<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1999
--------------
[ ] 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
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
South Carolina 57-0507055
(State or other jurisdiction of (IRS Employer
incorporation or organization) identification No.)
Post Office Box 789, Wade Hampton Boulevard, Greenville, SC 29602
-----------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: 864/609-8256
------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock as of the latest practicable date.
Number of shares outstanding
Title of each class as of March 31, 1999
------------------- ----------------------------
Common Stock 18,782,795
Page 1 of 15 sequentially numbered pages.
The Exhibit Index is on Page 14.
<PAGE> 2
PART I, ITEM 1
THE LIBERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(In 000's)
March 31, December 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS (Unaudited)
Investments:
Fixed Maturity Securities available for sale, at market, cost of $899,618
at 3/31/99 and $896,944 at 12/31/98 $ 922,523 $ 935,178
Equity Securities, at market, cost of $48,695 at 3/31/99 and $54,354 at
12/31/98 56,120 63,658
Mortgage Loans 212,075 215,549
Investment Real Estate 33,268 34,788
Loans to Policyholders 90,796 90,653
Other Long-Term Investments 22,420 21,256
Short-Term Investments 250 250
----------- -----------
Total Investments 1,337,452 1,361,332
Cash 16,880 16,633
Accrued Investment Income 13,640 13,508
Receivables 69,779 69,536
Receivable from Reinsurers 276,189 275,602
Deferred Acquisition Costs and Cost of Business Acquired 289,890 284,366
Buildings and Equipment 99,347 101,523
Intangibles Related to Television Operations 212,031 212,842
Goodwill Related to Insurance Acquisitions 22,627 22,868
Other Assets 50,212 52,473
----------- -----------
Total Assets $ 2,388,047 $ 2,410,683
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDERS' EQUITY
Liabilities
Policy Liabilities $ 1,341,175 $ 1,334,531
Notes, Mortgages and Other Debt 278,000 285,000
Accrued Income Taxes 7,347 7,348
Deferred Income Taxes 117,405 122,650
Accounts Payable and Accrued Expenses 98,637 106,523
Other Liabilities 4,014 4,157
----------- -----------
Total Liabilities 1,846,578 1,860,209
----------- -----------
Redeemable Preferred Stock
1994-A Series, $35.00 redemption value, shares issued and outstanding -
169,797 in 1999 and 198,259 in 1998 5,943 6,939
1994-B Series, $37.50 redemption value, shares issued and outstanding -
284,273 in 1999 and 374,059 in 1998 10,660 14,028
----------- -----------
Total Redeemable Preferred Stock 16,603 20,967
----------- -----------
Shareholders' Equity
Common Stock 73,073 70,565
Series 1995-A Convertible Preferred Stock, $35.00 redemption value,
599,985 shares issued and outstanding 20,999 20,999
Unearned Stock Compensation (5,077) (7,596)
Retained Earnings 416,684 418,790
Accumulated Other Comprehensive Income:
Unrealized Investment Gains 19,187 26,749
----------- -----------
Total Shareholders' Equity 524,866 529,507
----------- -----------
Total Liabilities, Redeemable Preferred Stock and Shareholders'
Equity $ 2,388,047 $ 2,410,683
=========== ===========
</TABLE>
See Notes to Consolidated and Condensed Financial Statements.
