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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 1-5846
THE LIBERTY CORPORATION
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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
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class 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
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to the
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of March 15, 1999:
Common Stock, No Par Value $989,371,471
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The number of shares outstanding of each of Registrant's classes of common
stock as of March 15, 1999:
Common Stock, No Par Value 18,733,661
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DOCUMENTS INCORPORATED BY REFERENCE
Portions of The Liberty Corporation Annual Report to Shareholders for the
year ended December 31, 1998 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 4, 1999 are incorporated into Part III, Items 10, 11, 12,
and 13 by reference.
This report is comprised of pages 1 through 76. The exhibit index is on page
30.
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PART I
ITEM 1. BUSINESS
GENERAL
The Registrant, The Liberty Corporation ("Liberty" or "the Company") is a
holding company incorporated under the laws of the state of South Carolina with
broad powers to engage in business. Currently the Company's subsidiaries are
operating in the television broadcasting, life insurance, and life insurance
policy administration businesses. The Company's principal executive offices are
in Greenville, South Carolina.
The Company's broadcasting subsidiary, Cosmos Broadcasting Corporation,
("Cosmos") consists of eleven network affiliated stations principally located in
the Southeast and Midwest, and a cable advertising company. The Company markets
insurance products through Liberty Life Insurance Company ("Liberty Life"),
which was founded in 1905. Additionally, Liberty is one of the nation's largest
life insurance third-party administrators, providing administrative services for
4.4 million policies through Liberty Insurance Services Corporation ("LIS").
Additional information concerning Liberty's subsidiaries and divisions is
included in "Management's Discussion and Analysis" in the Company's 1998 Annual
Report to Shareholders, which is incorporated herein by reference.
RECENT DEVELOPMENTS
On February 2, 1999, the Company announced that it was considering a
variety of restructuring alternatives that would more actively support the
business objectives of its operating subsidiaries and enhance value for
shareholders. While no decisions have been reached, options are being explored
that could potentially lead to a spin-off of one of the businesses, a joint
venture with another company or other possibilities.
During 1998, the Company completed the acquisition of three television
stations. In July 1998, the Company completed the acquisition of WALB
television, a NBC affiliate, located in Albany, Georgia for a cash purchase
price of $78.6 million. In November 1998, the Company completed the acquisition
of KGBT television, a CBS affiliate, located in Harlingen, Texas for a cash
purchase price of $42.9 million. In December 1998, the Company completed the
acquisition of WWAY television, an ABC affiliate, located in Wilmington, North
Carolina for a cash purchase price of $35.4 million. Funds for the acquisitions
were obtained from the Company's credit facility.
On April 8, 1998, the Company completed the sale of Pierce National Life
Insurance Company ("Pierce") to Fortis, Inc. The Company received cash totaling
approximately $139 million at closing. On December 31, 1997, Fortis, Inc. had
purchased 2,660 newly issued shares of Pierce common stock for $37.2 million in
cash. Subsequent to this stock purchase, Fortis, Inc. maintained a twenty-one
percent ownership interest in the common stock of Pierce through the completion
of the sale. LIS continues to administer the Pierce block of business and also
began to provide similar administrative services to another subsidiary of
Fortis, Inc. during 1998.
In March 1998, the Company completed a tender offer program to repurchased
2,400,000 shares of its common stock at $52 per share. In addition, the Company
repurchased 138,000 shares in the open market during 1998. The stock repurchases
were funded with borrowings from Company's credit facility.
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.
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TELEVISIONS BROADCASTING AND RELATED OPERATIONS
The following table shows data on the stations owned by Cosmos.
<TABLE>
<CAPTION>
Percentage Date
Network of U.S. formed
Market Network Contract Station television or
Market Station Rank(1) Channel Affiliation Expiration(2) Rank(3) households(4) acquired
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Louisville, KY WAVE-TV 48 3 NBC 2004 2 0.58% 1981
Toledo, OH WTOL-TV 66 11 CBS 1999 1 0.41 1965
Columbia, SC WIS-TV 86 10 NBC 2004 1 0.32 1953
Evansville, IN WFIE-TV 96 14 NBC 2004 1 0.28 1981
Harlingen, TX KGBT-TV 102 4 CBS 1999 3 0.25 1998
Montgomery, AL WSFA-TV 113 12 NBC 2004 1 0.23 1959
Albany, GA WALB-TV 148 10 NBC 2002 1 0.14 1998
Wilmington, NC WWAY-TV 152 3 ABC 2005 2 0.14 1998
Biloxi, MS WLOX-TV 158 13 ABC 2004 1 0.12 1995
Jonesboro, AK KAIT-TV 178 8 ABC 2004 1 0.08 1986
Lake Charles, LA KPLC-TV 179 7 NBC 2004 1 0.08 1986
</TABLE>
(1) Market rank is based on the relative size of the designated market areas
("DMAs") among the 211 generally recognized DMAs in the U.S., based on A.C.
Nielsen Co. ("Nielsen") estimates for the 1998-99 season.
(2) Contracts may be subject to renewal provisions that effectively extend the
expiration date.
(3) Station rank in its market area based on Nielsen November 1998 ratings
(from sign on to sign off)
(4) Based on Nielsen estimates for the 1998-99 season
NETWORK AFFILIATIONS. Each Cosmos station is affiliated with a major
network. The affiliation contracts provide that the network will offer to the
affiliated station a variety of network programs, for which the station has the
right of first refusal against any other television station located in its
community. The network typically retains the rights to sell a substantial
majority of the advertising time during such broadcasts. For airing network
programming the network pays the stations according to terms in its network
affiliation contract. The major networks typically provide programming for
approximately 90 hours of the average 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 over thirty
years.
Each network has the right to terminate its affiliation agreement in the
event of a material breach of such agreement by a station and in certain other
circumstances. Although Cosmos does not expect that its network affiliation
agreements will be terminated and expects to continue to be able to renew its
network affiliation agreements, no assurance can be given that such agreements
will not be terminated or that renewals will be obtained on as favorable terms
or at all.
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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, 1998:
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1998 1997 1996
Local and regional advertising 56% 62% 60%
National spot advertising 28 29 26
Network compensation 7 8 8
Political advertising 9 1 6
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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 the amount paid by the network to its affiliated
stations for broadcasting network programs. Political advertising is generated
by national and local elections, which can vary greatly from both market to
market and year to year.
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 those homes is based on the 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. Because television stations rely on advertising revenues, they are
sensitive to cyclical changes in the national and local economy. The size of
advertisers' budgets, which are affected by broad economic trends, affect the
broadcast industry in general. The strength of the local economy in each
station's market also significantly impacts revenues. The advertising revenues
of the stations are generally highest in the second and fourth quarters of each
year, due in part to increases in consumer advertising in the spring and retail
advertising in the period leading up to and including the holiday season.
Additionally, advertising revenues in even-numbered years can benefit from
demand for advertising time in Olympic broadcasts and advertising placed by
candidates for political offices. A station's local market strength is the
primary factor that buyers use when placing political advertising. From time to
time, proposals have been advanced in Congress to require television broadcast
stations to provide some advertising time to political candidates at no charge,
which would potentially reduce advertising revenues from political candidates.
Cosmos also has ancillary operations in cable advertising sales and a video
production company. Revenues from these operations amount to $10.4 million, $7.5
million and $6.3 million for calendar years 1998, 1997 and 1996, respectively.
The cable advertising sales are generated by CableVantage Inc., a marketing
company designed to assist local cable operators in the sale of commercial time
available in cable network programs. CableVantage was formed in 1994 to create
business opportunities with cable operators and build revenues from programs and
services specifically produced for cable.
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.
The stations compete for television viewers against other local network
affiliated and independent stations, as well as against cable and alternate
methods of television transmission. The primary basis of this competition is
program popularity. A majority of daily programming is supplied by the network
with which each station is affiliated. In time periods in which the network
provides programming, stations are primarily dependent upon the performance of
the network programs in attracting viewers. Stations compete in non-network time
periods based on the performance of its programming during such time periods,
using a combination of self-produced news, public affairs and other
entertainment programming, including
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syndicated programs, that the station believes will be attractive to viewers.
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 advertisers. Cosmos' commitment to local news programming
is an important element in maintaining Cosmos' current market positions.
The competition includes 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. Other
sources of competition include home entertainment systems (including video
cassette recorder and playback systems, videodiscs and television game devices),
the Internet, multichannel multipoint distribution systems, wireless cable,
satellite master antenna television systems and some low power in-home satellite
services. Stations also face competition from high-powered direct broadcast
satellite services, such as PrimeStar and DIRECTV, which transmit programming
directly to homes equipped with special receiving antennas. Stations compete
with these services both on the basis of service and product performance
(quality of reception and number of channels that may be offered) and price (the
relative cost to utilize these systems compared to broadcast television
viewing).
Further advances in technology may increase competition for household
audiences and advertisers. Video compression techniques, now in use with direct
broadcast satellites and in development for cable and wireless cable, are
expected to permit greater numbers of channels to be carried within existing
bandwidth. These technological developments, which are applicable to all video
delivery systems including over-the-air broadcasting, have the potential to
allow additional programming to highly targeted audiences. The ability to reach
narrowly defined audiences may further fragment viewers and influence
advertising spending. The television broadcasting industry is continually faced
with such technological change and innovation. Cosmos is unable to predict the
effect that technological changes will have on the broadcast television industry
in general, or more specifically to its own operations.
DIGITAL TELEVISION. Digital television is expected to be 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 (1) much of the technology and hardware is
newly developed and many operators may be inclined to postpone the conversions
as long as possible to allow refinement of this new technology, and (2) the
purchase of television sets required to view the digital signal is currently
cost prohibitive for most viewers. Cosmos is currently assessing the impact of
the conversion to digital television and plans to integrate as much of its
required 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 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
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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. To date the loosening of the ownership provisions, as well as the
other provisions included in the 1996 Act, have not had any significant direct
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 cable systems, application and reporting procedures and
other areas affecting the business and operations of television stations.
EMPLOYEES As of December 31, 1998 Cosmos has 1,130 full-time employees and
143 part-time employees, with approximately 63 represented by either the
American Federation of Radio and Television Artists or the International
Brotherhood of Electrical Workers. Historically Cosmos has not experienced any
labor problems and believes it has good relationships with its employees.
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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. In 1998, the
largest percentages of its premium income were from South Carolina (23%), North
Carolina (18%), Louisiana (8%), Texas (6%) and California (6%). The Company
believes that Liberty Life's Agency division is the largest provider of home
service business in the Carolinas and its LibertyDirect division is the second
largest provider of optional mortgage insurance in the life insurance industry.
Life insurance and annuity premiums contributed 68% of Liberty Life's total
premiums in 1998, 72% in 1997, and 77% in 1996. Accident and health insurance
premiums contributed the remainder.
AGENCY DIVISION. The Agency Division is Liberty Life's largest division,
contributing 51% of Liberty Life's premiums in 1998. Agents supporting this
division operate out of 49 district offices selling primarily individual life
insurance, including universal life and interest-sensitive whole life products,
as well as health insurance. Historically much of the activity of the agents in
this division (which was formerly referred to as Home Service) has focused on
periodically visiting homes to sell policies and collect premiums, hence the
name Home Service. Liberty Life's strategy in recent years has been to move
Agency from a traditional home service life insurance model to one that is
focused on being a competitive provider of financial security to the moderate
income market. In November 1997, Liberty completed the rollout of a hand-held,
pen-based computer (the "PriorityPad") to its entire Agency sales force. Loaded
on the PriorityPad is Liberty's proprietary needs assessment methodology, the
Priority Profile. This technology, combined with the Priority Profile
methodology, allows the agent to go through an interactive sales presentation
with the prospective customer. The PriorityPad also provides access to policy
rates, and interacts with the home office policy database to update records
necessary for the agent to better manage his or her customer base. Ultimately,
this technology may be used for application entry or to automate other
administrative processes. In the fall of 1998, Agency introduced a comprehensive
set of processes that focus on improving the ability of the agents to serve the
moderate income market and meet the strategic goals of accelerating new customer
acquisition and improving customer retention.
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.
LIBERTYDIRECT. The LibertyDirect division contributed 46% of Liberty Life's
premiums in 1998. This division has grown rapidly in recent years with premium
income more than doubling since 1995. Historically this division has primarily
sold decreasing term life, accident and disability insurance designed to fund
the outstanding balance 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 and has relationships with 12 of the top 15
mortgage servicing firms. The Company supports the marketing of these products
through direct mail and phone solicitations. In addition to products related to
the mortgage insurance, 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. Until April, 1998 the Company provided life insurance sold
to pre-fund funerals through Pierce. As previously mentioned, the Company sold
Pierce in April, 1998. The decision to sell Pierce was based on an assessment
that Pierce would not be able to satisfactorily meet long term financial and
marketing goals.
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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) 1998 1997 1996
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<S> <C> <C> <C>
Liberty Life
Agency $133,796 $135,305 $137,930
LibertyDirect 119,483 102,995 70,316
Other 7,405 6,978 8,472
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Total Liberty Life 260,684 245,278 216,718
Pierce National 24,247 105,414 104,653
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Total $284,931 $350,692 $321,371
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</TABLE>
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 LibertyDirect division is usually
written without medical examination.
REINSURANCE. Liberty Life uses reinsurance as a risk management tool in the
normal course of business and, in isolated strategic transactions, to
effectively buy or sell blocks of in force business. The Company has ceded $3.4
billion (18%) of its $18.9 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, 1998, 1997, and 1996 Liberty had ceded
life insurance premiums of $23.2 million, $25.6 million, and $27.3 million,
respectively. Accident and health premiums ceded made up the remainder of ceded
premiums which were $9.1 million, $8.6 million, and $9.2 million for the years
ended December 31, 1998, 1997 and 1996, 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. 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 also has coverage for
catastrophic accidents. Liberty Life cedes, in the normal course of business,
portions of its risks to a number of other insurance companies.
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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, 1998 was $2.2
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 assets equal to
the reserves reinsured, as determined under statutory accounting principles, be
held in escrow for the benefit of this block of business.
OPERATIONS. The administrative functions of underwriting and issuing new
policies, and the ongoing servicing and claims settlement of in force policies,
are provided by an affiliate, Liberty Insurance Services Corporation, at the
home office in Greenville, South Carolina. The Company's strategy is to allow
LIS to manage the administrative functions of its operations in order to take
advantage of the expertise that LIS has developed to provide administrative
services to the life insurance industry. LIS provides administrative support
services for Liberty's approximately 2.5 million policies representing $18.9
billion of life insurance in force. The Company intends to continue its focus on
reducing the unit costs of administrative services by increasing the volume of
business through internal growth in those businesses, potentially through
acquisitions of blocks of business similar in nature to its existing business,
and by investing in technology to further improve efficiency in its operations.
EMPLOYEES. At December 31, 1998 Liberty Life had approximately 1,650
employees. Approximately 1,200 of the employees are agents whose primary source
of compensation is commissions on products sold, with the majority of the agents
working for Liberty Life's Agency division.
INSURANCE COMPETITION AND RATINGS. Liberty Life competes with numerous
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 Liberty Life for sales of life
insurance products, and Liberty Life competes 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. While Liberty is de-emphasizing the home collection
of premiums, Liberty believes it is important for agents to continue to meet
with their customers regularly in order to adequately serve their insurance
needs.
The Company currently believes that it ranks second nationally in optional
mortgage insurance (provided through its LibertyDirect division) with an
estimated 24% market share. Approximately 31% 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). Liberty Life's current A.M. Best rating is "A" (Excellent).
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 rating be
downgraded, sales of their products and persistency of the existing 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.
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INSURANCE REGULATION. Like other insurance companies, Liberty Life is
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 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 Liberty Life's surplus nor its 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 Liberty Life indicate that Liberty Life's capital significantly
exceeds the minimum capital requirements at December 31, 1998.
Another NAIC Model Act limits dividends that may be paid in any calendar
year without regulatory approval to the lesser of 10% of the insurer's statutory
surplus at the prior year-end, or the statutory net gain from operations of the
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 1999 by
Liberty Life without approval from the South Carolina Insurance Commissioner is
$25.6 million. Actual dividends and distributions paid by Liberty Life were
$22.0 million in 1998, $21.0 million in both 1997 and 1996. 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
10
<PAGE> 11
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.
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. The most recent examination of
Liberty Life was for the three years ended December 31, 1994 has been completed
and the report issued did not indicate any significant areas of concern.
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 is 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.
11
<PAGE> 12
INSURANCE OPERATIONS - LIBERTY INSURANCE SERVICES CORPORATION
LIS provides a wide range of administrative support services, on a fee
baisis, to unaffiliated life and health insurance companies as well as for the
Company's insurance subsidiaries. These services include underwriting, issuance
of policies, accounting, customer service and claims processing and
adjudication. The services are tailored to support the special features of
insurance products offered by the companies that desire these services. In
addition LIS offers consulting services related to acquisition integration and
planning. LIS believes that its offers services that will permit its customers
to reduce their home office support costs and focus resources on marketing their
insurance products.
In marketing to unaffiliated life and health insurance companies the
Company's strategy is to target three potential markets:
- Insurance companies acquired by financial investors that either do not
want to manage the back office administrative functions or lack
experience in providing the required support.
- Insurance companies that have closed blocks of business that are
expensive to administer or are not core to their businesses.
- Insurance companies that prefer to focus management resources on
marketing
At December 31, 1998, LIS had approximately 4.4 million policies under
management. Approximately 1.9 million policies are administered for five
unaffiliated clients and 2.5 million of the policies are administered for
Liberty Life. In addition to the policies currently under management LIS has a
new contract with SunAmerica to service, beginning in mid-1999, a block of
240,000 policies.
COMPETITION. Outsourcing, or third party administration of insurance
administrative support services, is a relatively new and emerging business. Most
of LIS's competition for business opportunities is from vendors whose primary
business is in insurance systems and software. LIS believes it can successfully
compete with these companies because of its focus on the core business process
of insurance administration and its experience and proven ability to provide a
full range of insurance administrative services.
EMPLOYEES. At December 31, 1998, LIS had approximately 740 employees.
Substantially all of the employees are located at LIS headquarters in
Greenville, South Carolina.
12
<PAGE> 13
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 59
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 September, 1989 to December 31,
1997
ROBERT E. EVANS, Age 44
President of Liberty Life since March, 1999
Managing Director, Insurance Services of Fleet Financial Group from 1995 to
December 1998
Senior Vice President, Travelers Life and Annuity Business,
Travelers Insurance from 1993 to 1995 Vice President, Travelers Insurance
from 1986 to 1993
JENNIE M. JOHNSON, Age 51
President of Liberty Insurance Services Corporation since May, 1997
President of Pierce National Life Insurance Company from August, 1995 to
April 1998
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 41
Corporate Controller of Liberty since May, 1997
Treasurer of Liberty Life since May, 1997
Assistant Controller of Liberty from September, 1994 to May, 1997
JAMES M. KEELOR, Age 56
President of Cosmos since February, 1992
Vice President, Operations, of Cosmos from December, 1989 to February, 1992
MARTHA G. WILLIAMS, Age 56
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
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 the
Notes to the Consolidated Financial Statements beginning on pages 25-28 of The
Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on
pages 69-73 of this report and is incorporated in this Item 1 by reference.
13
<PAGE> 14
ITEM 2. PROPERTIES
MAIN OFFICES. The main office of the Company, Liberty Life, 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; Biloxi, MS; Albany, GA;
Harlingen; TX and Wilmington, NC.
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.
