated
financial statements are in accordance with generally accepted accounting
principles and necessarily include amounts that are based on management's
estimates and assumptions. Management believes that the consolidated financial
statements fairly reflect the Company's financial position and results of
operations.
To gather and control financial data, the Company maintains accounting
systems supported by internal controls that provide reasonable assurance over
the preparation of reliable financial statements. Management believes that a
high level of internal control is maintained by the selection and training of
qualified personnel, by the establishment and communication of accounting and
business policies, and by internal audits.
Ernst & Young LLP, independent auditors, are engaged to audit and to
render an opinion as to whether the Company's financial statements, considered
in the entirety, present the Company's financial condition and operating results
fairly. Their audit is conducted in accordance with generally accepted auditing
standards, and their report is included on this page.
The Audit Committee of the Board of Directors, composed of four outside
directors, reviews the Company's accounting and auditing policies and meets
regularly with the Company's internal audit staff and the independent auditors.
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
THE LIBERTY CORPORATION
We have audited the accompanying consolidated balance sheets of The
Liberty Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
The Liberty Corporation and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Greenville, South Carolina
February 6, 1998
62
<PAGE> 1
Exhibit 21
THE LIBERTY CORPORATION AND SUBSIDIARIES
LIST OF SUBSIDIARIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Jurisdiction of Percentage of Voting Stock
Incorporation Owned by Immediate Parent
----------------------------- -----------------------------
<S> <C> <C>
A. The Liberty Corporation S.C.
B. Liberty Life Insurance Company S.C. 100
C. Park Avenue Associates, Inc. S.C. 100
C. Exchange Place Corporation N.C. 100
C. Greensboro Holdings, Inc. S.C. 100
C. State National Fire Insurance Company Louisiana 100
C. State National Title Guaranty Company Louisiana 100
C. State National Mortgage Corporation Louisiana 100
B. Liberty Insurance Services Corporation S.C. 100
B. Pierce National Life Insurance Co. California 79
B. Cosmos Broadcasting Corporation S.C. 100
C. CableVantage Inc. S.C. 100
D. Special Services Corporation S.C. 100
D. Hampton Insurance Agency, Inc. S.C. 100
D. The Liberty Marketing Corporation S.C. 100
D. Bent Tree Corporation Georgia 100
D. TLC Business Ventures, Inc. S.C. 100
D. LC Insurance Limited Bermuda 100
D. Liberty Investment Group, Inc. S.C. 100
D. Liberty Capital Advisors, Inc. S.C. 100
D. Liberty Properties Group, Inc. S.C. 100
D. LPG Development Corporation S.C. 100
D. SouthChase Development Corporation S.C. 100
D. LIBCO of Florida, Inc. Florida 100
D. LPC of S. C., Inc. S.C. 100
D. Johnson/Liberty LLC S.C. 22
D. Commerce Center of Greenville, Inc. S.C. 100
</TABLE>
A. Separate condensed financial statements filed as a schedule to the
consolidated financial statements. Also included in the consolidated
financial statements.
B. Separate financial statements not filed. Included in the consolidated
financial statements.
C. Consolidated with the applicable parent.
D. Minor subsidiaries. Included in the condensed financial statements of The
Liberty Corporation.
63
<PAGE> 1
Exhibit 23
Consent of Independent Auditors
We consent to the incorporation by reference and the inclusion herein in this
Annual Report (Form 10-K) of The Liberty Corporation of our report dated
February 6, 1998, included in the 1997 Annual Report to Shareholders of The
Liberty Corporation and included in Form 10-K in Exhibit 13.
Our audits also included the financial statement schedules of The Liberty
Corporation listed in Item 14(a). These schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedules referred to above,
when considered in relation to the basic financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-34314) pertaining to the 1983 Performance Incentive
Compensation Program, in the Registration Statement (Form S-8 No. 33-34816)
pertaining to The Liberty Corporation and Adopting Related Employers' 401(k)
Thrift Plan, in the Registration Statement (Form S-8 No. 33-34814) pertaining to
The Cosmos Broadcasting Corporation Profit Sharing Retirement Plan and Trust, in
the Registration Statement (Form S-8 No. 33-34815) pertaining to The Liberty
Corporation Profit Sharing Plan and Trust, in the Registration Statement (Form
S-8 No. 333-22591) pertaining to The Cosmos Broadcasting Corporation Retirement
and Savings Plan, and in the Registration Statement (Form S-8 No. 333-22285)
pertaining to The Liberty Corporation Retirement and Savings Plan, and in the
Registration Statement (Form S-8 No. 333-30151) pertaining to The Performance
Incentive Compensation Program of our report dated February 6, 1998 with respect
to the consolidated financial statements and schedules of The Liberty
Corporation included and incorporated by reference in the annual report on Form
10-K for the year ended December 31, 1997.
/s/ Ernst & Young LLP
Greenville, South Carolina
March 24, 1998
64
<PAGE> 1
Exhibit 24
SPECIAL POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that I, William B. Timmerman, Director
of The Liberty Corporation, do hereby appoint Martha G. Williams and R. David
Black, or either of them, Special Attorney for me and in my name and on my
behalf to sign the Annual Report on Form 10-K and any amendments thereto for The
Liberty Corporation to be filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, for each fiscal year ended December
31, and generally to do and to perform all things necessary to be done in the
premises as fully and effectually in all respects as I could do if personally
present.
IN WITNESS WHEREOF, I have hereunto set my hand and seal this 6th day
of May, 1997.
/s/ William B. Timmerman
------------------------
William B. Timmerman
Director, The Liberty Corporation
A South Carolina Corporation
65
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<FISCAL-YEAR-END> DEC-31-1997
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