2
<PAGE> 3
THE LIBERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
(In 000's, except per share data) 1999 1998
--------- ---------
<S> <C> <C>
(Unaudited)
REVENUES
Insurance Premiums & Policy Charges $ 64,053 $ 87,982
Broadcasting Revenues 39,866 32,367
Net Investment Income 24,359 40,892
Service Contract Revenue 4,668 4,152
Realized Investment (Losses) Gains (8,344) 3,129
--------- ---------
Total Revenues 124,602 168,522
--------- ---------
EXPENSES
Policyholder Benefits 35,488 57,106
Insurance Commissions 18,559 20,557
General Insurance Expenses 18,010 20,132
Amortization of Deferred Acquisition Costs 10,377 12,446
Broadcasting Expenses 31,157 24,363
Interest Expense 3,927 3,290
Loss on sale of subsidiary -- 13,811
Other Expenses 3,622 5,464
--------- ---------
Total Expenses 121,140 157,169
--------- ---------
Income Before Income Taxes 3,462 11,353
Income Tax Provision 942 13,776
--------- ---------
NET INCOME (LOSS) $ 2,520 $ (2,423)
========= =========
EARNINGS (LOSS) PER SHARE:
Basic earnings (loss) per common share $ .11 $ (0.15)
Diluted earnings (loss) per common share $ .11 $ (0.15)
Dividends Per Common Share $ .22 $ .20
</TABLE>
See Notes to Consolidated and Condensed Financial Statements.
3
<PAGE> 4
THE LIBERTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED AND CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------
(In 000's) 1999 1998
----------- -----------
<S> <C> <C>
(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ 2,520 $ (2,423)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
(Decrease) increase in policy liabilities (4,937) 705
Decrease in accounts payable and accrued liabilities (8,288) (1,248)
Increase in receivables (1,478) (31)
Amortization of policy acquisition costs 10,376 12,446
Policy acquisition costs deferred (10,572) (15,332)
Realized investment losses (gains ) 8,344 (3,129)
Gain on sale of operating assets (109) (166)
Loss on sale of subsidiary -- 13,811
Minority interest in earnings of subsidiary -- 781
Depreciation and amortization 5,420 4,693
Amortization of bond premium and discount (1,000) (2,398)
Provision for deferred income taxes (1,166) 1,373
All other operating activities, net 7,620 758
----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 6,730 9,840
INVESTMENT ACTIVITIES
Investment securities sold 17,622 33,135
Investment securities matured or redeemed by issuer 32,347 64,408
Cost of investment securities acquired - available for sale (53,396) (142,828)
Mortgage loans made (4,399) (30,077)
Mortgage loan repayments 6,802 28,277
Purchase of investment real estate, buildings and equipment (3,353) (5,307)
Sale of investment real estate, buildings and equipment 2,346 2,388
Purchase of short-term investments -- (8,255)
Sales of short-term investments -- 8,255
All other investment activities, net (869) 132
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,900) (49,872)
FINANCING ACTIVITIES
Proceeds from borrowings 663,000 1,359,000
Principal payments on debt (670,000) (1,236,840)
Dividends paid (4,626) (4,360)
Stock issued for employee benefit and compensation programs 821 1,713
Repurchase of common stock -- (125,036)
Return of policyholders' account balances (7,793) (9,568)
Receipts credited to policyholders' account balances 15,015 17,311
----------- -----------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES (3,583) 2,220
INCREASE (DECREASE) IN CASH 247 (37,812)
Cash at beginning of year 16,633 61,786
----------- -----------
CASH AT END OF PERIOD $ 16,880 $ 23,974
=========== ===========
</TABLE>
See Notes to Consolidated and Condensed Financial Statements
4
<PAGE> 5
THE LIBERTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS
March 31, 1999
(Unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated and condensed financial
statements of The Liberty Corporation and Subsidiaries have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The
information included is not necessarily indicative of the annual
results that may be expected for the year ended December 31, 1999, but
it does reflect all adjustments (which are of a normal and recurring
nature) considered, in the opinion of management, necessary for a fair
presentation of the results for the interim periods presented. For
further information, refer to the consolidated financial statements and
footnotes thereto included in The Liberty Corporation annual report on
Form 10-K for the year ended December 31, 1998.