Other than the suit 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
None
14
<PAGE> 15
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 38
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 31 of The
Liberty Corporation Annual Report to Shareholders and is filed as Exhibit 13 on
page 39 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 32-40 of The Liberty Corporation Annual Report
to Shareholders and is filed as Exhibit 13 on pages 40-48 of this report and is
incorporated in this Item 7 by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information related to quantitative and qualitative disclosures about
market risk is contained on page 37 of The Liberty Corporation Annual Report to
Shareholders and is included in Exhibit 13 on pages 44-45 of this report and is
incorporated in this Item 7A by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
The Company's Consolidated Financial Statements and Report of Independent
Auditors are contained on pages 5-30 of The Liberty Corporation Annual Report to
Shareholders and is filed as Exhibit 13 on pages 49-74 of this report and are
incorporated in this Item 8 by reference. Quarterly Results of Operations are
contained on page 23 of The Liberty Corporation Annual Report to Shareholders
and is included in Exhibit 13 on page 67 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
15
<PAGE> 16
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 4, 1999 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 13 and is incorporated
in this Item 10 by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning Executive Compensation and transactions is contained
in The Liberty Corporation Proxy Statement for the May 4, 1999 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
4, 1999 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 4, 1999 Annual
Meeting of Shareholders and is incorporated in this Item 13 by reference.
16
<PAGE> 17
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, 1998, filed as Exhibit 13 to this report and
incorporated in Item 8 by reference:
Consolidated Statements of Income - For the three years ended
December 31, 1998
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Cash Flows - For the three years ended
December 31, 1998
Consolidated Statements of Shareholders' Equity - For the three years
ended December 31, 1998
Notes to Consolidated Financial Statements - December 31, 1998
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.
17
<PAGE> 18
(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 February 2, 1999.
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 May 1, 1998 (filed as Exhibit 10 to the
Registrant's Quarterly Report on Form 10Q for the quarter ended
March 31, 1998 and incorporated herein by reference).
10.1 See Credit Agreement dated May 1, 1998 (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 20 of The
Liberty Corporation Annual Report to Shareholders for the year
ended December 31, 1998) filed on page 64 of this report.
13. Portions of The Liberty Corporation Annual Report to Shareholders
for the year ended December 31, 1998:
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 Statements of Income - For the three years ended
December 31, 1998
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Cash Flows - For the three years
ended December 31, 1998
Consolidated Statements of Shareholders' Equity - For the
three years ended December 31, 1998
Notes to Consolidated Financial Statements - December 31, 1998
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 years
ended December 31, 1983, 1985, 1989, 1994, 1995, 1996, and 1997.
27. Financial Data Schedule (Electronic Filing Only)
(b). REPORTS ON FORM 8-K
There were no reports on Form 8-K filed after September 30, 1998.
18
<PAGE> 19
(c). EXHIBITS FILED WITH THIS REPORT
3.2 Bylaws as amended through February 2, 1999
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 64 of The
Liberty Corporation Annual Report to Shareholders for the year
ended December 31, 1998).
13. Portions of The Liberty Corporation Annual Report to Shareholders
for the year ended December 31, 1998:
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
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Information:
Consolidated Statements of Income - For the three years ended
December 31, 1998
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Cash Flows - For the three years
ended December 31, 1998
Consolidated Statements of Shareholders' Equity - For the
three years ended December 31, 1998
Notes to Consolidated Financial Statements - December 31, 1998
Report of Independent Auditors
21. The Liberty Corporation and Subsidiaries, List of Subsidiaries
23. Consent of Independent Auditors
27. Financial Data Schedule (Electronic Filing Only)
19
<PAGE> 20
(d). CONSOLIDATED FINANCIAL STATEMENT SCHEDULES FILED WITH THIS REPORT
I- Summary of Investments - December 31, 1998
II- Condensed Financial Statements of The Liberty Corporation
(Parent Company) December 31, 1998 and 1997
III- Supplementary Insurance Information - For the Three Years
Ended December 31, 1998
IV- Reinsurance - For the Three Years Ended December 31, 1998
V- Valuation and Qualifying Accounts and Reserves - For the
Three Years Ended December 31, 1998
20
<PAGE> 21
Schedule I
THE LIBERTY CORPORATION AND SUBSIDIARIES
SUMMARY OF INVESTMENTS
DECEMBER 31, 1998
(In 000's)
<TABLE>
<CAPTION>
Amount at
Which Shown
on Balance
Type of Investment Cost Value Sheet
- ----------------------------------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturity securities, available for sale
Bonds:
United States Government and government agencies and
authorities $ 127,200 $ 133,188 $ 133,188
States, municipalities, and political subdivisions -- -- --
Foreign governments -- -- --
Foreign corporate and other 38,851 38,464 38,464
Public utilities 87,864 98,147 98,147
Convertibles and bonds with warrants attached -- -- --
All other corporate bonds 607,908 627,890 627,890
Redeemable preferred stocks 35,121 37,489 37,489
---------- ---------- ----------
Total 896,944 935,178 935,178
---------- ---------- ----------
Equity securities, available for sale
Common stocks:
Public utilities -- --
Banks, trusts and insurance companies $ 7,622 $ 10,904 $ 10,904
Foreign other 1,189 1,267 1,267
Industrial, miscellaneous, and all other 36,411 41,124 41,124
Nonredeemable preferred stocks 9,132 10,363 10,363
---------- ---------- ----------
Total 54,354 $ 63,658 63,658
---------- ========== ----------
Mortgage loans on real estate 215,549 215,549
Investment real estate 34,788 34,788
Policy loans 90,653 90,653
Other long-term investments 21,256 21,256
Short-term investments 250 250
---------- ----------
Total investments $1,313,794 $1,361,332
========== ==========
</TABLE>
21
<PAGE> 22
Schedule II
THE LIBERTY CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
DECEMBER 31, 1998 and 1997
(In $000's, except share data)
<TABLE>
<CAPTION>
ASSETS 1998 1997
------ --------- ---------
<S> <C> <C>
Cash $ 4,062 $ 5,015
Fixed maturity securities 3,386 36,045
Equity securities 13,408 30,033
Loans, notes and other receivables 9,202 10,372
Investment properties, at cost less accumulated depreciation of
$1,495 in 1998 and $1,319 in 1997 19,218 23,955
Other long-term investments 7,037 6,167
Buildings and equipment, at cost less accumulated depreciation of
$15,813 in 1998 and $13,868 in 1997 16,150 18,077
Investment in affiliated companies* 524,223 683,472
Intercompany debt and advances* 236,816 94,173
Income taxes recoverable 9,719 6,360
Deferred income tax benefits (liabilities) (3,020) (5,744)
Other assets 7,053 7,908
--------- ---------
Total Assets $ 847,254 $ 915,833
========= =========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Liabilities:
Notes, mortgages and other debt $ 283,000 $ 189,214
Accounts payable and accrued expenses 12,334 13,830
Other liabilities 595 605
--------- ---------
Total Liabilities 295,929 203,649
Redeemable Preferred Stock:
1994-A Series, $35.00 redemption value, 198,259 and 504,168
shares issued and outstanding in 1998 and 1997, respectively 6,939 17,646
1994-B Series, $37.50 redemption value, 374,509 and 525,948
shares issued and outstanding in 1998 and 1997, respectively 14,028 19,723
--------- ---------
Total Redeemable Preferred Stock 20,967 37,369
Shareholders' Equity:
Common stock
Authorized - 50,000,000 shares, no par value
Issued and outstanding - 18,684,172 in 1998 and 20,712,686 in 1997 70,565 182,994
Convertible Preferred Stock, 1995-A Series,
599,985 shares issued and outstanding 20,999 20,999
Unearned stock compensation (7,596) (10,872)
Accumulated other comprehensive income 26,749 61,850
Retained earnings 419,641 419,844
--------- ---------
Total Shareholders' Equity 530,358 674,815
--------- ---------
Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity $ 847,254 $ 915,833
========= =========
</TABLE>
*Eliminated in consolidation.
See notes to condensed financial statements.
22
<PAGE> 23
Schedule II
THE LIBERTY CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(In $000's)
<TABLE>
<CAPTION>
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
REVENUES
Dividends from subsidiaries* $ 22,000 $ 74,814 $ 33,250
Interest-unaffiliated 1,816 561 676
Intercompany interest* 11,679 8,157 8,519
Realized investment gains (losses) (373) 5,504 (5,407)
Other 13,620 18,318 27,123
-------- --------- --------
Total Revenues 48,742 107,354 64,161
EXPENSES
Salaries and wages 7,035 17,507 18,240
Interest-unaffiliated 12,403 13,021 15,007
Intercompany interest* 1,753 2,193 2,471
Taxes and licenses 1,163 2,069 2,250
Depreciation and amortization 2,949 7,373 8,645
Loss from sale of subsidiary 13,811 -- --
Other 12,993 6,298 10,621
-------- --------- --------
Total Expenses 52,107 48,461 57,234
-------- --------- --------
Income (loss) before income taxes (3,365) 58,893 6,927
Income tax expense (benefit) 1,132 (5,746) (9,786)
-------- --------- --------
Income (loss) before earnings of subsidiaries (4,497) 64,639 16,713
Earnings of subsidiaries
net of dividends paid to parent* 22,741 7,385 21,230
-------- --------- --------
NET INCOME $ 18,244*** $ 72,024** $ 37,943***
======== ========= ========
</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 $483 and $603 in 1998 and 1996,
respectively, due to gains deferred on a consolidated basis until
completion of the earnings process.
See notes to condensed financial statements.
23
<PAGE> 24
Schedule II
THE LIBERTY CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(In $000's)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 18,244 $ 72,024 $ 37,943
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 2,949 7,373 8,645
Provision for deferred income taxes 94 1,556 (1,143)
Earnings from subsidiary operations, net of
dividends paid to parent (22,741) (7,385) (21,230)
Non-cash dividends paid to parent -- (39,370) --
Gain on disposal of assets (1,826) (2,011) (3,172)
Realized investment (gains) losses 373 (5,504) 5,407
Loss on sale of subsidiary 13,811 -- --
Change in operating assets and liabilities:
Decrease (increase) in intercompany debt and
advances* 14,299 2,748 (79)
(Increase) decrease in accounts and notes 1,170 (2,482) 2,063
receivable
(Decrease) increase in accounts payable and (1,496) (2,996) 5,189
accrued expenses
Decrease (increase) in other assets 855 1,065 892
Increase (decrease) in other liabilities, and
accrued income taxes (3,369) 4,847 1,164
Other (966) 53 (2,083)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 21,397 29,918 33,596
INVESTING ACTIVITIES
Investment securities sold, matured, or redeemed 44,866 349
Cost of investment securities acquired (1,275) -- --
Purchase of investment properties (3,545) (7,563) (22,556)
Sale of investment properties 9,112 49,601 13,982
Net cash received on sale of subsidiary 133,060 -- --
Net cash paid on purchase of broadcasting business (156,942) -- --
Other 6,175 923 1,270
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 31,451 43,310 (7,304)
FINANCING ACTIVITIES
Proceeds from borrowings 3,265,000 2,505,000 2,957,704
Principal payments on debt (3,171,214) (2,559,007) (2,966,087)
Dividends paid (18,447) (19,540) (18,366)
Repurchase of common stock (131,114) -- --
Stock issued for employee benefit and performance
incentive compensation programs 1,974 3,884 1,441
----------- ----------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES (53,801) (69,663) (25,308)
INCREASE (DECREASE) IN CASH (953) 3,565 984
Cash at beginning of year 5,015 1,450 466
----------- ----------- -----------
CASH AT END OF YEAR $ 4,062 $ 5,015 $ 1,450
=========== =========== ===========
</TABLE>
*Eliminated in consolidation.
See notes to condensed financial statements.
24
<PAGE> 25
Schedule II
THE LIBERTY CORPORATION (PARENT COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. NOTES, MORTGAGES AND OTHER DEBT
The general debt obligations at December 31, 1998, are as follows:
Average
(In 000's) Interest Rate Amount
---------- ------------- --------
Notes due to banks, maturing in 2003 5.8% $283,000
In May 1998, the Parent Company refinanced its credit facility into a, $300
million revolving credit facility maturing in April, 2003. The Parent Company
may request up to an additional $150 million under the new facility subject to
approval by the bank group. Borrowings under the facility were used to refinance
indebtedness, as well as to provide funds to meet working capital requirements.
See Note 5 of The Liberty Corporation and Subsidiaries Consolidated Financial
Statements which provides additional information as to this agreement.
2. DIVIDENDS TO PARENT COMPANY
During 1998, the Parent Company received dividends from its subsidiaries of
approximately $22 million.
3. RETAINED EARNINGS
As of December 31, 1998 and 1997, retained earnings of $419,641,000 and
$419,844,000 respectively, in The Liberty Corporation (Parent Company)
financial statements differs from The Liberty Corporation and Subsidiaries
consolidated financial statements. The difference of $851,000 and $368,000
at December 31, 1998 and 1997, respectively, relates to the elimination of
gains on intercompany transactions on a consolidated basis.
25
<PAGE> 26
Schedule III
THE LIBERTY CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(In 000's)
<TABLE>
<CAPTION>
Deferred Future Policy Other Policy
Policy Benefits, Claims &
Acquisition Cost of Business Losses, Claims Unearned Benefits
Segment Costs Acquired and Loss Expenses Premiums Payable
- ----------------------------------- ---------------- ------------------ -------------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
December 31, 1998
Agency $217,137 $30,769 $863,138 $1,960 $18,741
LibertyDirect 22,034 2,368 32,994 561 19,711
Corporate & Other 9,593 2,465 381,277 16,150
---------------- ------------------ -------------------- ---------------- -----------------
Total $248,764 $35,602 $1,277,408 $2,521 $54,602
================ ================== ==================== ================ =================
December 31, 1997
Agency $210,166 $33,724 $849,676 $1,868 $19,374
LibertyDirect 17,958 3,168 31,187 678 21,547
Pre-need 34,494 22,687 620,861 1,518 6,248
Corporate & Other 12,997 2,647 384,998 17,976
---------------- ------------------ -------------------- ---------------- -----------------
Total $275,615 $62,226 $1,886,722 $4,064 $65,145
================ ================== ==================== ================ =================
December 31, 1996
Agency $204,026 $37,553 $836,048 $1,851 $15,434
LibertyDirect 11,538 4,173 30,544 734 12,281
Pre-need 30,682 26,202 591,869 1,826 6,843
Corporate & Other 15,936 2,836 390,301 25,380
---------------- ------------------ -------------------- ---------------- -----------------
Total $262,182 $70,764 $1,848,762 $4,411 $59,938
================ ================== ==================== ================ =================
</TABLE>
<TABLE>
<CAPTION>
Benefits Accident &
Net Claims, Losses Other Health
Premium Investment & Settlement Amortization Operating Premiums
Segment Revenue Income Benefits Expense Expenses Written
- ---------------------------- ------------- --------------- ------------------ ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
1998
Agency $133,796 $74,403 $95,856 $31,160 $58,811 $13,248
LibertyDirect 119,483 1,881 23,053 7,366 75,129 80,174
Pre-need 24,247 14,774 23,914 3,126 5,861 88
Corporate & Other 7,405 28,755 11,838 9,366 32,105 62
------------- --------------- ------------------ ----------------- ------------- ---------------
Total $284,931 $119,813 $154,661 $51,018 $171,906 $93,572
============= =============== ================== ================= ============= ===============
1997
Agency $135,305 $71,050 $95,548 $27,872 $43,360 $13,679
LibertyDirect 102,995 1,989 23,112 5,681 62,339 64,525
Pre-need 105,414 56,078 97,860 10,513 26,079 338
Corporate & Other 6,978 29,202 11,407 1,498 27,721 172
------------- --------------- ------------------ ----------------- ------------- ---------------
Total $350,692 $158,319 $227,927 $45,564 $159,499 $78,714
============= =============== ================== ================= ============= ===============
1996
Agency $137,930 $68,977 $94,503 $28,551 $44,162 $14,117
LibertyDirect 70,316 2,214 16,273 4,970 44,582 35,709
Pre-need 104,653 52,112 95,938 11,929 27,999 424
Corporate & Other 8,472 31,918 12,037 28,517 36,245 273
------------- --------------- ------------------ ----------------- ------------- ---------------
Total $321,371 $155,221 $218,751 $73,967 $152,988 $50,523
============= =============== ================== ================= ============= ===============
</TABLE>
26
<PAGE> 27
Schedule IV
THE LIBERTY CORPORATION AND SUBSIDIARIES -- REINSURANCE
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(In 000's)
<TABLE>
<CAPTION>
Amount
Gross Ceded to Other Assumed From Net % of Amount
Amount Companies Other Companies Amount Assumed to Net
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
- ----------------------------------------------
Life Insurance in Force
Agency $9,744,011 $239,508 $9,504,503 --
LibertyDirect 5,148,397 2,090 $15,100 5,161,407 0.3%
Corporate & Other 3,973,020 3,120,946 852,074 --
---------------- ---------------- --------------- ----------------
Total life insurance in force $18,865,428 $3,362,544 $15,100 $15,517,984 0.1%
================ ================ =============== ================
Insurance premiums and policy charges:
Life, annuity and other considerations
Agency $122,101 $1,736 $164 $120,528 0.1%
LibertyDirect 38,744 (456) 39,200 --
Pre-need 24,183 27 24,156 --
Corporate & Other 29,492 21,907 7,585 --
---------------- ---------------- --------------- ----------------
Total life, annuity and other considerations 214,519 23,214 164 191,469 0.1%
Accident and health
Agency 13,279 11 13,268 --
LibertyDirect 89,323 9,109 69 80,283 0.1%
Pre-need 86 5 91 5.0%
Corporate & Other (180) (180) --
---------------- ---------------- --------------- ----------------
Total accident and health 102,508 9,120 74 93,462 0.1%
---------------- ---------------- --------------- ----------------
Total Insurance Premiums and Policy Charges $317,027 $32,334 $238 $284,931 0.1%
================ ================ =============== ================
Year ended December 31, 1997
- ----------------------------------------------
Life Insurance in Force
Agency $9,708,545 $252,926 $9,455,619 --
LibertyDirect 5,200,591 3,859 $17,172 5,213,904 0.3%
Pre-need 1,550,497 19,930 19 1,530,586 --
Corporate & Other 4,328,103 3,422,197 905,906
---------------- ---------------- --------------- ----------------
Total 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
Agency $123,346 $1,725 $121,621 --
LibertyDirect 38,418 14 $315 38,719 0.8%
Pre-need 105,783 745 105,038 --
Corporate & Other 30,085 23,091 6,994 --
---------------- ---------------- --------------- ----------------
Total life, annuity and other considerations 297,632 25,575 315 272,372 0.1%
Accident and health
Agency 13,684 2 2 13,684
LibertyDirect 72,369 8,613 520 64,276 0.8%
Pre-need 341 1 36 376 10.0%
Corporate & Other (16) (16) --
---------------- ---------------- --------------- ----------------
Total accident and health 86,378 8,616 558 78,320 0.7%
---------------- ---------------- --------------- ----------------
Total Insurance Premiums and Policy Charges $384,010 $34,191 $873 $350,692 0.3%
================ ================ =============== ================
Year ended December 31, 1996
- ----------------------------------------------
Life Insurance in Force
Agency $9,797,925 $269,785 $9,528,140 --
LibertyDirect 4,580,738 10,527 $13,035 4,583,246 0.3%
Pre-need 1,564,079 33,284 64 1,530,859 --
Corporate & Other 4,753,785 3,773,501 980,284
---------------- ---------------- --------------- ----------------
Total 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
Agency $125,492 $1,675 $(1) $123,816 --
LibertyDirect 34,492 29 219 34,682 0.6%
Pre-need 104,970 756 16 104,230 --
Other 33,373 24,833 8,540 --
---------------- ---------------- --------------- ----------------
Total life, annuity and other considerations 298,327 27,293 234 271,268 0.1%
Accident and health
Agency 14,128 16 2 14,114 --
LibertyDirect 43,868 9,187 953 35,634 2.7%
Pre-need 405 2 20 423 4.7%
Corporate & Other (68) (68) --
---------------- ---------------- --------------- ----------------
Total accident and health 58,333 9,205 975 50,103 1.9%
---------------- ---------------- --------------- ----------------
Total Insurance Premiums and Policy Charges $356,660 $36,498 $1,209 $321,371 0.4%
================ ================ =============== ================
</TABLE>
27
<PAGE> 28
Schedule V
THE LIBERTY CORPORATION AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
(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, 1998
679(c)
Accounts receivable - 2(b)
reserve for bad debts $ 1,441 $ 837 $ 10 $ 444(a) $ 1,163
---------- ------------ ---------- ----------- ----------
Year Ended December 31, 1997
Accounts receivable - 227(b)
reserve for bad debts $ 2,310 $ 429 $ -- $ 1,071(a) $ 1,441
---------- ------------ ---------- ----------- ----------
Year Ended December 31, 1996
Accounts receivable - 20(b)
reserve for bad debts $ 1,975 $ 567 $ 101 $ 313(a) $ 2,310
---------- ------------ ---------- ----------- ----------
</TABLE>
Notes:
(a) Uncollectible accounts written off, net of recoveries.
(b) Reversal of reserves no longer required
(c) Sale of subsidiary
28
<PAGE> 29
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 29th day of
March, 1999
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 29th day of March, 1999.
By: /s/ Kenneth W. Jones *By: /s/ John H. Mullin III
---------------------------- ----------------------------
Kenneth W. Jones John H. Mullin III
Corporate Controller Director
*By: /s/ Rufus C. Barkley, Jr. *By: /s/ Benjamin F. Payton
---------------------------- ----------------------------
Rufus C. Barkley, Jr. Benjamin F. Payton
Director Director
*By: /s/ Edward E. Crutchfield *By: /s/ J. Thurston Roach
---------------------------- ----------------------------
Edward E. Crutchfield J. Thurston Roach
Director Director
*By: /s/ John R. Farmer *By: /s/ Eugene E. Stone, IV
---------------------------- ----------------------------
John R. Farmer Eugene E. Stone, IV
Director Director
By: /s/ Hayne Hipp *By: /s/ William B. Timmerman
---------------------------- ----------------------------
Hayne Hipp William B. Timmerman
Director Director
*By: /s/ W. W. Johnson *By: /s/ Martha G. Williams
---------------------------- ----------------------------
W. W. Johnson *Martha G. Williams, as
Director Special Attorney in Fact
*By: /s/ William O. McCoy
----------------------------
William O. McCoy
Director
29
<PAGE> 30
Annual Report on Form 10-K
The Liberty Corporation
December 31, 1998
Index to Exhibits
<TABLE>
<CAPTION>
PAGE
EXHIBITS NUMBER
<S> <C> <C>
3.2 The Liberty Corporation Bylaws as Amended through February 2, 1999. 31
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 20 of The Liberty Corporation
Annual Report to Shareholders for the year ended December 31, 1998). 64
13. Portions of The Liberty Corporation Annual Report to Shareholders
for the year ended December 31, 1998:
Market for the Registrant's Common Stock and Related Security Stockholder Matters 38
Selected Financial Data 39
Management's Discussion and Analysis of Financial Condition and Results of
Operations 40-48
Quantitative and Qualitative Disclosures About Market Risk 44-45
Financial Statements and Supplementary Information:
Consolidated Statements of Income - For the three years ended December 31, 1998 49
Consolidated Balance Sheets - December 31, 1998 and 1997 50-51
Consolidated Statements of Cash Flows - For the three years ended December 31, 1998 52
Consolidated Shareholders' Equity - For the three years ended December 31, 1998 53
Notes to Consolidated Financial Statements - December 31, 1998 54-73
Report of Independent Auditors 74
21. The Liberty Corporation and Subsidiaries, List of Significant Subsidiaries 75
23. Consent of Independent Auditors 76
27. Financial Data Schedule
</TABLE>
30
<PAGE> 1
Exhibit 3.2
Bylaws as Amended February 2, 1999
THE LIBERTY CORPORATION
BYLAWS
ARTICLE I - SHAREHOLDERS
Section 1. Annual Meetings. The annual meeting of the shareholders of
the Company shall be held on such day during the first one hundred and fifty
days of the calendar year as the Board of Directors may determine.
Section 2. Special Meetings. Special meetings of the shareholders may
be called at any time by a majority of the Board of Directors, the Chairman of
the Board, the Chief Executive Officer, the President, or upon request of
shareholders holding at least one-tenth of the outstanding stock of the Company
entitled to vote at such meeting.
Section 3. Place of Meetings. Each annual and special meeting of the
shareholders shall be held at the principal office of the Company, or at such
other place within or without the State of South Carolina as shall be designated
by the Board of Directors or the officer calling such meeting.
Section 4. Notice of Meetings. Written or printed notice stating the
place, day and hour of meeting and, in the case of a special meeting, the
purpose or purposes for which the meeting is called, shall be mailed by or at
the direction of the Secretary, an Assistant Secretary or officer calling the
meeting, not less than ten nor more than fifty days before the date of the
meeting, to each shareholder of record, addressed to him at his address as it
appears on the stock books of the Company, as of the date set pursuant to
Section 4 of Article VI hereof.
Section 5. Proxies. At a meeting of shareholders, a shareholder may
vote by proxy executed in writing by the shareholder and filed with the
Secretary of the Company, bearing date within eleven months prior to the meeting
unless a longer period is provided therein and is permitted by law. In lieu of
voting by proxy executed in writing, a shareholder may vote by proxy transmitted
to the Secretary of the Company, or such other person or entity authorized by
the Company to receive proxies, by telegram, cablegram, telephone, or other
means of electronic transmission, provided that any such transmission must set
forth or be submitted with information from which it can be determined that such
transmission was authorized by the shareholder. Any copy, facsimile
telecommunication or other reliable reproduction of such writing or transmission
may be substituted or used in lieu of the original writing or transmission for
any and all purposes for which the original writing or transmission could be
used, provided that any such reproduction is a complete reproduction of the
entire original writing or transmission.
Section 6. Quorum. A majority of the issued and outstanding shares of
the Company, present in person or by proxy and entitled to vote thereat, shall
constitute a quorum at a meeting of shareholders.
Section 7. Voting. Subject to the laws of the State of South Carolina
with respect to multiple ownership of stock and the provisions of the Articles
of Incorporation and Article VI hereof, each shareholder shall be entitled to
one vote for each share of stock standing in his name on the books of the
Company. Only those whose names appear as shareholders on the books of the
Company, or their proxies or legal representatives, shall be entitled to vote or
to participate in any meeting of shareholders. A majority of the votes cast at a
duly called meeting at which a quorum is present shall decide any question that
may come before the meeting, except as otherwise provided by law, these Bylaws
or the Articles of Incorporation of the Company.
Section 8. Control Share Statute. Article 1 of Title 36, Chapter 2 of
the Code of Laws of South Carolina 1976 does not apply to control share
acquisition of shares of this Corporation (as defined in such Article).
Section 9. Shareholder Nominations and Proposals. At a meeting of the
shareholders, only such business shall be conducted which has been properly
brought before the meeting. To be properly brought before a meeting,
31
<PAGE> 2
business must be specified in the notice of the meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, otherwise
properly brought before the meeting by or at the direction of the Board of
Directors, or otherwise properly brought before the meeting by a shareholder.
For business to be properly brought before a meeting by a shareholder,
the Secretary of the Company must have received written notice thereof from the
shareholder describing the nomination or proposal not less than one hundred and
twenty nor more than one hundred and fifty calendar days before the date of the
Company's proxy statement released to shareholders in connection with the
previous year's annual meeting; provided however, that in the event an annual
meeting was not held during the previous year, or if the date of the current
year's annual meeting has been changed by more than thirty days from the date of
the previous year's meeting, the required notice by the shareholder of such
nomination or proposal to be timely must be received by the Secretary of the
Company within a reasonable time before the Company begins to print its proxy
materials.
In the case of shareholder nominations for election to the Board of
Directors, the shareholder's notice to the Secretary shall set forth (a) as to
each person whom the shareholder proposes to nominate for election or
re-election as a director: (i) the name, age, business address and, if known,
residence address, (ii) the principal occupation or employment for the past five
years, (iii) the class and number of shares of the Company which are legally or
beneficially owned, (iv) other directorships held, (v) the names of business
entities of which each such nominee owns a ten percent or more legal or
beneficial interest, and (vi) all other information with respect to the nominees
required by the Federal proxy rules in effect at the time the notice is
submitted; and (b) as to the shareholder giving the notice (i) the name and
record address of the shareholder and (ii) the class and number of shares of
capital stock of the Company which are legally or beneficially owned by the
shareholder. In addition, the notice shall be accompanied by a written statement
of each proposed nominee consenting to the proposed nomination, agreeing to
serve as a director if elected, and confirming the accuracy of the information
relating to the proposed nominee as set forth in the notice. The Company may
require any proposed nominee to furnish such other information as may be
reasonably required to determine the eligibility of such nominee to serve as a
director of the Company. No person shall be eligible for election as a director
of the Company unless nominated in accordance with the procedures set forth
herein.
In the case of shareholder proposals other than the election of
directors, the shareholder's notice to the Secretary shall set forth as to each
matter proposed to be brought before the meeting (i) a brief description of the
business to be brought before the meeting, (ii) the name, business and residence
address of each of the shareholders submitting the proposal, (iii) the principal
occupation or employment of that shareholder, (iv) the class and number of
shares of the Company which are legally or beneficially owned by such
shareholder, (v) any material interest of the shareholder in such business, and
(vi) such other information as the Board of Directors reasonably determines is
necessary or appropriate.
The Chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a shareholder nomination or proposal was not made in
accordance with the procedures prescribed in these Bylaws or is otherwise not in
accordance with law. If the Chairman should so determine, he shall so declare to
the meeting and the defective nomination or proposal shall be disregarded.
Notwithstanding anything in these Bylaws to the contrary, no elections or other
business shall be conducted at any meeting of the shareholders except in
accordance with the procedures set forth in Section 9 of Article I hereof.
32
<PAGE> 3
ARTICLE II - DIRECTORS
Section 1. General Powers and Authority. The business and property of
the Company shall be managed by the Board of Directors and they shall and may
exercise all powers and authority of the Company except as limited by law, the
Articles of Incorporation, or elsewhere by these Bylaws. They shall have power
and authority to make all necessary rules and regulations for their government
and for the regulation of the business of the Company which are not inconsistent
with the Articles of Incorporation and these Bylaws, and shall have general
management and control of the Company. The Board of Directors may delegate from
time to time to any committee, officer or agent, such power and authority as
permitted by law.
Section 2. Number, Election and Terms. Except as otherwise fixed
pursuant to Article 4 of the Restated Articles of Incorporation relating to the
rights of the holders of any class or series of stock having a preference over
the Common Stock as to dividends or upon liquidation (the "Preferred Stock") to
elect additional directors under specified circumstances, the number of
directors shall be 12; provided however, that the number of directors may be
fixed from time to time at any number, not less than 9 nor more than 16, by
resolution adopted by the Board of Directors. The directors, other than those
who may be elected under specified circumstances by the holders of any class or
series of Preferred Stock, shall be classified, with respect to the time for
which they severally hold office, into three classes, as nearly equal in number
of members as possible, as determined by the Board of Directors. One such class
shall hold office initially for a term expiring at the annual meeting of
shareholders to be held in 1986, another class shall hold office initially for a
term expiring at the annual meeting of shareholders to be held in 1987, and
another class shall hold office initially for a term expiring at the annual
meeting of shareholders to be held in 1988. At each annual meeting of
shareholders, the successors to the class of directors whose term expires at
that meeting shall be elected to hold office for a term expiring at the annual
meeting of shareholders held in the third year following the year of their
election, and the successor to any director previously elected by the directors
pursuant to Section 3 below as a member of a class whose term is not expiring at
that meeting shall be elected by the shareholders for the remainder of the full
term of the class of directors in which the new directorship was created or the
vacancy occurred. The members of each class of directors shall hold office until
their successors are elected and qualified or until their earlier resignation,
disqualification, disability, death or removal from office.
Section 3. Newly Created Directorships and Vacancies. Except for any
directors who may be elected under specified circumstances by the holders of any
class or series of Preferred Stock, newly created directorships resulting from
any increase in the number of directors and any vacancies on the Board of
Directors resulting from death, resignation, disqualification, removal or other
cause shall be filled solely by the affirmative vote of a majority of the
remaining directors then in office, even though less than a quorum of the Board
of Directors. Any director elected in accordance with the preceding sentence
shall hold office until the next shareholders' meeting at which directors of any
class are elected and until such director's successor shall have been elected
and qualified, or until his earlier resignation, disqualification, disability,
death or removal from office. At the time of any increase in the number of
directors, except in the case of directors elected in specified circumstances by
the holders of any class or series of Preferred Stock, the Board of Directors
shall specifically allocate the additional directorships among the three classes
so as to make the three classes as nearly equal in number of members as
possible. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director, but subject to this
restriction, the Board of Directors shall effect and allocate any decrease in
the number of directors in a manner and at such time or times so as to keep the
three classes as nearly equal in number of members as possible.
Section 4. Removal. Except for any directors who may be elected under
specified circumstances by the holders of any class or series of Preferred
Stock, any director may be removed from office, without cause, only by the
affirmative vote of the holders of 80% of the combined voting power of the then
outstanding shares of stock entitled to vote generally in the election of
directors, voting together as a single class.
Section 5. Regular Meetings. A regular meeting of the Board of
Directors shall be held without other notice than this Bylaw immediately after,
and at the same place as, the annual meeting of shareholders. The Board of
33
<PAGE> 4
Directors may provide, by resolution, the date, time and place, either within or
without the State of South Carolina, for the holding of additional regular
meetings without other notice than such resolution.
Section 6. Special Meetings. Special meetings of the Board of Directors
may be called by the Executive Committee, the Chairman of the Board, the Vice
Chairman of the Board, the Chief Executive Officer or upon request of a majority
of the Board, and may be held at such time and place, either within or without
the State of South Carolina, as may be specified in the notice thereof. To the
extent permitted by applicable law, special meetings of the Board of Directors,
or of any committee thereof, may be held by conference telephone communication.
Section 7. Notice of Meetings. Notice of each special meeting of the
Board of Directors, stating the time, manner and place where the meeting is to
be held, shall be given by or at the direction of the Secretary or an Assistant
Secretary by mailing the same to each director at his residence or business
address not less than three days before such meeting, or by giving the same to
him personally or telegraphing or telephoning the same to him at his residence
or business address not later than the day before the day on which the meeting
is to be held. Any and all requirements for call and notice of meetings may be
dispensed with if all directors are present at the meeting or if those not
present at the meeting shall at any time waive or have waived notice thereof.
Section 8. Quorum and Manner of Action. A majority of the number of
directors then in office shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors. Except as otherwise provided
in the Restated Articles of Incorporation, the vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.
Section 9. Compensation. The directors shall receive such fees,
retainers, expenses and the like for attendance at meetings of the Board and
performance of their duties, as may be determined by the Board of Directors;
provided, however, that no salaried officer shall receive a fee or retainer for
attendance at such meetings or performance of such Board duties.
ARTICLE III - COMMITTEES
Section 1. Executive Committee. The Executive Committee shall consist
of not less than two members, all of whom shall be members of the Board of
Directors. Except as otherwise limited by law, the Executive Committee shall be
vested with full authority to act for and on behalf of the Board of Directors in
the management of the business and affairs of the Company and to do all things,
including actions specified by these Bylaws to be performed by the Board of
Directors, in the same manner and with the same authority and effect as if such
acts had been performed by the Board of Directors.
The members of the Executive Committee shall be elected by the Board of
Directors and shall serve at the pleasure of the Board of Directors. The Board
of Directors shall designate the chairman of such committee, or if for any
reason the Board shall fail to designate the chairman, then such committee shall
elect its own chairman. Meetings of each such committee shall be held at such
times and places as may be determined by its chairman or as may be agreed upon
by members of the committee. A quorum at any meeting of such committee shall
consist of a majority of the committee, and any action taken by such committee
shall require the assent of at least a majority of the members who are present.
Notice of meetings shall be given in the same manner as for special meetings of
the Board of Directors. Any action taken by the Executive Committee shall be
deemed to be action taken by the Board of Directors and shall be binding on the
Company, but the Board of Directors shall at all times have the power to reverse
and overrule any action taken by such committee, provided that the exercise of
such power by the Board of Directors shall not in any way abrogate the
obligations or duties owing by the Company to third parties who have acted in
reliance on the action taken by such committee. All proceedings by such
committee and all action taken by each such committee shall be reported to the
Board of Directors at the meeting of the Board of Directors next following such
proceedings or action.
34
<PAGE> 5
Section 2. Other Committees. There shall be such other committees
consisting of directors, officers and employees of the Company as the Board of
Directors, chairman of the Board, or the Chief Executive Officer of the Company
may appoint from time to time.
Section 3. Compensation. Members of committees shall receive such fees,
retainers and expenses for attendance at committee meetings and performance of
committee duties as may be determined by the Board of Directors; provided,
however, that no salaried officer of the Company shall receive a fee or retainer
for attendance at such meetings or performance of such committee duties.
ARTICLE IV - OFFICERS
Section 1. Designation and Number. The officers of the Company shall be
a Chairman of the Board, a Chief Executive officer, a President, one or more
Vice-Presidents, a Secretary, a Treasurer, and a controller, with such
designation of rank, powers and duties as the Board of Directors may from time
to time designate and determine. Such other officers or assistant officers as
may be deemed necessary may be elected or appointed by the Board of Directors
with such duties and powers as the Board may from time to time designate and
determine. Any two or more of said offices may be held by one person at the same
time, except that the Chairman, Chief Executive Officer, or President may not
also be the Secretary or Treasurer.
Section 2. Election and Tenure. The officers of the Company shall be
elected annually at the first regular meeting of the Board of Directors held
after each annual meeting of shareholders, or at a special meeting called for
that purpose if for any reason officers should not be elected at such first
meeting, and shall hold office until the first regular meeting of the Board of
Directors held after the next annual meeting of shareholders and their
successors are duly elected and qualified; provided, however, that any officer
may be removed from office by the Board of Directors at any regular or special
meeting, meeting, and any vacancy in any office, however caused, may be filled
by the Board of Directors at any regular or special meeting.
Section 3. Duties of Officers. The Board of Directors shall, from time
to time, in its discretion, designate and prescribe the duties incident to each
office, and it may, at any time, expressly authorize any officer to perform any
duty or function which is usually performed by any other officer.
Section 4. Salaries. The salaries of the officers shall be fixed from
time to time by the Board of Directors or by a committee of the Board. No
officer shall be prevented from receiving such salary by reason of the fact that
he is also a director of the Company.
ARTICLE V - INDEMNIFICATION OF DIRECTORS AND OFFICERS
To the extent permitted by and subject to the laws of the State of
South Carolina, any present or former director, officer or employee of the
Company, or any person who, at the request of the Company, express or implied,
may have served as a director or officer of another Company in which this
Company owns shares or of which this Company is a creditor, shall be entitled to
reimbursement of expenses and other liabilities, including attorney's fees
actually and reasonably incurred by him and any amount owing or paid by him in
discharge of a judgment, fine, penalty of costs against him or paid by him in a
settlement approved by a court of competent jurisdiction, in any action or
proceeding, including any civil, criminal or administrative action, suit,
hearing or proceeding, to which he is a party by reason of being or having been
a director, officer or employee of this or such other Company.