2. COMPREHENSIVE INCOME
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS
130"). This Standard established rules for the reporting and display of
comprehensive income and its components; however, the adoption of this
standard had no impact on the Company's net income or shareholders'
equity. In addition to certain other adjustments, SFAS 130 requires
unrealized gains or losses on the Company's available for sale
securities and foreign currency translation adjustments, which prior to
adoption were reported separately in shareholders' equity to be
included in other comprehensive income. The components of comprehensive
income, net of related income taxes, for the three months ended March
31, 1999 and 1998, respectively are as follows:
<TABLE>
<CAPTION>
(In $000s) 1999 1998
---------- ------------------------------------------
<S> <C> <C>
Net Income $ 2,520 $(2,423)
Unrealized losses on securities (7,562) (602)
Foreign currency translation adjustments - 146
------------------------------------------
Comprehensive income $(5,042) $(2,879)
==========================================
</TABLE>
3. EARNINGS PER SHARE
The calculation of basic and diluted earnings per share is as follows:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
(Unaudited)
Numerator:
Net Income $ 2,520,000 $(2,423,000)
Preferred Stock Dividends (534,000) (676,000)
--------------- --------------
Numerator for basic earnings per share -
income available to common shareholders 1,986,000 (3,099,000)
Effect of Dilutive securities:
Stock Options --- ---
Redeemable Preferred Stock --- ---
Convertible Preferred Stock --- ---
--------------- ---------------
Numerator for diluted earnings per share $ 1,986,000 $(3,099,000)
=============== ===============
Denominator:
Denominator for basic earnings per share -
weighted average shares 18,563,000 20,161,000
Effect of Dilutive securities:
Stock Options --- ---
Redeemable Preferred Stock --- ---
Convertible Preferred Stock --- ---
--------------- ---------------
Denominator for diluted earnings per share -
weighted average shares plus assumed
conversions 18,563,000 20,161,000
=============== ===============
Basic Earnings Per Share $.11 $(0.15)
=============== ==============
Diluted Earnings Per Share $.11 $(0.15)
=============== ==============
</TABLE>
5
<PAGE> 6
4. SEGMENT REPORTING
In June, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131"). This
Standard is effective for financial statements issued for periods
beginning after December 15, 1997. SFAS 131 requires that a public
company report financial and descriptive information on the basis that
it is reported internally for evaluating segment performance and
deciding how to allocate resources to segments. The Company adopted
this standard as of January 1, 1998.
The Company operates primarily in the television broadcasting and life
insurance industries. The Company currently has five reportable
segments. Prior to the sale of Pierce in April 1998, the Company had
six reportable segments. All segments except the television
broadcasting are included in Insurance Operations. 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 is evaluated based
on income before income taxes excluding realized gains and losses and
unusual, non-operating items. See the Company's 1998 form 10K for
additional information on the types of operations for each of the
Company's segments.
The following tables summarize financial information by segment for the
periods ended March 31, 1999 and 1998:
<TABLE>
<CAPTION>
Liberty LIS Cosmos -
For the quarter Liberty Life Pierce Insurance Adjust- Total Television
ended March 31, Life Liberty National Admin- Corporate ments Insurance Broad- Elimin- Total
1999 Agency Direct Pre-need istration & Other (1) Operations casting ations Consolidated
- ------------------- -------- --------- -------- -------- --------- --------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outside revenues $51,447 $29,711 $ - $ 4,668 $ 7,254 $(8,344) $ 84,736 $ 39,866 $ - $ 124,602
Intersegment
revenues - - - 9,612 5,300 - 14,912 - (14,912) -
Segment profit
(loss) before
income taxes 3,307 2,121 - (1,113) 3,791 (8,344) (238) 3,700 3,462
Income tax
expense (benefit) - (385) 142 (243) 1,185 942
--------- --------- ---------- --------- -----------
Segment net
income - $ (728) $ 5 $ 2,515 $ 2,520
========= ========= ========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
Liberty LIS Cosmos -
For the quarter Liberty Life Pierce Insurance Adjust- Total Television
ended March 31, Life Liberty National Admin- Corporate ments Insurance Broad- Elimin- Total
1998 Agency Direct Pre-need istration & Other (1) Operations casting ations Consolidated
- ------------------- -------- --------- -------- -------- --------- --------- ---------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Outside revenues $52,535 $28,595 $ 38,460 $ 4,152 $ 9,284 $ 3,129 $ 136,155 $ 32,367 $ - $ 168,522
Intersegment
revenues - - - - 2,308 561 2,869 - (2,869) -
Segment profit
(loss) before
income taxes 6,035 3,766 5,640 650 1,260 (11,463) 5,888 5,465 11,353
Income tax
expense (benefit) 2,098 249 9,698 12,045 1,731 13,776
--------- --------- ---------- --------- -----------
Segment net
income $ 3,452 $ 401 $ (6,157) $ 3,734 $ (2,423)
========= ========= ========== ========= ===========
</TABLE>
(1) The adjustments column reflects unallocated realized investment gains and
losses, income taxes, and unusual, non-operating items.