To the extent permitted by and subject to the laws of the State of
South Carolina, the Company is authorized to purchase and maintain insurance on
behalf of any present or former director, officer, or employee of the Company,
or any person who, at the request of the Company, express or implied, may have
served as a director or officer of another company in which this Company owns
shares or of which this Company is a creditor, against any liability
35
<PAGE> 6
asserted against him and incurred by him in any such capacity or arising out of
his status as such together with such costs, fees, penalties, fines and the like
with respect thereto, all as set forth hereinabove.
This section is not intended to extend or to limit in any way the
rights and remedies provided with respect to indemnification of directors,
officers, employees, and other persons provided by the laws of the State of
South Carolina but is intended to express the desire of the shareholders of this
Company that indemnification be granted to such directors, officers, employees
and other persons to the fullest extent allowable by such laws.
ARTICLE VI - CAPITAL STOCK
Section 1. Certificates of Stock. The shares of the Corporation shall
be represented by certificates, provided that the Board of Directors of the
Corporation may provide by resolution or resolutions that some or all of any or
all classes or series of its stock shall be uncertificated shares.
Notwithstanding the adoption of such a resolution by the Board of Directors,
every holder of stock represented by certificates and every holder of
uncertificated shares, upon request, shall be entitled to have a certificate,
which shall be in such form as may be prescribed by the Board of Directors,
shall be signed by the Chairman, Vice Chairman, Chief Executive Officer,
President or a Vice President and by the Treasurer or the Secretary or an
Assistant Secretary, and shall be sealed with the Company's seal or a facsimile
thereof; provided, however, that if the certificate is countersigned by a
transfer agent or any assistant transfer agent, or is registered by a registrar,
other than the Company itself or an employee of the Company, such certificates
may be signed with the facsimile signatures of the officers authorized to
execute such certificates. All certificates shall be consecutively numbered or
otherwise identified. Except as otherwise expressly provided by law, the rights
and obligations of the holders of uncertificated stock and the rights and
obligations of the holders of certificates representing stock of the same class
and series shall be identical.
Section 2. Stock Record. The name and address of the person or entity
to whom shares of the capital stock are issued, together with the certificate
number, if a certificate is issued, number of shares and date of issue, shall be
entered on the stock transfer books of the Company. All certificates surrendered
to the Company for transfer shall be canceled, and no new certificate or record
of uncertificated shares shall be issued or made until the former certificate
for a like number of shares shall have been surrendered and canceled. In the
case of a lost, destroyed or mutilated certificate, a new certificate of stock
or record of uncertificated shares may be issued or made therefor upon such
terms and indemnity to the Company as the Board of Directors may prescribe.
Section 3. Transfer of Stock. Transfer of stock of the Company shall be
made on the books of the Company by direction of the person or entity named in
the certificate or, in the case of uncertificated shares, by the person or
entity in whose name shares stand on the books of the Company, or his attorney,
lawfully constituted in writing, and upon the surrender of the certificate or
certificates for such shares, where certificated, properly endorsed, with such
evidence of the authenticity of such transfer, authorization and other matters
as the Company or its agents may reasonably require, and accompanied by any
necessary stock transfer tax stamps; or if the Board of Directors shall by
resolution so provide, transfer of stock may be made in any other manner
provided by law. Any such resolution providing for the issuance of
uncertificated shares shall not apply to shares represented by a certificate
until such certificate is surrendered to the Company. The person or entity in
whose name shares stand on the books of the Company shall be deemed by the
Company to be the owner thereof for all purposes.
Section 4. Closing Stock Transfer Books and Fixing Record Date. The
Board of Directors shall have power to close the stock transfer books of the
Company for a period not exceeding fifty days preceding the date of any meeting
of shareholders, payment of dividends, allocation of rights, change, conversion
or exchange of capital stock, or the date of determining shareholders for any
other purpose. In lieu of closing the stock transfer books, in order to
determine the holders of record of the Company's stock who are entitled to
notice of meetings, to vote at a meeting or adjournment thereof or to receive
payment of any dividend or allotment of rights, or to exercise rights with
respect to any change, conversion or exchange of capital stock, or to give
consent, or to make a determination of the shareholders of record for any other
purpose, the Board of Directors of the Company may fix in advance a record date
for such
36
<PAGE> 7
determination of shareholders, which date shall not be more than fifty days
prior to the date of the action which requires such determination, nor, in the
case of a shareholders' meeting, shall it be less than ten days in advance of
such meeting.
ARTICLE VII - AMENDMENTS
Section 1. Amendment by Shareholders. These Bylaws may be added to,
amended or repealed, by the majority vote of the entire outstanding stock of the
Company at any regular meeting of the shareholders, or at any special meeting,
where such proposed action has been announced in the call and notice of such
meeting.
Section 2. Amendment by Board of Directors. Subject to the right of the
shareholders to adopt, amend or repeal Bylaws, the Board of Directors shall have
the power to adopt, amend or repeal Bylaws, by an affirmative vote of a majority
of all directors then holding office, provided that notice of the proposal to
adopt, amend or repeal the Bylaws is included in the notice to the directors
with respect to the meeting at which such action takes place.
37
<PAGE> 1
CORPORATE INFORMATION
- -------------------------------------------------------------------------------
THE LIBERTY CORPORATION AND SUBSIDIARIES
STOCK DATA
The Liberty Corporation's Common Stock is listed on the New York Stock Exchange
under the symbol LC. As of December 31, 1998, 1,195 shareholders of record in 40
states, the District of Columbia, Canada and Australia held the 18,684,172
Common Stock shares outstanding. Quarterly high and low stock prices and
dividends per share as reported by the Wall Street Journal were:
- -------------------------------------------------------------------------------
Market Price Per Share Quarterly
Dividend
High Low Per Share
- -------------------------------------------------------------------------------
1998
- -------------------------------------------------------------------------------
Fourth Quarter $49.38 $36.25 $0.22
Third Quarter 52.31 38.31 0.22
Second Quarter 52.50 47.88 0.22
First Quarter 52.94 44.88 0.20
1997
- -------------------------------------------------------------------------------
Fourth Quarter $47.31 $42.56 $0.20
Third Quarter 45.75 40.25 0.20
Second Quarter 42.00 38.38 0.20
First Quarter 43.38 37.38 0.185
1996
- -------------------------------------------------------------------------------
Fourth Quarter $41.25 $32.25 $0.185
Third Quarter 35.88 30.12 0.185
Second Quarter 33.38 30.88 0.185
First Quarter 36.00 33.00 0.17
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 AGENT
Wachovia Bank, N.A.
Winston-Salem, North Carolina
1-800-633-4236
Written shareholder correspondence and requests for transfer should be sent to:
Wachovia Shareholder Services
C/O Boston EquiServe
P.O. Box 8217
Boston, Massachusetts 02266-8217
The Bank of New York
101 Barclay Street
New York, New York 10286
1-800-524-4458
For a free copy of the 10-K or other information contact:
The Liberty Corporation Shareholder Relations
Box 789
Greenville, SC 29602
Telephone (864) 609-8256
LIBERTY ON THE WEB
For the latest news releases and corporate and business unit information, you
can access Liberty on the web at www.libertycorp.com
Annual Meeting
The Liberty Corporation will hold its annual meeting on Tuesday, May 4, 1999, at
10:30 a.m. in The Liberty Corporation Headquarters, Greenville, South Carolina.
All Shareholders are invited to attend.
38
<PAGE> 2
SELECTED FINANCIAL DATA
- -------------------------------------------------------------------------------
THE LIBERTY CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
(In 000's, except per share data) 1998 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues * $ 584,264 $ 660,256 $ 619,097 $ 605,681 $ 540,361 $ 472,945
Income Before Income Taxes & Cumulative
Effect of Accounting Changes $ 49,101 $ 111,577 $ 56,499 $ 88,795 $ 38,868 $ 77,324
Net Income $ 17,761 $ 74,951 $ 37,340 $ 59,353 $ 26,178 $ 39,147
Earnings Per Diluted Share $ 0.80 $ 3.34 $ 1.66 $ 2.72 $ 1.26 $ 2.01
Change in Net Unrealized Investment Gains and
Losses $ (34,766) $ 21,789 $ (18,260) $ 111,095 $ (58,286) $ 1,276
Dividends Per Common Share $ 0.86 $ 0.785 $ 0.725 $ 0.665 $ 0.62 $ 0.56
Depreciation and Amortization $ 19,672 $ 20,870 $ 22,387 $ 19,034 $ 16,019 $ 13,522
Expenditures for Property and Equipment $ 11,630 $ 10,006 $ 10,554 $ 13,288 $ 9,616 $ 15,465
Assets $ 2,410,683 $3,184,758 $ 3,060,765 $3,034,296 $ 2,667,264 $2,187,033
Notes, Mortgages and Other Debts $ 285,000 $ 191,914 $ 247,861 $ 258,444 $ 231,647 $ 149,489
Redeemable Preferred Stock $ 20,967 $ 37,369 $ 45,599 $ 45,667 $ 45,816 --
Consolidated Shareholders' Equity $ 529,507 $ 674,447 $ 580,861 $ 575,762 $ 395,589 $ 433,845
</TABLE>
*See Notes 6 and 16 regarding 1998 dispositions and acquisitions
39
<PAGE> 3
MANAGEMENT'S DISCUSSION AND ANALYSIS
- -------------------------------------------------------------------------------
THE LIBERTY CORPORATION AND SUBSIDIARIES
The Liberty Corporation ("Liberty", "the Company" or "the parent company")
is a holding company with operations in broadcasting and insurance. The
Company's broadcasting subsidiary, Cosmos Broadcasting, ("Cosmos") consists of
eleven network affiliated stations in the Southeast and Midwest and a cable
advertising company. Six of the stations are affiliated with NBC, three with
ABC, and two with CBS. The Company markets its insurance products through its
insurance subsidiary, Liberty Life Insurance Company ("Liberty Life").
Additionally, Liberty is one of the nation's largest life insurance third-party
administrators, providing administrative services for over 4.4 million policies
through Liberty Insurance Services Corporation ("LIS").
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. The words "expect", "believe",
"anticipate" or similar expressions identify forward-looking statements.
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
national and local markets for television advertising; 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.
SIGNIFICANT EVENTS AND TRANSACTIONS
In February 1999, the Company announced that it was considering a variety of
restructuring alternatives that would more actively support the business
objectives of its operating subsidiaries and enhance value for shareholders.
While no decisions have been reached, options are being explored that could
potentially lead to a spin-off of one of the businesses, a joint venture with
another company or other possibilities.
During 1998, the Company completed the acquisition of three television
stations. In July 1998, the Company completed the acquisition of WALB
television, a NBC affiliate, located in Albany, Georgia for $78.6 million. In
November 1998, the Company completed the acquisition of KGBT television, a CBS
affiliate, located in Harlingen, Texas for $42.9 million. In December 1998, the
Company completed the acquisition of WWAY television, an ABC affiliate, located
in Wilmington, North Carolina for $35.4 million. The purchase of these stations
was funded using proceeds from the Company's credit facility.
On April 8, 1998, the Company completed the sale of Pierce National Life
Insurance Company ("Pierce") to Fortis, Inc. The Company received cash totaling
approximately $139 million at closing. The Company recognized a loss on the sale
of Pierce of $18.9 million in the first quarter of 1998. On December 31, 1997,
Fortis, Inc. had purchased 2,660 newly issued shares of Pierce common stock for
$37.2 million in cash. Subsequent to this stock purchase, Fortis, Inc.
maintained a twenty-one percent ownership interest in the common stock of Pierce
through the completion of the sale. LIS continues to administer the Pierce block
of business and also began to provide similar administrative services to another
subsidiary of Fortis, Inc. during 1998.
In March 1998, the Company completed a tender offer program whereby it
repurchased 2,400,000 shares of its common stock at $52 per share. In addition,
the Company repurchased 138,000 shares in the open market during 1998. The stock
repurchases were funded with borrowings from Company's credit facility.
In May 1997, Liberty completed the sale of its business rental property and
the majority of its business park 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.
SUMMARY OF CONSOLIDATED
RESULTS OF OPERATIONS
(In 000s) 1998 1997 1996
- -------------------------------------------------------------------------------
Revenues $584,264 $660,256 $619,097
- -------------------------------------------------------------------------------
Operating earnings $53,320 $70,909 $66,032
Net realized investment
gains (losses) 861 4,042 (1,748)
Loss of sale of subsidiary (18,919) -- --
Special charges (17,501) -- (26,944)
- -------------------------------------------------------------------------------
Net income $17,761 $74,951 $37,340
- -------------------------------------------------------------------------------
THE YEAR 1998 COMPARED WITH THE YEAR 1997
For 1998, consolidated revenues were $584.3 million, a 12% decrease from the
prior year. Excluding Pierce's results from both periods, revenues increased 9%
for the year. The increase was attributable to broadcasting revenues which were
up $21.6 million, or 16%, over the prior year. Also contributing to the increase
were premiums from the LibertyDirect segment of Liberty Life, which increased
16% over the prior year.
Operating earnings for 1998 of $53.3 million declined 25% compared with
1997. The reduction in earnings from having only one quarter of Pierce earnings
in 1998, financing costs associated
40
<PAGE> 4
with the share repurchases and higher corporate litigation related expenses
combined to reduce operating earnings.
Net income for the year was $17.8 million, and included special charges of
$17.5 million, the $18.9 million loss on the sale of Pierce, and realized
investment gains of $0.9 million. Significant components of the $17.5 million
special charge include amounts related to developing and implementing an
Activity Value Analysis process to redistribute resources into areas of the
Company that are growing and reduce costs where necessary; expensing of
previously capitalized costs of projects that are no longer expected to be
implemented and projects where primary additional functionality was limited to
compliance with year 2000; additional deferred acquisition cost amortization on
universal life products from changes in interest rate assumptions; and a
provision for additional taxes related to certain universal life products.
THE YEAR 1997 COMPARED WITH THE YEAR 1996
Consolidated 1997 revenues of $660.3 million were up 7% compared with the
$619.1 million reported for 1996. Liberty Life's LibertyDirect segment revenue
increase of $32.5 million accounted for the majority of the consolidated revenue
increase.
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 special charges of $26.9 million. Excluding the special charges, net
income for 1996 was $64.3 million, and 1997 earnings increased $10.7 million
(17%) over the adjusted 1996 earnings. The increase in 1997 was primarily the
result of a $5.8 million positive fluctuation in net realized investment gains
and operating earnings growth in LibertyDirect and Pierce. 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 expensed 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. All of the special charges represented non-cash items, and had no
material impact on the insurance subsidiaries' statutory financial condition.
BUSINESS SEGMENTS
The Company operates primarily in the television broadcasting and life
insurance industries. The Company has six reportable segments which are defined
based on the products and services provided. Television broadcasting is one
segment. The five reportable segments comprising the Insurance Operations are
Agency, LibertyDirect, Insurance administration, Pre-need, and Corporate and
Other. In the life insurance industry the Company currently markets products
through Liberty Life and provides insurance administrative services through LIS.
Prior to the sale of Pierce in April 1998, the Company also marketed pre-need
life insurance through Pierce. Additional segment information is included in
Note 18 to the Consolidated Financial Statements.
BROADCASTING RESULTS OF OPERATIONS
(In 000s) 1998 1997 1996
- -------------------------------------------------------------------------------
Gross broadcasting revenues $159,461 $137,898 $137,336
Agency commissions 22,383 19,005 19,433
- -------------------------------------------------------------------------------
Net broadcasting revenues 137,078 118,893 117,903
Expenses 87,655 76,679 75,534
- -------------------------------------------------------------------------------
Income before interest and taxes 49,423 42,214 42,369
- -------------------------------------------------------------------------------
Interest expense 12,533 8,348 8,630
- -------------------------------------------------------------------------------
Income before income taxes 36,890 33,866 33,739
- -------------------------------------------------------------------------------
Income taxes 14,157 12,140 13,455
- -------------------------------------------------------------------------------
Net income $ 22,733 $ 21,726 $ 20,284
- -------------------------------------------------------------------------------
As noted earlier, Cosmos completed three acquisitions in 1998. The
acquisitions are included in the broadcasting results from the date acquired and
impact the comparability of 1998 results with prior years.
THE YEAR 1998 COMPARED WITH 1997
Gross broadcasting revenues increased $21.6 million (16%) in 1998 compared
with 1997. Excluding the impact of the 1998 acquisitions, gross broadcasting
revenues increased $13.8 million, or 10%. The remainder of the comparison of
1998 with 1997 will focus on same station results and exclude the impact of the
1998 acquisitions.
Higher political revenues in 1998 provided the majority of the revenue
increase, with political revenues increasing $10.3 million over 1997 levels.
While 1998 was not a major national election year, there were contested
political races and issues in several of Cosmos' markets. Cosmos capitalized on
the overall strength of its stations in the local markets to capture a
significant portion of the political dollars spent in its markets. Local
revenues were up 3% and national revenues down 2% compared with 1997. The volume
of political spending had a negative impact on local revenue growth as the
political advertising displaced other advertisers during portions of the year.
National revenues were soft in most Cosmos markets all year.
On a same station basis broadcasting expenses increased $6.5 million (8%) in
1998 compared with 1997. The expense increase was high due to expenditures for
operations and projects designed to build future revenue. Also, as more fully
explained in the review of insurance segment results, Cosmos absorbed $1.5
million in higher expenses related to amounts that were previously borne by the
Corporate and Other segment.
Interest expense increased $4.2 million in 1998 directly related to the
financing of the 1998 acquisitions. Cosmos does not have its own credit
facility. All of Cosmos interest expense and related debt is paid, or payable,
to the parent company. The interest rate charged is
41
<PAGE> 5
intended to approximate the rate Cosmos would pay if it had a separate credit
facility. For 1998 and 1997 the interest rate was 8%.
The effective income tax rate for 1998 was 38.4% compared with 35.8% in
1997. Both rates were lower than the combined federal and state statutory rate
of 39.5%. In 1998 a tax benefit was obtained from implementation of tax planning
strategies. In 1997 a tax benefit was recorded related to the settlement of
outstanding tax issues.
THE YEAR 1997 COMPARED WITH 1996
Gross broadcasting revenues for 1997 were $137.9 million compared with
$137.3 million in 1996. Although 1997 was expected to be an off 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 from national and local advertising due to
the over strength of the economy.
Broadcasting expenses rose 2% in 1997 compared with the 1996 levels. As
previously discussed, Cosmos also benefited from a favorable $1.3 million
adjustment to income tax expense in 1997.
CASH FLOW INFORMATION
Additional measures of broadcasting performance are based on cash flow. Cash
flow information is included for the broadcasting segment because such data is
commonly used as a performance measure for broadcasting companies by investors
for, among other items, measuring a company's debt, and debt service, capacity.
This cash flow information is not, and should not be used as, an alternative or
substitute for the net income or cash flows included in the Company's
Consolidated Financial Statements, and is not a measure of financial performance
under generally accepted accounting principles.
(In 000s) 1998 1997 1996
- -------------------------------------------------------------------------------
Cash Flow and Related Information
Broadcast cash flow (1) $62,031 $51,884 $52,489
- -------------------------------------------------------------------------------
Station cash flow (2) 65,406 55,031 55,681
- -------------------------------------------------------------------------------
Broadcast cash flow margin (3) 45.3% 43.6% 44.5%
- -------------------------------------------------------------------------------
Capital expenditures $7,277 $5,752 $6,030
- -------------------------------------------------------------------------------
(1) Broadcast cash flow is defined as earnings before depreciation and
amortization, interest expense, non-operating income and expenses, and
income taxes.
(2) Station cash flow is broadcast cash flow plus cash headquarters expenses.
(3) Broadcast cash flow divided by net broadcasting revenue
The 1998 acquisitions added $3.6 million to both broadcast and station cash
flow. Excluding the impact of the acquisitions, broadcast cash flow increased
13% in 1998 compared with 1997. Cash flow for 1997 was down 1% compared with
1996. The cash flow amounts were impacted by the same items as previously
discussed for revenues and expenses.
INSURANCE RESULTS OF OPERATIONS
(in 000's) 1998 1997 1996
- -------------------------------------------------------------------------------
Operating revenues (1)
Insurance premiums and
policy charges $284,931 $350,692 $321,371
Net investment income 119,813 158,319 155,157
Service contract revenues 18,217 7,121 7,751
- -------------------------------------------------------------------------------
Total operating revenues $422,961 $516,132 $484,279
- -------------------------------------------------------------------------------
Operating earnings before
income taxes $45,456 $71,485 $65,997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
PRO FORMA INFORMATION
Pro forma revenues (2) $378,001 $354,640 $327,578
Pro forma operating
earnings before
income taxes (3) $38,507 $40,471 $40,817
- -------------------------------------------------------------------------------
(1) Excluding realized investment gains and losses and intersegment revenues
(2) Excluding Pierce operating revenues
(3) Pro forma adjusting for the combined impact of the sale of Pierce and the
financing cost associated with the share repurchase as if both transactions
had occurred at the beginning of each period presented.
Pro forma operating revenues for 1998 increased $23.4 million, or 7%,
compared with pro forma 1997 revenues. The LibertyDirect segment revenues for
1998 were $121.4 million, up $16.4 million, or 16%, from 1997 levels, with
substantially all of the growth coming from an accidental death product. The LIS
contract with Fortis resulted in revenues increasing $11.1 million in 1998
compared with 1997 revenues. Revenues for the Agency segment totaled $208.2
million in 1998, essentially the same as for 1997.
Pro forma income before income taxes from insurance operations for 1998 was
$38.5 million, a decrease of $2.0 million compared with pro forma $40.5 million
reported in 1997. Higher non-recurring litigation expenses in 1998 accounted for
the decline. In 1998, Liberty incurred costs in connection with the settlement
and conclusion of litigation over an acquisition-related contract dispute.
Expenses continue in connection with a previously disclosed suit against a
software development company where Liberty is the plaintiff. Litigation related
costs incurred for these two cases, which is reported in the Corporate and Other
segment decreased pretax operating earnings $5.0 million in 1998 compared with
1997.
42
<PAGE> 6
INSURANCE SEGMENT RESULTS
1998 1997 1996
- -------------------------------------------------------------------------------
SEGMENT OPERATING REVENUES
(excluding intersegment revenues)
Agency $208,199 $206,355 $206,907
LibertyDirect 121,364 104,984 72,530
Liberty Insurance Services 18,217 7,121 7,751
Pierce National 39,021 161,492 157,065
Corporate and Other 36,160 36,180 40,326
- -------------------------------------------------------------------------------
OPERATING REVENUES $422,961 $516,132 $484,579
PRE TAX OPERATING EARNINGS
Agency $22,372 $39,575 39,691
LibertyDirect 15,816 13,852 6,705
Liberty Insurance Services (1,304) 325 965
Pierce National 6,120 27,040 21,199
Corporate and Other 2,452 (9,307) (2,563)
- -------------------------------------------------------------------------------
Pre tax earnings from operations $45,456 $71,485 $65,997
- -------------------------------------------------------------------------------
THE YEAR 1998 COMPARED WITH 1997
With the sale of Pierce and the substantially reduced investment in real estate,
the parent company operations primarily support Liberty Life and LIS and, to a
lesser extent Cosmos. As a result significantly more of the parent company costs
are being charged or allocated to the segments. Because more costs are charged
directly to the insurance segments. The segment most significantly impacted by
the change in expense charges and allocations was Agency, the largest segment in
terms of revenues and assets. A significant portion (estimated to be
approximately $7.0 million) of the decline in Agency pre-tax operating earnings
is related to change in the expense reporting. Agency also had higher direct
expenses primarily related to technology costs from equipping its field force
with the PriorityPad sales tool. In addition to higher general expenses Agency
also had approximately $3.3 million in higher deferred policy acquisition cost
amortization expense. The higher deferred acquisition cost amortization relates
primarily to changes in the systems and methodology used to amortize deferred
acquisition costs for Agency's interest sensitive products. The system and
methodology changes increased the amortization expense over what had been
recognized in prior years using the previous system and estimates. Going
forward, subject to changes in actual experience, the amount of interest
sensitive deferred acquisition cost amortization is expected to be comparable to
the amounts recognized in 1998. Offsetting a portion of the higher general
expenses and deferred acquisition amortization expense was higher investment
income. Investment income in Agency increased $3.4 million compared with 1997
levels as Agency benefited from the decision in 1997 to sell its commercial real
estate portfolio and redeploy the proceeds into investments that have higher
current yields. If the interest environment that existed at the end of 1998
continues throughout 1999, it is expected that investment income in Agency will
be lower in 1999 than it has been in recent years.
Strong premium growth and good mortality results enabled LibertyDirect to
increase earnings by $1.9 million in 1998, overcoming an estimated $3.5 million
increase in allocated expenses. LibertyDirect's primary source of premiums is
from products sold to pay mortgage balances on the death or disability of the
insured. Lapses in this line are influenced by, among other factors, the level
of mortgage loan refinancing activity. While interest rates were low in 1998
leading to periods of higher refinancing activity, there has not been a
significant impact to date on LibertyDirect's lapse experience.
Liberty Insurance Services reported an operating loss of $1.3 million before
income taxes in 1998. This compares with income before income taxes of $0.3
million in 1997. Higher expenses associated with the start up of the Fortis
contract was the primary cause for the fluctuation in pretax earnings. The
contract was not expected to contribute to earnings in 1998 but is expected to
be profitable in future periods. LIS operations include intersegment profits of
approximately $0.6 million from servicing Liberty Life business in 1998 and no
significant intersegment profits in 1997. The improvement in the Corporate and
Other segment in 1998 compared with 1997 came predominantly from the shift in
expenses to the other segments and lower net interest costs.
THE YEAR 1997 COMPARED WITH 1996
Operating earnings before income taxes for the Agency segment were level
with 1996 amounts. Total revenues and all expense categories were similar in
amounts between the periods. LibertyDirect experienced strong premium and profit
growth in 1997 compared with 1996. The LibertyDirect segment reported a $32.5
million (45%) increase in premiums and a $7.1 million (107%) increase in pretax
operating earnings over 1996.
LIS pretax earnings from operations were $0.3 million, a decline of $0.7
million from the $1.0 million reported in 1996.
INVESTMENTS
As of December 31, 1998, Liberty's consolidated investment portfolio was
carried at $1.4 billion compared with $2.1 billion at the end of 1997.
Approximately 69% of consolidated invested assets were in fixed maturity
securities (bonds and redeemable preferred stocks), 16% was in mortgage loans,
7% in policy loans, with the balance consisting of equity securities (5%), real
estate (2%), and other long-term investments (1%).
The overall average credit rating of fixed maturity securities as of December
31, 1998 was A+. Less than investment grade securities comprised 4.9% of the
fixed maturity portfolio at December 31, 1998, compared with 3.2% at December
31, 1997.
43
<PAGE> 7
- -------------------------------------------------------------------------------
Bond Portfolio Quality Rating Chart
AAA 33.0%
AA 11.5%
A 18.1%
BBB 32.5%
Below BBB 4.9%
- -------------------------------------------------------------------------------
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, 1998 and 1997, 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 1998 and 1997 interest rates fluctuated within a relatively narrow range.
In 1998, there was a decrease in shareholders' equity of $10.9 million resulting
from a decline in the fair value of the portfolio. During 1997 shareholders'
equity increased $21.8 million as a result of changes in the fair value of
securities. While the volatility experienced in the last two years has not been
as great as that experienced in other periods, there could be significant
fluctuations in shareholders' equity as a result of carrying securities at
market value if interest rates change significantly.
- -------------------------------------------------------------------------------
Fixed Maturity Securities
Ratio of Fair Value to Amortized Cost Chart
1998 104.3%
1997 105.4%
1996 103.6%
1995 106.1%
1994 95.7%
1993 107.4%
- -------------------------------------------------------------------------------
Although Liberty's entire fixed maturity and equity security portfolios have
been classified as available for sale, Liberty pursues a value-oriented, as
opposed to a trading-oriented, investment philosophy in the management of its
securities portfolios. Accordingly, turnover in the portfolios has historically
been relatively 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. In an environment
where yields have approached historic lows, Liberty's focus remains on prudently
managing credit, interest rate and liquidity risk, the primary investment risks
within a fixed income portfolio.
Approximately 27% of Liberty's $935 million fixed maturity portfolio at
December 31, 1998, was composed of mortgage-backed securities. This compares
with approximately 38% at year-end 1997. 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 12% of the book value of Liberty's mortgage-backed
securities at December 31, 1998, and 19% at year-end 1997, are sensitive to
prepayment or extension risk. The remaining 88% of Liberty's mortgage-backed
investment portfolio at December 31, 1998, consisted of planned amortization
class ("PAC") instruments. This compares to 81% at December 31, 1997. 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 $215.5 million comprised 16% of the consolidated investment
portfolio at December 31, 1998. This compares to mortgage loans of $244.8
million, or 11%, of the consolidated investment portfolio at December 31, 1997.
Substantially all of these mortgage loans are commercial mortgages with a
loan-to-value ratio not exceeding 75% when made. Approximately 52% of these
loans at December 31, 1998, are concentrated in North and South Carolina; and
88% are in the states of North Carolina, South Carolina, Tennessee, Georgia and
Virginia. Mortgage loan delinquencies, defined as payments 60 or more days past
due, have historically been low and were 0.22% at the end of 1998 compared to
the latest available industry rate of 0.57%.
As discussed above, Liberty's consolidated investment portfolio including
fixed maturity securities available for sale, mortgage loans and other financial
instruments such as policy loans and debt swap agreements (see Note 5 to the
Consolidated Financial Statements) are subject to market risks including the
risk of changes in interest rates at varying maturities. Additionally, the
44
<PAGE> 8
Company's equity securities available for sale portfolio is subject to market
risk including equity pricing risk.
As typical in the industry, certain life insurance products of the Company
contain minimum rate guarantees regarding interest credited (see Note 4 to the
Consolidated Financial Statements). The Company employs various methodologies to
manage its exposures to interest rate risks. The asset/liability matching
process focuses primarily on the management of interest rate risk of the
Company's insurance operations. Liberty monitors the duration of insurance
liabilities compared to the duration of assets backing the various insurance
lines of business to evaluate the timing of cash flows becoming available from
the assets to fund the expected benefits of the insurance liabilities. The
Company's goal with such an analysis is to balance the risk and profitability
for each insurance line of business and for the Company as a whole.
The Company considers the timing of cash flows arising from market risk
sensitive instruments and insurance products under varying interest rate
scenarios as well as the correlated impact on reported earnings under those
scenarios. The following table of various hypothetical interest rate scenarios
illustrates the estimated impact to Liberty's earnings for the next year, based
on the assumptions contained in the Company's model, if such scenarios
materialized:
Estimated Incremental
Increase or Decrease in
CHANGE IN INTEREST RATE Earnings (in 000s)
- -------------------------------------------------------------------------------
Increase 1 percent $ 841
Decrease 1 percent (1,965)
These estimates were derived by modeling estimated cash flows of the
Company's available for sale fixed maturity securities, mortgage loans, policy
loans and interest rate swaps. Changes in interest rates illustrated above
assume parallel shifts in the yield curve graded pro-rata over four quarters.
Incremental income (loss) is net of taxes at 35%. Estimated cash flows produced
in the model assume reinvestments representative of Liberty's current strategy
and calls/prepayments which would result when the issuers or borrowers can
benefit financially based upon the difference between prepayment penalties and
new money rates under each scenario.
The estimated incremental increase or decrease in earnings from the indicated
changes in interest rates relates only to the earnings provided directly from
fixed maturity securities, mortgage loans, policy loans and debt. In addition,
any fluctuation in interest rates would change the Company's earnings because of
the impact of the changes on other components of the Company's operations that
are directly and indirectly influenced by the change in interest rates, or
because of the impact of the underlying economic conditions that caused interest
rates to change have on the demand for the Company's products and services.
Liberty's portfolio of equity securities is exposed to price risk. The
Company held equity securities with a market value of $63.7 million at December
31, 1998, including $12.7 million in Liberty Properties Trust, a non-affiliated
real estate investment trust. The majority of stocks within the portfolio are
considered to be small or mid-capitalization stocks (below $5 billion in market
capitalization) and most closely correlate with the performance of the S&P
MidCap 400 Index. If the market value of the S&P MidCap 400 Index, and of
Liberty Property Trust specifically, declined 10% from December 31, 1998 values,
the market value of the Company's common stock portfolio could be expected to
decrease by approximately $6.4 million.
Additional disclosures concerning the fair values in relation to the carrying
values of Liberty's financial instruments are included in Note 17 to the
Consolidated Financial Statements.
As of December 31, 1998 and 1997, investment real estate totaled $34.8
million and $49.2 million, representing 2% of consolidated investment portfolio
at both periods. The portfolio consists primarily of residential land and lots
in various stages of development and completion. Liberty does not currently plan
to make any future investments in new investment real estate properties but will
continue to manage the existing portfolio to maximize the value to the Company.
Substantially all of the remaining investment real estate is located in South
Carolina.
Liberty has experienced pre-tax impairments on investment assets of $0.6
million, $7.2 million and $4.3 million for the years ended December 31, 1998,
1997, and 1996, respectively. The high level of impairments in 1997 was due to
approximately $6.6 million of write-downs 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. 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.
LIQUIDITY AND CAPITAL RESOURCES
In May 1998, Liberty entered into a $300 million credit facility maturing in
April, 2003, replacing the previous $275 million facility that was scheduled to
mature in 1999. The Company may request up to an additional $150 million under
the current facility, subject to the approval of the participating lenders. The
credit agreement contains various restrictive and financial covenants typical of
a credit facility of this size and nature. These restrictions primarily pertain
to limitations on the quality and types of investments and prescribed ratios of
consolidated debt to consolidated total capital and fixed charges coverage.
Liberty funded the 1998 purchases of three television stations, with a total
purchase of approximately $156.9 million, from borrowings under the credit
facility.
45
<PAGE> 9
- -------------------------------------------------------------------------------
Debt to Capital Ratio Chart
Excluding Unrealized Investment Gains and Losses
1998 35.2%
1997 22.8%
1996 29.7%
1995 31.4%
1994 31.9%
1993 25.9%
- -------------------------------------------------------------------------------
Liberty has entered into interest rate swaps 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 ("1994-A Series") 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 ("1994-B
Series") 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. At December 31, 1998, there were 198,259
shares outstanding for the 1994-A Series and 374,059 shares outstanding for the
1994-B Series. These shares are eligible to be redeemed beginning in March, 1999
and Liberty expects to call them for redemption in 1999.
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.
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 Liberty Life indicate that Liberty
Life's capital significantly exceeds the minimum capital requirements at
December 31, 1998.
The parent company's short-term cash needs consist primarily of: (1)
working capital requirements, (2) interest on corporate debt, and (3) dividends
to shareholders. The parent company's primary long-term cash need is the
repayment of corporate debt. The parent company depends primarily on dividends
and debt service payments paid to it by its subsidiaries to meet its short-term
and long-term cash needs. Historically, Liberty's primary businesses have
provided sufficient liquidity to fund their own operations as well as the
operations of the parent company. Liberty receives funds from Liberty Life
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 $24.8 million for 1998 compared with $61.8 million for 1997 and
$74.2 million for 1996.
Liberty's net cash used in investing activities was $44.8 million in 1998
compared with net cash provided of $2.8 million in 1997 and net cash used of
$88.9 million in 1996. The net cash used in investing activities in 1998 was
primarily related to the purchase of television stations, with a portion of the
cash to fund the purchases generated from the sale of Pierce. The primary
sources of net cash provided by investing activities in 1997 was the sale of the
commercial real estate as described previously, and the sale of Pierce National
stock to Fortis, Inc. The net cash used in investing activities in 1996 was
primarily related to the purchase of investment securities.
Cash flow used in financing activities for 1998 was $25.1 million. During
1998 the Company repurchased 2,538,000 shares of its common stock for $131.1
million. Of the amount repurchased $125.5 million was repurchased through a
tender offer with the balance purchased in the open market. Other than the stock
repurchases, cash flow related to 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 in 1996.
At December 31, 1998 outstanding debt totaled $285 million and the debt to
capital ratio was 35%. The Company believes that its current level of cash and
expected future cash flows from operations are sufficient to meet the needs of
its business and to satisfy its debt service. If suitable opportunities arise
for additional acquisitions, Liberty believes it can arrange for additional
credit or use Common Stock or Preferred Stock as payment for all or part of the
46
<PAGE> 10
consideration for such acquisitions; or Liberty may seek additional funds in the
equity or debt markets. Under Liberty's credit facility there exists no
restriction on acquisition funding, however, the total debt to capital ratio is
limited to 35%. Because the debt to capital ratio was 35% at December 31, 1998
the current credit facility would have to be modified or re-negotiated to permit
a significant amount of additional debt.
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.
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.
IMPACT OF THE YEAR 2000
The Year 2000 issue is the result of computer programs written to use two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have date sensitive software or embedded
chips 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 billings, pay personnel properly, or engage
in normal business activities.
The Company has determined that it will be required to modify or replace
significant portions of its software and certain hardware so that its systems
will properly utilize dates beyond December 31, 1999. The Company currently
believes that with modifications and replacements to software and certain
hardware, the Year 2000 issue will be mitigated. However, if the required
modifications and replacements are not made or are not completed timely, the
Year 2000 issue could have a material impact on the operations of the Company.
The Company's plan to resolve the Year 2000 issue involves the following four
phases: assessment, remediation, testing, and implementation. The Company has
completed the full assessment of all systems that could be significantly
affected by the Year 2000. The completed assessment indicated that a number of
the Company's information technology systems could be affected, particularly the
insurance administration, billing, and commissioning systems. The Company also
completed an assessment of the equipment used at the television stations. In
addition, the Company is gathering information about the Year 2000 compliance
status of its significant suppliers and business partners and is continuing to
monitor their compliance.
PROGRESS IN BECOMING YEAR 2000 COMPLIANT
As mentioned previously the Company has completed the assessment phase to
determine its information technology exposures. Liberty is 100% complete with
its assessment phase, approximately 99% complete on the remediation phase, 65%
complete with its testing phase and has implemented a number of business
critical Year 2000 compliant systems. The Company plans to be significantly
complete with its testing efforts by March 31, 1999. Completion of the
implementation phase for all significant systems is expected by June 30, 1999.
The Company is approximately 90% complete in the remediation phase of its
operating equipment used in the broadcasting operations. The Company is
approximately 95% complete with the testing of its remediated operating
equipment. Once testing is complete, the operating equipment will be ready for
immediate use. Testing and implementation of affected equipment is expected to
be 100% complete by June 30, 1999.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO THE YEAR
2000
The Company's insurance collection system interfaces directly with
significant third party vendors including a large number of banks and financial
institutions. The Company is in the process of working with its primary third
party vendors to ensure that the Company's systems that interface directly with
third parties are Year 2000 compliant by December 31, 1999. The Company has
completed its remediation efforts on its collection system and is 95% complete
with the testing phase. Testing of all significant systems that are tied to
vendor interfaces was completed by December 31, 1998. The Company is asking its
critical vendors to provide, in written form, documentation relating to their
Year 2000 compliance. To date, Liberty is not aware of any significant supplier
or subcontractor with a Year 2000 issue that would materially impact the
Company's results of operations, liquidity, or capital resources. However, the
Company has no means of ensuring that its suppliers or subcontractors will be
Year 2000 ready. The inability of the Company's suppliers or subcontractors to
complete their Year 2000 resolution process in a timely fashion could materially
impact the Company, although the effect of non-compliance by significant
suppliers or subcontractors is not fully determinable. The Company will continue
to monitor correspondence from significant suppliers and subcontractors and
develop contingency plans where deemed appropriate.
RISK AND RISK FACTORS
Management believes it has an effective program in place to resolve the Year
2000 issue in a timely manner. As noted above, the Company has not yet completed
all necessary phases of the Year 2000 program. In the event that the Company,
for unforeseen
47
<PAGE> 11
reasons, does not complete any additional phases, the Company would be unable to
correctly issue certain insurance policies, invoice customers, collect payments
or pay agents properly. Disruptions in the economy generally resulting from Year
2000 issues could also adversely affect the Company. Additionally, the Company
could be subject to litigation for computer systems product failure, such as,
equipment shutdown or failure to properly date business records. The amount of
potential liability and lost revenue cannot be reasonably estimated at this
time.
CONTINGENCY PLANS
The Company has contingency plans for certain critical applications and is
working on such plans for others. These contingency plans involve, among other
actions, manual workarounds and adjusting staffing strategies. Additionally, the
Company has decided to remediate and test older systems that are planned for
replacement during the first half of 1999. Thus, if replacement projects are
delayed for any reason, the older systems will function beyond the Year 2000.
YEAR 2000 COSTS
The Company is using both internal and external resources to reprogram or
replace, test and implement the software and equipment to ensure it is Year 2000
compliant. The Company has implemented several major systems projects during the
last three and one-half 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 were Year 2000 compliant. The total cost of
the projects to be undertaken for which a component of the project, or the
entire project, has to do with remediating the Year 2000 problem is estimated to
be approximately $18.4 million and is being funded through operating cash flows.
Of the total, approximately $11.1 million is expected to be expensed, 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 $16.1 million of costs ($6.9 million capitalized and $9.2
million expensed). Of this total, the amounts in 1998 include approximately $4.1
million capitalized and $8.7 million expensed, including $7.3 million included
in the special charges.
NEW ACCOUNTING PRONOUNCEMENTS
In June, 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This standard is required to be adopted in years
beginning after June 15, 1999. The Company has not determined when it will adopt
this standard. The Statement will require the Company to recognize all
derivatives on the balance sheet at fair value. Derivatives that are not hedges
must be adjusted to fair value through income. If the derivative is a hedge,
depending on the nature of the hedge, changes in the fair value of derivatives
will be either offset against the change in fair value of the hedged assets,
liabilities or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. The Company's use of derivatives is limited to fixing
the cost of borrowings on a portion of the outstanding debt. The Company has not
yet determined what the effect of Statement 133 will be on the earnings and
financial position of the Company, but it is not expected to be material.
48
<PAGE> 12
CONSOLIDATED STATEMENTS OF INCOME
THE LIBERTY CORPORATION AND SUBSIDIARIES
(In $000's, except per share data)
<TABLE>
<CAPTION>
For the Years Ended December 31 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Insurance premiums and policy charges $284,931 $350,692 $ 321,371
Broadcasting revenues 159,461 137,898 137,336
Net investment income 119,813 158,319 155,221
Service contract revenues 18,217 7,121 7,751
Realized investment gains (losses) 1,842 6,226 (2,582)
- ----------------------------------------------------------------------------------------------------------------------
Total revenues 584,264 660,256 619,097
- ----------------------------------------------------------------------------------------------------------------------
EXPENSES
Policyholder benefits 154,661 227,927 218,751
Insurance commissions 79,659 78,939 66,483
General insurance expenses 87,988 67,270 73,790
Amortization of deferred acquisition costs and cost of business acquired 51,018 45,564 73,967
Broadcasting expenses 109,161 95,588 94,867
Interest expense 14,208 13,209 15,139
Loss on sale of subsidiary 13,811 -- --
Other expenses 24,657 20,182 19,601
- ----------------------------------------------------------------------------------------------------------------------
Total expenses 535,163 548,679 562,598
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes 49,101 111,577 56,499
Provision for income taxes 31,340 36,626 19,159
- ----------------------------------------------------------------------------------------------------------------------
Net income $ 17,761 $ 74,951 $ 37,340
- ----------------------------------------------------------------------------------------------------------------------
EARNINGS PER COMMON SHARE
- ----------------------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.80 $ 3.50 $ 1.67
- ----------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.80 $ 3.34 $ 1.66
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
49
<PAGE> 13
CONSOLIDATED BALANCE SHEETS
THE LIBERTY CORPORATION AND SUBSIDIARIES
(In 000's)
<TABLE>
<CAPTION>
At December 31 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturity securities
Available for sale, at market, cost of $896,944 in 1998 and $1,587,587 in 1997 $ 935,178 $1,673,888
Equity securities, primarily at market, cost of $54,354 in 1998, $55,992 in 1997 63,658 74,568
Mortgage loans 215,549 244,821
Investment real estate, at cost less accumulated depreciation $12,212 in 1998,
$10,742 in 1997 34,788 49,169
Policy loans 90,653 100,322
Other long-term investments 21,256 18,459
Short-term investments 250 250
- -------------------------------------------------------------------------------------------------------------------------
Total Investments 1,361,332 2,161,477
- -------------------------------------------------------------------------------------------------------------------------
Cash 16,633 61,786
Accrued investment income 13,508 21,723
Receivables net of bad debt reserves, $1,163 in 1998, $1,441 in 1997 69,536 69,433
Receivable from reinsurers 275,602 278,165
Deferred acquisition costs 248,764 275,615
Cost of business acquired 35,602 62,226
Buildings and equipment, at cost, less accumulated depreciation $127,502 in 1998,
$114,473 in 1997 101,523 74,338
Intangibles related to television operations, at cost, net of amortization $37,465 in
1998, $29,168 in 1997 212,842 90,080
Goodwill related to insurance acquisitions, at cost, net of amortization $9,133 in
1998, $10,929 in 1997 22,868 33,950
Other assets 52,473 55,965
- -------------------------------------------------------------------------------------------------------------------------
Total Assets $2,410,683 $3,184,758
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 14
<TABLE>
<CAPTION>
(In 000's)
At December 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Liabilities:
Policy liabilities:
Future policy benefits $ 1,279,929 $ 1,890,786
Claims and benefits payable 30,247 36,991
Policyholder funds 24,355 28,154
- ---------------------------------------------------------------------------------------------------------------------------
1,334,531 1,955,931
Notes and mortgages payable 285,000 191,914
Accrued income taxes 7,348 3,282
Deferred income taxes 122,650 173,562
Accounts payable and accrued expenses 106,523 106,191
Other liabilities 4,157 4,902
Minority interest -- 37,160
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities 1,860,209 2,472,942
- ---------------------------------------------------------------------------------------------------------------------------
Redeemable Preferred Stock:
1994-A Series, $35.00 redemption value, 198,259 and 504,168 shares issued and
outstanding in 1998 and 1997, respectively 6,939 17,646
1994-B Series, $37.50 redemption value, 374,059 and 525,948 shares issued and
outstanding in 1998 and 1997, respectively 14,028 19,723
- ---------------------------------------------------------------------------------------------------------------------------
Total Redeemable Preferred Stock 20,967 37,369
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity:
Common stock
Authorized - 50,000,000 shares, no par value
Issued and outstanding - 18,684,172 shares in 1998, 20,712,686 shares in 1997 70,565 182,994
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 - 1,172,303 shares in 1998, 1,630,101 shares in 1997
Unearned stock compensation (7,596) (10,872)
Retained earnings 418,790 419,476
Accumulated other comprehensive income 26,749 61,850
- ---------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity 529,507 674,447
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Total Liabilities, Redeemable Preferred Stock and Shareholders' Equity $ 2,410,683 $ 3,184,758
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
51
<PAGE> 15
CONSOLIDATED STATEMENTS OF CASH FLOWS
THE LIBERTY CORPORATION AND SUBSIDIARIES
(In 000's)
<TABLE>
<CAPTION>
For the Years Ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 17,761 $ 74,951 $ 37,340
Adjustments to reconcile net income to net cash provided by operating
activities:
(Decrease) increase in policy liabilities (13,320) 7,390 5,545
Increase in accounts payable and accrued expenses 7,717 2,571 14,050
Increase in receivables (1,146) (6,600) (4,645)
Amortization of deferred acquisition costs and cost of business acquired 51,018 45,564 73,967
Policy acquisition costs deferred (52,337) (55,312) (51,122)
Realized investment (gains) losses (1,842) (6,226) 2,582
Gain on sale of operating assets (1,826) (2,011) (3,172)
Loss on sale of subsidiary 13,811 -- --
Depreciation and amortization 19,672 20,870 22,387
Amortization of bond premium and discount (6,858) (7,575) (5,835)
Provision for deferred income taxes (4,312) 1,613 (8,905)
All other operating activities, net (3,584) (13,394) (7,957)
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 24,754 61,841 74,235
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment securities sold 78,583 128,513 181,572
Investment securities matured or redeemed by issuer: 171,166 100,031 75,369
Cost of investment securities acquired (274,631) (288,053) (322,633)
Mortgage loans made (57,192) (50,067) (38,845)
Mortgage loan repayments 57,079 35,535 21,111
Purchase of investment properties, buildings and equipment (16,274) (21,552) (43,926)
Sale of investment properties, buildings and equipment 20,933 63,164 37,858
Purchases of short-term investments (8,255) (42,423) (73,602)
Sales of short-term investments 8,255 42,423 73,352
Cash received on issuance of Pierce National Life common stock -- 37,160 --
Net cash received on sale of subsidiary 133,060 -- --
Net cash paid on purchase of television stations (156,942) -- --
All other investment activities, net (602) (1,940) 823
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (44,820) 2,791 (88,921)
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Proceeds from borrowings 3,265,000 2,505,000 2,957,704
Principal payments on debt (3,171,914) (2,560,947) (2,970,011)
Dividends paid (18,447) (19,540) (18,366)
Stock issued for employee benefit and compensation programs 1,974 3,884 1,441
Repurchase of common stock (131,114) -- --
Return of policyholders' account balances (31,606) (38,949) (35,966)
Receipts credited to policyholders' account balances 61,020 70,932 72,917
- -----------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (25,087) (39,620) 7,719
- -----------------------------------------------------------------------------------------------------------------------------------
(DECREASE) INCREASE IN CASH (45,153) 25,012 (6,967)
Cash at beginning of year 61,786 36,774 43,741
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AT END OF YEAR $ 16,633 $ 61,786 $ 36,774
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to consolidated financial statements.
52
<PAGE> 16
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
THE LIBERTY CORPORATION AND SUBSIDIARIES
(Amounts in 000's except per share data)
<TABLE>
<CAPTION>
UNEARNED ACCUMULATED
COMMON CONVERTIBLE STOCK OTHER
SHARES COMMON PREFERRED COMPEN- COMPREHENSIVE RETAINED
OUTSTANDING STOCK STOCK TION INCOME EARNINGS TOTAL(1)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 20,061 $ 158,735 $ 20,999 $ (6,050) $56,987 $345,091 $575,762
Net income 37,340 37,340
Net unrealized investment losses (18,260) (18,260)
Foreign currency translation
adjustment 795 795
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
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) $39,522 $364,065 $580,861
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 74,951 74,951
Net unrealized investment gains 21,789 21,789
Foreign currency translation
adjustment 539 539
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)
Stock issued for employee
benefit and performance
incentive compensation programs 268 11,320 (3,704) 7,616
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) $61,850 $419,476 $674,447
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 17,761 17,761
Net unrealized investment losses (34,766) (34,766)
Foreign currency translation
adjustment (335) (335)
Dividends - Common Stock - $0.86
per share (15,846) (15,846)
Dividends - Redeemable Preferred
Stock - $2.10 per share (1,551) (1,551)
Dividends - Convertible
Preferred Stock - $1.75 per (1,050) (1,050)
share
Stock issued for employee
benefit and performance
incentive compensation programs 51 3,897 3,276 7,173
Stock issued for conversion of
redeemable preferred stock 458 14,788 14,788
Stock repurchased as part of
tender or on open market (2,538) (131,114) (131,114)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998 18,684 $ 70,565 $ 20,999 $ (7,596) $26,749 $418,790 $529,507
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Comprehensive income, which includes the aggregate of net income, net
unrealized investment gains (losses) and foreign currency translation
adjustment, was $19,875, $97,279, and $(17,340) for 1996, 1997 and 1998,
respectively.
See notes to consolidated financial statements.
53
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ----------------------------------------------------------------------
THE LIBERTY CORPORATION AND SUBSIDIARIES
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) through April 8, 1998 (see Note 6), 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. 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
eleven network affiliated television stations throughout the southeastern and
midwestern states. Information on the Company's operations by segment is
included in Note 18 of this report.
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 com-missions 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. 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
54
<PAGE> 18
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. 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.
- - 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.
- - 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. 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 in 1996.
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
55
<PAGE> 19
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 adopted by the Company January 1, 1998. This statement requires
companies to report and display comprehensive income and its components as part
of the general financial statements. The most significant items which 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.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") was adopted by
the Company retroactively in 1998. This statement 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 (see Note 18).
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 133, "Accounting for
Derivative Instruments and Hedging Activities" was issued by the Financial
Accounting Standards Board in June, 1998. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge, changes in the fair
value of derivatives will be either offset against the change in fair value of
the hedged assets, liabilities or firm commitments through earnings or
recognized in other comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in fair value will be
immediately recognized in earnings. The Company's use of derivatives is limited
to fixing the cost of borrowings on a portion of the outstanding debt. This
standard is required to be adopted in years beginning after June 15, 1999 and
the Company has not determined when it will adopt this standard. The Company has
not yet determined what the effect of Statement 133 will be on the earnings and
financial position of the Company, but it is not expected to be material.
RECLASSIFICATIONS have been made in the 1997 and 1996 Consolidated Financial
Statements to conform to the 1998 presentation.
2. INVESTMENTS
Amortized cost and estimated fair values of investments in available for sale
securities at December 31, 1998 and 1997 are as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
1998 (In 000s) Cost Gains Losses Value
- --------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Fixed maturity securities
US government obligations $4,561 $340 --- $4,901
Foreign
Corporate and Other 38,851 1,433 1,820 38,464
Corporate securities 609,619 35,873 6,399 639,093
Mortgage-backed securities 243,913 9,301 494 252,720
- --------------------------------------------------------------------------------
Total 896,944 46,947 8,713 935,178
Equity securities 54,354 13,481 4,177 63,658
- --------------------------------------------------------------------------------
Total $951,298 $60,428 $12,890 $998,836
- --------------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
1997 (In 000s) Cost Gains Losses Value
- --------------------------------------------------------------------------------
AVAILABLE FOR SALE:
Fixed maturity securities
US government obligations $15,248 $571 $12 $15,807
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 securities 55,992 21,326 2,750 74,568
- --------------------------------------------------------------------------------
Total $1,643,579 $110,254 $5,377 $1,748,456
- --------------------------------------------------------------------------------
56
<PAGE> 20
Realized gains (losses) and the change in unrealized gains (losses) on the
Company's fixed maturities and equity securities are summarized as follows:
Total Gains
Fixed Equity (Losses) on
(In 000s) Maturities Securities Investments
- --------------------------------------------------------------------------------
1998
Realized investment
gains (losses) $131 $1,947 $2,078
Change in unrealized
investment gains
(losses) (10,629) (8,026) (18,655)
- --------------------------------------------------------------------------------
Combined $(10,498) $(6,079) $(16,577)
- --------------------------------------------------------------------------------
1997
Realized investment
gains (losses) $ (150) $ 8,755 $ 8,605
Change in unrealized
investment gains
(losses) 33,975 4,416 38,391
- --------------------------------------------------------------------------------
Combined $ 33,825 $13,171 $ 46,996
- --------------------------------------------------------------------------------
1996
Realized investment
gains (losses) $ (2,864) $10,160 $ 7,296
Change in unrealized
investment gains
(losses) (31,389) 289 (31,100)
- --------------------------------------------------------------------------------
Combined $(34,253) $10,449 $(23,804)
- --------------------------------------------------------------------------------
The schedule below details consolidated investment income and related
investment expenses for the years ended December 31.
(In 000s) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest on
Bonds $84,971 $123,932 $113,016
Mortgage loans 19,804 21,191 19,858
Policy loans 4,601 4,981 4,932
Short-term investments 933 708 600
Dividends on
Preferred stocks 3,490 4,543 6,196
Common stocks 512 574 1,050
Investment property rentals 771 4,121 9,712
Net gain on investment
real estate held for
development 3,123 3,838 6,518
Other investment income 7,122 6,705 5,643
- --------------------------------------------------------------------------------
Total investment income 125,327 170,593 167,525
Investment expenses 5,514 12,274 12,304
- --------------------------------------------------------------------------------
Net investment income $119,813 $158,319 $155,221
- --------------------------------------------------------------------------------
Proceeds from sales of fixed maturities and the related gross realized gains
and losses for the three years ended December 31are shown below. The amounts
shown below do not include those related to unscheduled redemptions or
prepayments, nor do they reflect any impairments taken during the years
presented.
(In 000s) 1998 1997 1996
- --------------------------------------------------------------------------------
Proceeds from sales $52,548 $83,978 $157,425
Gross realized gains 947 315 1,088
Gross realized losses (2,051) (1,489) (4,832)
The following investment assets were non-income producing for the twelve months
ended December 31, 1998:
Balance Sheet
(In 000s) Amount
- --------------------------------------------------------------------------------
Investment real estate $ 10,118
Other long-term investments 21,510
Mortgage loans 2,028
- --------------------------------------------------------------------------------
Total $ 33,656
- --------------------------------------------------------------------------------
For the year ended December 31, 1998, the Company incurred realized losses of
$3,453,000 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, 1998, are as follows:
Cumulative Provision
(In 000s) for Impairments
- --------------------------------------------------------------------------------
Mortgage loans $ 734
Investment real estate 8,942
Other long-term investments 1,416
- --------------------------------------------------------------------------------
Total $ 11,092
- --------------------------------------------------------------------------------
The amortized cost and estimated fair value of fixed maturities at December
31, 1998, by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
Amortized Fair
(In 000s) Cost Value
- --------------------------------------------------------------------------------
Due in one year or less $ 17,818 $ 18,161
Due after one year through five years 103,857 109,605
Due after five years through ten years 224,512 234,900
Due after ten years 306,844 319,792
- --------------------------------------------------------------------------------
653,031 682,458
Mortgage-backed securities primarily
maturing in five to twenty-five years 243,913 252,720
- --------------------------------------------------------------------------------
Total $896,944 $935,178
- --------------------------------------------------------------------------------
57
<PAGE> 21
3. REINSURANCE AGREEMENTS
The Company uses reinsurance as a risk management tool in the nor mal 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,
1998, $3.4 billion (18%) of the Company's total $18.9 billion gross insurance in
force was ceded to other companies. In the accompanying financial statements,
insurance premiums and policy charges, policy-holder 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, 1998, Liberty Life's interest in
the assets held in escrow consisted of investments with an amortized cost of
$66.2 million and a fair value of $69.5 million. Comparable book and fair value
at December 31, 1997 was $63.3 million and $66.5 million, respectively. These
investments had an average rating of AA-. The total face value of insurance
ceded to Life Re at December 31, 1998, was $2.2 billion and the Company has
recorded a receivable related to this transaction from Life Re of $252.0 million
as of December 31, 1998. Currently, Life Re has an A.M. Best rating of A+.
During 1998 and 1997, Liberty Life had ceded premiums and policy charges of
$16.3 million and $17.1 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, 1998, the
amortized cost and fair value of the invested assets held in escrow was $238.3
million and $252.1 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. 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.
The effect of reinsurance on premiums and policy charges and benefits was as
follows for the years ending December 31:
(In 000s) 1998 1997 1996
- --------------------------------------------------------------------------------
Direct premiums and
policy charges $317,027 $384,010 $356,660
Reinsurance assumed 238 873 1,209
Reinsurance ceded (32,334) (34,191) (36,498)
- --------------------------------------------------------------------------------
Net premiums and policy
charges $284,931 $350,692 $321,371
- --------------------------------------------------------------------------------
Gross benefits $180,611 $257,685 $243,584
Reinsurance recoveries (25,950) (29,758) (24,833)
- --------------------------------------------------------------------------------
Net benefits $154,661 $227,927 $218,751
- --------------------------------------------------------------------------------
4. DEFERRED ACQUISITION COSTS, COST OF BUSINESS ACQUIRED AND FUTURE POLICY
BENEFITS
A summary of the changes in deferred acquisition costs is as follows:
(In 000s) 1998 1997 1996
- --------------------------------------------------------------------------------
Beginning balance $275,615 $262,182 $265,188
Deferred during the year 52,337 55,312 51,122
Amortized during the year (46,363) (37,069) (57,812)
Adjustment related to
unrealized investment
(gains) losses 2,357 (4,508) 3,712
Insurance in force ceded/
sold (35,248) --- ---
Foreign currency
translation 66 (302) (28)
- --------------------------------------------------------------------------------
Ending balance $248,764 $275,615 $262,182
- --------------------------------------------------------------------------------
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. The insurance in force
ceded/sold is in connection with the sale of Pierce National Life Insurance
Company in 1998. Also in 1998, the Company recognized an additional $6.4 million
of amortization for the unlocking of the interest spread assumptions on
interest-sensitive products.
58
<PAGE> 22
A summary of the changes in costs of business acquired through acquisitions
is as follows:
(In 000s) 1998 1997 1996
- --------------------------------------------------------------------------------
Beginning balance $62,226 $70,764 $86,925
Interest accrued 3,366 5,070 5,860
Related to insurance in
force ceded/ sold (21,975) --- ---
Foreign currency
adjustment 6 (43) (6)
Amortized during the year (8,021) (13,565) (22,015)
- --------------------------------------------------------------------------------
Ending balance $35,602 $62,226 $70,764
- --------------------------------------------------------------------------------
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
7.85% 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 1998 or 1997.
Under current assumptions, amortization of cost of business acquired, prior
to consideration of accrued interest implicit in the calculation of the
amortization, for the next five years is expected to be as follows:
(In 000s) Amortization
- --------------------------------------------------------------------------------
1999 $6,099
2000 5,447
2001 4,909
2002 4,367
2003 4,091
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 5.9% for 1998 for Liberty Life Insurance Company, 6.7% and 6.6% for
1997 and 1996 which includes Pierce National Life Insurance Company in addition
to Liberty Life Insurance Company. 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% to 6.25% in 1998, 4.0% to 6.45% in 1997,
and 4.0% to 6.75% in 1996.
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.
5. DEBT
The debt obligations at December 31 are as follows:
Interest
(In 000s) Rate 1998 1997
- --------------------------------------------------------------------------------
Borrowings under
revolving credit
agreement 5.8% $283,000 $188,000
Mortgage loans on
investment property 8.0% --- 1,214
Other --- 2,000 2,700
- --------------------------------------------------------------------------------
Total $285,000 $191,914
- --------------------------------------------------------------------------------
Maturities of the debt obligations at December 31, 1998, are as follows:
Maturities (In 000s) Amount
- --------------------------------------------------------------------------------
1999 $700
2000 650
2001 650
2002 ---
2003 283,000
Thereafter ---
- --------------------------------------------------------------------------------
Total $285,000
- --------------------------------------------------------------------------------
In May 1998, the Company refinanced its credit facility into a new, $300
million revolving credit facility maturing in April, 2003. The Company may
request up to an additional $150 million under the new facility subject to
approval by the bank group.
The Company's borrowings against the revolving credit facility were
$283,000,000 at December 31, 1998. During 1998, the maximum amount outstanding
on the new revolving facility amounted to approximately $283,000,000 with an
average balance outstanding of approximately $223,000,000 and an average
weighted interest rate of 5.8%.
The Company has the option to solicit money market interest quotes from the
bank group for borrowings under the revolving
59
<PAGE> 23
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 $300,000,000 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 and financial covenants
typical of a credit facility of this size and nature. These restrictions
primarily pertain to limitations on the quality and types of investments and
defined ratios of consolidated debt to consolidated total capital and fixed
charges coverage. As of December 31, 1998, the Company was in compliance with
all covenants under its debt agreement, or events of noncompliance had been
waived.
The Company has entered into interest rate swap agreements as a means of
managing interest rate exposure on its floating rate debt. The agreements are
contracts to exchange fixed and floating interest rate payments periodically
over the life of the agreements, without the exchange of the underlying notional
amounts. The Company pays the counterparty a fixed rate and the counterparty
pays the Company interest at a floating rate based on three month LIBOR. The
interest differential to be paid or received on the swaps is accrued and
included in interest expense for financial reporting purposes. The agreements
are with major financial institutions and the Company's credit exposure is
limited to the value of the interest rate swap that has, or may become favorable
to the Company. Information about the interest rate swaps follows:
Fixed Rate Notional
Paid by Amount
Expiration Date Company (in 000's)
- --------------------------------------------------------------------------------
March, 2004, cancelable in
March, 2002 5.75% $80,000
September, 2003 cancelable
in September, 2001 4.91% $100,000
The swap cancellation options may only be exercised by the counterparties.
Interest paid, net of amounts capitalized, amounted to approximately
$12,654,000, $13,576,000, and $18,102,000 in 1998, 1997, and 1996, respectively.
Interest capitalized amounted to $583,000, $1,071,000, and $2,367,000 in 1998,
1997, and 1996, respectively.
6. DISPOSITIONS
On April 8, 1998, the Company completed the sale of Pierce National Life
Insurance Company ("Pierce") to Fortis, Inc. The Company received cash totaling
approximately $139 million at closing. The Company recognized an after-tax loss
of the sale of Pierce of $18.9 million in the first quarter of 1998.
On December 31, 1997, Fortis had 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 through the completion of the sale. 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, 1998, 469,948 shares of the 1994-A Series and 224,597
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.
60
<PAGE> 24
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.
The Company and its subsidiaries are also defendants in various law- suits
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.
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. Annual rental expense amounted to approximately
$6,911,000, $6,275,000, and $5,601,000 in 1998, 1997, and 1996, respectively.
Future commitments under operating leases are shown below:
Data
Processing
Branch and Telephone
(in 000's) Offices Equipment Other Total
- --------------------------------------------------------------------------------
Year
1999 $1,349 $3,226 $566 $5,141
2000 820 2,168 160 3,148
2001 554 307 86 947
2002 383 --- 33 416
2003 196 --- --- 196
Thereafter 481 --- --- 481
- --------------------------------------------------------------------------------
Total $3,783 $5,701 $845 $10,329
- --------------------------------------------------------------------------------
At December 31, 1998, the Company had commitments for additional investments
and other items totaling $29,594,000.
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, 1998, there were
1,172,303 shares of preferred stock outstanding (see Note 7 for
61
<PAGE> 25
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 subsidiaries was $503,328,000 and $720,904
at December 31, 1998 and 1997, respectively. The comparable amounts as
determined under statutory accounting practices were $146,786,000 and
$212,513,000 at December 31, 1998 and 1997, respectively. The amount that
retained earnings exceeds statutory unassigned surplus ($330,084,000) 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 unrealized appreciation on fixed maturity securities
available for sale and equity securities in the balance sheet caption
accumulated other comprehensive income (see Note 19) as of December 31 are as
follows:
(In 000s) 1998 1997
- --------------------------------------------------------------------------------
Carrying value of securities $998,836 $1,748,456
Amortized cost of securities 951,298 1,643,579
- --------------------------------------------------------------------------------
Net unrealized appreciation 47,538 104,877
Adjustment to deferred
acquisition costs (6,387) (8,745)
Deferred income taxes (14,402) (34,617)
- --------------------------------------------------------------------------------
Total $ 26,749 $ 61,515
- --------------------------------------------------------------------------------
In March 1998, the Company completed a stock tender offer under which the
Company repurchased 2,400,000 shares of its common stock at $52.00 per share. In
addition, the company repurchased in the open market 138,000 shares during 1998.
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, 1998, 83 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 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 non-qualified options
outstanding, 355,783 were exercisable at December 31, 1998; 349,609 were
exercisable at December 31, 1997; and 323,900 were exercisable at December 31,
1996. The options expire on various dates beginning May 17, 1999, and ending
November 4, 2008. There were no incentive stock options outstanding at either
December 31, 1998 or December 31, 1997. Incentive stock options totaling 25,500
were outstanding and exercisable at December 31, 1996.
In accordance with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("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 $2,297,000, $2,330,000, and $2,143,000, for the
years ended December 31, 1998, 1997 and 1996, 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 weighted average estimated fair value for the options at the date
of grant using a Black-Scholes option pricing model, and the weighted average
assumptions using to determine the estimated fair value are as follows:
1998 1997 1996
- --------------------------------------------------------------------------------
Estimated fair value $10.92 $10.65 $8.39
Underlying assumptions used to
determine estimated fair
value:
Risk free interest rate 5.1% 6.3% 6.6%
Dividend yield 2.0% 2.0% 2.0%
Expected stock price volatility 0.17 0.16 0.16
Weighted average expected life 7 YEARS 7 years 7 years
62
<PAGE> 26
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 periods. The Company's pro forma
information is as follows:
In $000s, except per share 1998 1997 1996
amounts
- --------------------------------------------------------------------------------
Net Income:
As Reported $17,761 $74,951 $37,340
Pro forma 17,063 75,554 37,201
Basic Earnings per Share:
As Reported $0.80 $3.50 $1.67
Pro forma 0.76 3.48 1.66
Diluted Earnings per Share:
As Reported $0.80 $3.34 $1.66
Pro forma 0.76 3.32 1.65
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, 1998.
<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 at 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 at 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 at 12/31/97 343,973 -- -- 842,810 $32.29
AWARDED 60,825 51.00 247,940 45.65
VESTED (37,180) 31.09
EXERCISED (105,061) 23.76
FORFEITED (73,291) 39.59 (55,399) 36.24
- -----------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT 12/31/98 294,327 -- -- 930,290 $36.58
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable stock options:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$16.25-$26.00 210,000 3.8 years $24.23 187,340 $24.04
$26.01-$51.00 720,290 8.4 years 40.18 168,443 34.37
- ---------------------------------------------------------------------------------------------------------------------------------
Total or weighted
average 930,290 7.3 years $36.58 355,783 $28.93
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, there were 1,059,169 shares of the Company's stock
reserved for future grants under the Program.
63
<PAGE> 27
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, 1998,
1997 and 1996:
For the year ended 1998
------------------------------------
($000s except per share Shares Per
amounts) Income (Denom- Share
(Numerator) inator) Amount
------------------------------------
Net income $17,761
Less: Preferred stock
dividends (2,601)
---------
BASIC EPS
Income available to
common shareholders 15,160 18,806 $0.80
========
Effect of Dilutive
Securities:
Stock Options --- 149
Redeemable preferred stock --- ---
Convertible preferred stock --- ---
------------------------
DILUTED EPS
Income available to
common shareholders
plus assumed conversions $15,160 18,955 $0.80
==================================
For the year ended 1997
---------------------------------
($000s except per share Shares Per
amounts) Income (Denom- Share
(Numerator) inator) Amount
---------------------------------
Net income $74,951
Less: Preferred stock
dividends (3,583)
-----------
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
==================================
For the year ended 1996
----------------------------------
Shares Per
($000s except per share Income (Denom- Share
amounts) (Numerator) inator) Amount
----------------------------------
Net income $37,340
Less: Preferred stock
dividends (3,700)
----------------------------------
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
=================================
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. In
addition, the company repurchased in the open market 138,000 shares during 1998.
12. EMPLOYEE BENEFITS
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 revised 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 was adopted by the company in 1998.
The Company has several postretirement plans that provide medical and life
insurance benefits for qualified retired employees. The post-retirement 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.
64
<PAGE> 28
Net periodic postretirement benefit cost was $1,422,000, $1,378,000, and
$1,494,000 for the years ended December 31, 1998, 1997, and 1996, respectively,
and included the following components:
- --------------------------------------------------------------------------------
(In $000s) 1998 1997 1996
- --------------------------------------------------------------------------------
Medical Life Medical Life Medical Life
- --------------------------------------------------------------------------------
Service cost $143 $ -- $ 143 $ -- $ 162 $ --
Interest cost 981 298 936 299 1,042 290
- --------------------------------------------------------------------------------
Net periodic
postretirement
benefit cost $1,124 $298 $1,079 $299 $1,204 $290
- --------------------------------------------------------------------------------
The following schedule reconciles the accumulated postretirement benefit
obligation included in the balance sheets as of December 31, 1998, 1997, and
1996 (in 000's):
1998 1997 1996
- --------------------------------------------------------------------------------
Medical and Life Benefits
Benefit obligation at
beginning of year $18,379 $18,543 $18,487
Service cost 143 143 162
Interest cost 1,279 1,235 1,332
Plan participants'
contributions 644 557 531
Benefits paid (1,954) (1,993) (1,860)
Plan expenses (115) (106) (109)
- --------------------------------------------------------------------------------
Benefit obligation at end
of year $18,376 $18,379 $18,543
- --------------------------------------------------------------------------------
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:
1998 1997
- --------------------------------------------------------------------------------
(In $000s) Medical Life Medical Life
- --------------------------------------------------------------------------------
Retirees $13,573 $3,673 $12,052 $4,221
Fully eligible
active plan 518 --- 820 60
participants
Other active plan
participants 279 --- 928 57
- --------------------------------------------------------------------------------
Accumulated
postretirement
benefit 14,370 3,673 13,800 4,338
obligation
Unrecognized net
gain (loss) 20 313 712 (471)
- --------------------------------------------------------------------------------
Accrued
postretirement
benefit $14,390 $3,986 $14,512 $3,867
obligation
- --------------------------------------------------------------------------------
The weighted-average discount rate is 7.0% and 7.5% for 1998 and 1997,
respectively. At December 31, 1998, a 8% annual rate of increase in the per
capita cost of covered medical benefits is assumed for 1999.
The rate is to decrease by 1% per year to 5.5% in 2002 and remain at that level
thereafter. At December 31, 1997, the weighted-average annual assumed rate of
increase in the per capita cost of covered medical benefits was 8.5% for 1998,
and was assumed to decrease to 8% in 1999, then decrease 1% per year to 5.5% in
2002 and thereafter.
Assumed health care cost trends rates have a significant effect on the
amounts reported for the medical plans. A one-percentage-point change in assumed
health care cost trend rates would have the following effects (in 000's):
1% Increase 1% Decrease
- --------------------------------------------------------------------------------
Effect on total of service and
interest rate components $ 89 $ (75)
Effect on post retirement benefit
obligation 921 (777)
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 $5,187,000, $4,853,000, and $4,959,000 in 1998, 1997,
and 1996, 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 $2,509,000, $2,379,000, and $2,218,000 in 1998, 1997, and 1996,
respectively.
13. PROVISION FOR INCOME TAXES
The provision for income taxes consists of the following:
(In 000s) 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $34,372 $34,595 $25,717
State and local 1,280 418 2,347
- --------------------------------------------------------------------------------
Total current 35,652 35,013 28,064
Deferred:
Federal (3,981) 1,923 (8,460)
State and local (331) (310) (445)
- --------------------------------------------------------------------------------
Total deferred (4,312) 1,613 (8,905)
- --------------------------------------------------------------------------------
Total tax provision $31,340 $36,626 $19,159
- --------------------------------------------------------------------------------
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.
65
<PAGE> 29
Significant components of the Company's deferred tax liabilities and assets
as of December 31, 1998 and 1997 are as follows:
(In 000s) 1998 1997
- --------------------------------------------------------------------------------
Insurance operations deferred tax
liabilities:
Deferred acquisition costs $ 66,682 $ 84,862
Policy liabilities 6,912 20,325
Market discount on investments 9,891 11,476
Tax over book partnership losses 1,325 1,118
Unrealized investment gains
recognized in equity 14,402 34,617
Deferred and Uncollected Premiums 1,631 ---
Software Development Costs 3,604 ---
Non-insurance companies deferred
tax liabilities:
Book over tax basis in acquired
television station 12,665 13,884
Book over tax basis in
investment property transferred
to partnership 3,629 5,310
Unrealized investment gains
recognized in equity 92 1,517
Tax over book depreciation 4,071 5,161
Tax over book amortization 3,057 3,593
Other 2,210 1,953
- --------------------------------------------------------------------------------
Total deferred tax liabilities 130,171 183,816
- --------------------------------------------------------------------------------
Insurance operations deferred tax assets:
Employee benefit accruals 6,000 6,048
Non-insurance companies deferred
tax assets:
Net operating loss carryover 358 358
Book over tax partnership losses 1,163 3,848
- --------------------------------------------------------------------------------
Total deferred tax assets 7,521 10,254
- --------------------------------------------------------------------------------
Net deferred tax liability $122,650 $173,562
- --------------------------------------------------------------------------------
At December 31, 1998 and 1997, the Company had unrealized gains from
securities classified as available for sale and equity securities of $47,539,000
and $104,877,000, respectively, for which a deferred tax liability has been
established.
The reconciliation of income tax computed at the U.S. federal statutory tax
rates to income tax expense is:
(In 000s) 1998 1997 1996
- --------------------------------------------------------------------------------
Federal income tax rate 35% 35% 35%
Rate applied to pre-tax
income $17,185 $39,052 $19,775
Tax exempt interest and
dividends (562) (1,036) (1,166)
Sale of subsidiary 9,942 --- ---
State and local income
taxes 790 248 1,233
Other 3,985 (1,638) (683)
- --------------------------------------------------------------------------------
Provision for income taxes $31,340 $36,626 $19,159
- --------------------------------------------------------------------------------
The Company has net operating loss carryforwards of $1,023,000 at December
31, 1998 and 1997, 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 $29,709,000, $35,644,000, and
$30,047,000 in 1998, 1997, and 1996, 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, unless it exceeds certain limitations under
the Internal Revenue Code, or unless the income tax deferral status of the
account is modified by future tax legislation. 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.
66
<PAGE> 30
14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations for each of the years ended December 31, 1998
and 1997, are as follows:
<TABLE>
<CAPTION>
Quarter Ended
- --------------------------------------------------------------------------------------------------------------
1998 (In 000s except per share amounts) March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 168,522 $138,639 $135,966 $141,137
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 11,353 $ 25,344 $ 16,939 $ (4,535)
- --------------------------------------------------------------------------------------------------------------
Net income (loss) $ (2,423) $ 16,268 $ 10,907 $ (6,991)
- --------------------------------------------------------------------------------------------------------------
Basic Earnings (loss) per common share $ (0.15) $ 0.85 $ 0.56 $ (0.42)
- --------------------------------------------------------------------------------------------------------------
Diluted Earnings (loss) per common share $ (0.15) $ 0.82 $ 0.55 $ (0.42)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
- --------------------------------------------------------------------------------------------------------------
1997 (In 000s except per share amounts) March 31 June 30 Sept. 30 Dec. 31
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $159,917 $170,454 $166,684 $163,201
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes $ 24,122 $ 31,850 $ 30,994 $ 24,611
- --------------------------------------------------------------------------------------------------------------
Net income (loss) $ 15,867 $ 20,398 $ 20,229 $ 18,457
- --------------------------------------------------------------------------------------------------------------
Basic Earnings (loss) per common share $ 0.74 $ 0.96 $ 0.94 $ 0.86
- --------------------------------------------------------------------------------------------------------------
Diluted Earnings (loss) per common share $ 0.71 $ 0.92 $ 0.90 $ 0.81
- --------------------------------------------------------------------------------------------------------------
</TABLE>
In 1998, there was an after-tax loss of $18.9 million on the sale of Pierce
National Life Insurance Company booked in the first quarter. Included in this
after-tax amount was a pre-tax loss of $13.8 million and a tax provision of $5.1
million . Liberty's tax basis in Pierce National was less than the net
consideration received resulting in a taxable gain on the transaction and an
additional tax liability to the company. The sale of Pierce has also resulted in
lower revenues for the second, third, and fourth quarters.
Liberty undertook an analysis beginning in the third quarter to better
redistribute resources into areas of the company that are growing and to reduce
costs where necessary. In addition, Liberty embarked on a re-engineering of its
Agency sales group in 1998. In the fourth quarter it launched "Agency of the
Future", a program which it believes will increase sales, lower lapses and slow
agent turnover.
Costs associated with the analysis and beginning implementation of the
resource reallocation are part of an after-tax accounting charge of $17.5
million during the fourth quarter. Other significant items included in this
charge are: expensing of previously capitalized cost of projects that are no
longer expected to be implemented and projects where primary additional
functionality is limited to compliance with year 2000; additional deferred
acquisition cost amortization on universal life products from changes in
interest rate assumptions; and a provision for additional taxes related to
certain universal life products.
15. STATUTORY RESULTS OF OPERATIONS
Statutory net income of the Insurance Group for each of the years ended
December 31, 1998, 1997, and 1996 was $30.4 million, $53.0 million, and $42.8
million, respectively.
16. ACQUISITIONS
During 1998, the Company completed the acquisition of three television
stations. In July, 1998, the Company completed the acquisition of WALB
television, a NBC affiliate, located in Albany, Georgia for $78.6 million. In
November 1998, the Company completed the acquisition of KGBT television, a CBS
affiliate, located in Harlingen, Texas for $42.9 million. In December 1998, the
Company completed the acquisition of WWAY television, an ABC affiliate, located
in Wilmington, North Carolina for $35.4 million. All of these acquisitions have
been accounted for as purchases, and the results of operations included in the
accompanying consolidated financial statements since the date of acquisition.
The purchase of these stations was funded using proceeds from the Company's
credit facility.
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.
67
<PAGE> 31
- 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. 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 $21,510,000 and
$18,924,000 at December 31, 1998 and 1997, 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.
The carrying amounts and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------- ---------------------------------- ---------------------
Estimated Estimated
Carrying Fair Carrying Fair
(in 000s) Amount Value Amount Value
- ---------------------------------------------------------- ---------------------------------- ---------------------
<S> <C> <C> <C> <C>
ASSETS
Fixed maturity securities available for sale $935,178 $935,178 $1,673,888 $1,673,888
Equity securities 63,658 63,658 74,568 74,568
Mortgage loans 215,549 216,665 244,821 250,889
Policy loans 90,653 88,380 100,322 97,960
Other long-term investments 21,256 21,256 18,459 18,459
Short-term investments and cash 16,883 16,883 62,036 62,036
LIABILITIES
Investment-type insurance contracts 15,336 13,744 79,317 75,450
Notes, mortgages and other debt 285,000 285,000 191,914 191,914
Film contract obligations included in other liabilities 10,345 9,342 9,738 8,765
Interest rate swap -- 2,736 --- 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.
68
<PAGE> 32
18. SEGMENT INFORMATION
The Company operates primarily in the television broadcasting and life
insurance industries. In the life insurance industry the Company currently
markets products through Liberty Life Insurance Company and provides insurance
administrative services through Liberty Insurance Services Corporation ("LIS").
Prior to the sale of Pierce in April 1998, the Company also marketed pre-need
life insurance through Pierce. The Company has six reportable segments which are
defined based on the products and services provided. The five reportable
segments comprising the Insurance Operations are Agency, LibertyDirect,
Pre-need, Insurance Administration and Corporate and Other. Television
broadcasting is sixth segment. Within insurance operations Liberty Life's Agency
division markets various life insurance products to individuals including
individual life, health and interest sensitive whole life products. The
LibertyDirect division of Liberty Life primarily markets term life, accident and
disability insurance designed to pay a residential mortgage balance upon the
death or disability of the insured. Subsequent to the sale of Pierce, the
Company is no longer active in the pre- need segment; however, separate
disclosure is included due to the significance of the segment in 1997 and 1996.
The operations of LIS comprise the insurance administration segment and LIS
provides back office insurance administration services including underwriting,
policy issuance, accounting, customer service and claims processing to internal
and external insurance clients. The Corporate and Other segment includes
activities of the parent company and minor subsidiaries, the operations of
Liberty Life not part of either Agency or LibertyDirect, and earnings on surplus
of Liberty Life not allocated to the reportable segments. Surplus is allocated
to Agency and LibertyDirect based on a formula intended to approximate the
amount of capital necessary to support the business in those segments. The
television broadcasting segment is comprised of the operations of Cosmos
Broadcasting ("Cosmos"). Cosmos owns and operates eleven television stations,
primarily in the southeast and midwest. Each of the stations is affiliated with
a major network, with six NBC affiliates, three ABC affiliates, and two CBS
affiliates.
The Company evaluates segment performance based on several factors. For
segments that are comprised of a separate company (LIS and Cosmos) the primary
factor is net income excluding unusual, non-operating items. For those segments
that are not separate companies performance in evaluated based on income before
income taxes excluding realized gains and losses and unusual, non-operating
items. The accounting policies of the reportable segments are the same as those
described in the summary of significant accounting policies. Intersegment
service revenues reported by the insurance administration segment are based upon
agreements between LIS and the affiliate purchasing the services. For the year
ended December 31, 1998, income before income taxes for LIS included
approximately $640,000 earned from services provided to affiliates. There were
no significant intersegment profits in 1997 or 1996.
Foreign assets are not material and for 1998 substantially all of the
Company's revenue was derived from the United States. Pierce had Canadian
operations and, for 1997 and 1996, revenues from Canada amount to less than 5%
of consolidated revenues.
The following tables summarize financial information by segment for the
periods ended December 31, 1998, 1997 and 1996, respectively. The adjustment
column reflects unallocated realized investment gains and losses, unallocated
income taxes and unusual, non-operating items.
69
<PAGE> 33
<TABLE>
<CAPTION>
Liberty LIS Cosmos -
As of and for the Liberty Life Pierce Insurance Total Television Total
year ended Life Liberty National - Admin- Corporate Adjust- Insurance Broad- Elimini- Consoli-
December 31, 1998 Agency Direct Pre-need istration & Other ments(3) Operations casting ations dated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Premiums and policy fees $133,796 $119,483 $24,247 $ 7,405 $284,931 $ 284,931
Net investment income 74,403 1,881 14,774 28,755 119,813 119,813
Servicing fees $ 18,217 18,217 18,217
Broadcasting revenues $159,461 159,461
Intersegment revenues:
Servicing fees 34,257 34,257 ($34,257)
Interest income 12,533 12,533 (12,533)
Realized investment
gains (losses) $ 1,842 1,842 1,842
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues 208,199 121,364 39,021 52,474 48,693 1,842 471,593 159,461 (46,790) 584,264
Policy benefits 95,856 23,053 23,914 12,228 (390) 154,661 154,661
Insurance commissions 14,391 62,462 2,249 557 79,659 79,659
Operating expenses 44,420 12,667 3,612 53,778 16,717 14,831 146,025 99,029 (34,257) 210,797
Amortization expense(1) 31,160 7,366 3,126 2,531 6,835 51,018 11,009 62,027
Interest expense 14,208 14,208 12,533 (12,533) 14,208
Loss on sale of subsidiary 13,811 13,811 13,811
- -----------------------------------------------------------------------------------------------------------------------------------
Total expenses 185,827 105,548 32,901 53,778 46,241 35,087 459,382 122,571 (46,790) 535,163
Income (loss) before
income taxes 22,372 15,816 6,120 (1,304) 2,452 (33,245) 12,211 36,890 49,101
Income tax expense
(benefit) 2,209 (509) 15,483 17,183 14,157 31,340
----------------- ----------------- ----------
Net income (loss) $ 3,911 ($795) ($4,972) $ 22,733 $ 17,761
================= ================= ==========
Segment assets $1,430,597 $ 88,140 $ 0 $4,640 $561,882 $2,085,259 $325,424 $2,410,683
Expenditures for
property and
equipment (2) $ 0 $1,717 $ 3,457 $ 5,174 $ 6,456 $ 11,630
</TABLE>
(1) For insurance segments amortization expense includes goodwill amortization,
amortization of deferred policy acquisition costs and cost of business
acquired, and depreciation of buildings and equipment. For the broadcasting
segment amortization expense includes the amortization of intangibles
related to television operations and depreciation of buildings and
equipment.
(2) Fixed assets are not allocated to segments that are not separate companies.
(3) Special charges of $17.5 million after tax were recognized in 1998 and
$26.9 million after tax were recognized in 1996 and are included in the
adjustments column.
70
<PAGE> 34
<TABLE>
<CAPTION>
Liberty LIS Cosmos -
As of and for the Liberty Life Pierce Insurance Total Television Total
year ended Life Liberty National - Admin- Corporate Adjust- Insurance Broad- Elimini- Consoli-
December 31, 1997 Agency Direct Pre-need istration & Other ments(3) Operations casting ations dated
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Premiums and policy fees $135,305 $102,995 $105,414 $6,978 $350,692 $350,692
Net investment income 71,050 1,989 56,078 29,202 158,319 158,319
Servicing fees $7,121 7,121 7,121
Broadcasting revenues $137,898 137,898
Intersegment revenues:
Servicing fees
Interest income 8,348 8,348 ($8,348)
Realized investment
gains (losses) $6,226 6,226 6,226
-------------------------------------------------------------------------------------------------------------
Total revenues 206,355 104,984 161,492 7,121 44,528 6,226 530,706 137,898 (8,348) 660,256
Policy benefits 95,548 23,112 97,860 11,407 227,927 227,927
Insurance commissions 14,696 53,668 9,907 668 78,939 78,939
Operating expenses 28,664 8,671 16,172 6,796 27,053 87,356 85,801 173,157
Amortization expense(1) 27,872 5,681 10,513 1,498 45,564 9,883 55,447
Interest expense 13,209 13,209 8,348 (8,348) 13,209
-------------------------------------------------------------------------------------------------------------
Total expenses 166,780 91,132 134,452 6,796 53,835 452,995 104,032 (8,348) 548,679
Income (loss) before
income taxes 39,575 13,852 27,040 325 (9,307) 6,226 77,711 33,866 111,577
Income tax expense 9,064 116 15,306 24,486 12,140 36,626
------------------- --------------------- ----------
Net income $17,976 $209 $53,225 $21,726 $74,951
=================== ===================== ==========
Segment assets $1,427,860 $61,313 $881,117 $5,868 $640,652 $3,016,810 $167,948 $3,184,758
Expenditures for
property and
equipment(2) $574 $-- $3,680 $4,254 $5,752 $10,006
</TABLE>
(1) For insurance segments amortization expense includes goodwill amortization,
amortization of deferred policy acquisition costs and cost of business
acquired, and depreciation of buildings and equipment. For the broadcasting
segment amortization expense includes the amortization of intangibles
related to television operations and depreciation of buildings and
equipment.
(2) Fixed assets are not allocated to segments that are not separate companies.
(3) Special charges of $17.5 million after tax were recognized in 1998 and
$26.9 million after tax were recognized in 1996 and are included in the
adjustments column.
71
<PAGE> 35
<TABLE>
<CAPTION>
Liberty LIS Cosmos -
As of and for the Liberty Life Pierce Insurance Total Television Total
year ended Life Liberty National - Admin- Corporate Adjust- Insurance Broad- Elimini- Consoli-
December 31, 1996 Agency Direct Pre-need istration & Other ments(3) Operations casting ations dated
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues
Premiums and policy fees $137,930 $70,316 $104,953 $8,472 ($300) $321,371 $321,371
Net investment income 68,977 2,214 52,112 31,854 64 155,221 155,221
Servicing fees $7,751 7,751 7,751
Broadcasting revenues $137,336 137,336
Intersegment revenues:
Servicing fees 5,408 5,408 ($5,408)
Interest income 8,630 8,630 (8,630)
Realized investment
gains (losses) (2,582) (2,582) (2,582)
-------------------------------------------------------------------------------------------------------------
Total revenues 206,907 72,530 157,065 13,159 48,956 (2,818) 495,799 137,336 (14,038) 619,097
Policy benefits 94,503 16,273 95,938 12,187 (150) 218,751 218,751
Insurance commissions 15,978 37,979 11,594 595 337 66,483 66,483
Operating expenses 28,184 6,603 16,405 12,194 21,247 14,066 98,699 85,040 (5,408) 178,331
Amortization expense(1) 28,551 4,970 11,929 2,351 26,166 73,967 9,927 83,894
Interest expense 15,139 15,139 8,630 (8,630) 15,139
-------------------------------------------------------------------------------------------------------------
Total expenses 167,216 65,825 135,866 12,194 51,519 40,419 473,039 103,597 (14,038) 562,598
Income (loss) before
income taxes 39,691 6,705 21,199 965 (2,563) (43,237) 22,760 33,739 56,499
Income tax expense
(benefit) 7,212 494 (197) 5,704 13,455 19,159
------------------- --------------------- ----------
Net income (loss) $13,987 $471 $17,056 $20,284 $37,340
=================== ===================== ==========
Segment assets $1,378,893 $45,794 $827,728 $5,707 $633,166 $2,891,288 $169,477 $3,060,765
Expenditures for
property and
equipment (2) $1,267 $-- $3,257 $4,524 $6,030 $10,554
</TABLE>
(1) For insurance segments amortization expense includes goodwill amortization,
amortization of deferred policy acquisition costs and cost of business
acquired, and depreciation of buildings and equipment. For the broadcasting
segment amortization expense includes the amortization of intangibles
related to television operations and depreciation of buildings and
equipment.
(2) Fixed assets are not allocated to segments that are not separate companies.
(3) Special charges of $17.5 million after tax were recognized in 1998 and
$26.9 million after tax were recognized in 1996 and are included in the
adjustments column.
72
<PAGE> 36
19. COMPREHENSIVE INCOME
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130 (SFAS 130) "Reporting Comprehensive Income," which required the Company to
reclassify, for financial reporting purposes only, certain amounts shown below
which were previously included as separate components in Shareholders' Equity,
and are now included in Accumulated other comprehensive income on the
Consolidated Balance Sheets. After making these balance sheet reclassifications,
the following amounts were included in accumulated other comprehensive income at
December 31, 1998 and December 31, 1997 (in 000's):
1998 1997
- --------------------------------------------------------------------------------
Accumulated Other Comprehensive Income Item
Unrealized appreciation on
available for sale fixed
maturity and equity securities $26,749 $61,515
Foreign currency translation --- 335
- --------------------------------------------------------------------------------
Total $26,749 $61,850
- --------------------------------------------------------------------------------
The components of other comprehensive income (loss) and the related tax effects,
for the years 1998, 1997, and 1996 are as follows (in 000's):
Amount Income Tax Amount
Before (Expense) Net of
1998 Taxes Benefit Taxes
- --------------------------------------------------------------------------------
Unrealized gains on
available for sale
securities $45,179 $(15,812) $29,367
Less: reclassification
adjustment for gains
realized in net income (4,028) 1,410 (2,618)
- --------------------------------------------------------------------------------
Net unrealized gains $41,151 $(14,402) $26,749
- --------------------------------------------------------------------------------
Total comprehensive income $41,151 $(14,402) $26,749
- --------------------------------------------------------------------------------
Amount Income Tax Amount
Before (Expense) Net of
1997 Taxes Benefit Taxes
- --------------------------------------------------------------------------------
Unrealized gains on
available for sale
securities $101,617 $(36,537) $65,080
Less: reclassification
adjustment for gains
realized in net income (5,484) 1,919 (3,565)
- --------------------------------------------------------------------------------
Net unrealized gains $96,133 $(34,618) $61,515
Foreign currency
translation 515 (180) 335
- --------------------------------------------------------------------------------
Total comprehensive
income $96,648 $(34,798) $61,850
- --------------------------------------------------------------------------------
Amount Income Tax Amount
Before (Expense) Net of
1996 Taxes Benefit Taxes
- --------------------------------------------------------------------------------
Unrealized gains on
available for sale
securities $72,607 $(26,149) $46,458
Less: reclassification
adjustment for gains
realized in net income (10,357) 3,625 (6,732)
- --------------------------------------------------------------------------------
Net unrealized gains $62,250 $(22,524) $39,726
Foreign currency
translation (314) 110 (204)
- --------------------------------------------------------------------------------
Total comprehensive income $61,936 $(22,414) $39,522
- --------------------------------------------------------------------------------
73
<PAGE> 37
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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Greenville, South Carolina
February 9, 1999
74
<PAGE> 1
Exhibit 21
THE LIBERTY CORPORATION AND SUBSIDIARIES
LIST OF SUBSIDIARIES
DECEMBER 31, 1998
<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. 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 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.
75
<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 9, 1999, included in the 1998 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, 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 9, 1999 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, 1998.
/s/ Ernst & Young LLP
Greenville, South Carolina
March 25, 1999
76
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 935,178
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 63,658
<MORTGAGE> 215,549
<REAL-ESTATE> 34,788
<TOTAL-INVEST> 1,361,332
<CASH> 16,633
<RECOVER-REINSURE> 275,602
<DEFERRED-ACQUISITION> 284,366
<TOTAL-ASSETS> 2,410,683
<POLICY-LOSSES> 1,279,929
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 30,247
<POLICY-HOLDER-FUNDS> 24,355
<NOTES-PAYABLE> 285,000
20,967
20,999
<COMMON> 70,565
<OTHER-SE> 437,943
<TOTAL-LIABILITY-AND-EQUITY> 2,410,683
284,931
<INVESTMENT-INCOME> 119,813
<INVESTMENT-GAINS> 1,842
<OTHER-INCOME> 177,678
<BENEFITS> 154,661
<UNDERWRITING-AMORTIZATION> 51,018
<UNDERWRITING-OTHER> 167,647
<INCOME-PRETAX> 49,101
<INCOME-TAX> 31,340
<INCOME-CONTINUING> 17,761
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,761
<EPS-PRIMARY> .80
<EPS-DILUTED> .80
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