6
<PAGE> 7
5. COMMITMENTS AND CONTINGENCIES
At March 31, 1999, the Company had made commitments as shown below:
(In 000's)
Investment real estate $ 836
Mortgage loans and bonds 18,368
Other 48
-----------
$19,252
===========
6. REDEMPTION OF 1994-A and 1994-B SERIES PREFERRED STOCK
On April 29, 1999, the Company announced that it has called for the
redemption of its 1994-A Series voting cumulative preferred stock, and
its 1994-B Series voting cumulative preferred stock. Shares will be
redeemed at $35.00 per share and $37.50 per share for the 1994-A and
1994-B preferred stock, respectively, plus accrued interest from April
1, 1999 through the redemption date. Alternatively, at any time up to
5:00 p.m. Eastern time on May 25, 1999, holders of either series of
preferred stock may convert their shares into the common stock of the
Company on a share for share basis.
7. SALE OF PIERCE NATIONAL LIFE
On April 8, 1998, the Company completed the sale of Pierce National Life
Insurance Company to Fortis, Inc. Fortis purchased 21% of the common
stock of Pierce as of December 31, 1997. The Company received cash
totaling approximately $139 million at closing. The Company recognized a
loss on the sale of Pierce of $18.9 million during the first quarter of
1998.
8. RECLASSIFICATIONS
Certain reclassifications have been made in the previously reported
financial statements to make the prior year amounts comparable to those
of the current year. Such reclassifications had no effect on previously
reported net income, total assets, or shareholders' equity.
7
<PAGE> 8
PART I, ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
(Unaudited)
The Liberty Corporation is a holding company with operations in insurance and
broadcasting. Liberty ("the Company") markets its insurance products through
Liberty Life Insurance Company. Additionally, Liberty is one of the nation's
largest life insurance third-party administrators, providing administrative
services for approximately 4.4 million policies through Liberty Insurance
Services Corporation. The Company's broadcasting subsidiary, Cosmos
Broadcasting, consists of eleven network affiliated stations in the Southeast
and Midwest.
Six stations are affiliated with NBC, three with ABC, and two with CBS.
SIGNIFICANT 1998 TRANSACTIONS AFFECTING COMPARABILITY WITH 1999
Sale of Pierce National Life
On April 8, 1998, Liberty completed the sale of Pierce National Life Insurance
Company ("Pierce") to Fortis, Inc. Liberty recognized a loss of approximately
$18.9 million related to the sale of Pierce in the first quarter of 1998.
Stock Repurchase
On March 11, 1998, Liberty completed the repurchase of 2.4 million shares of
common stock at a price of $52 per share. The stock repurchase was funded from
the Company's credit facility.
RESULTS OF OPERATIONS
Liberty reported a consolidated first quarter net income of $2.5 million
compared with a net loss of $2.4 million for the first quarter of 1998 (see
table below). Operating earnings (which exclude net realized investment gains
and losses and the loss on the Pierce sale) were $7.9 million, a decrease of
approximately 45% compared with the $14.5 million reported in the comparable
prior-year quarter. Contributing to the decline in operating earnings was the
dilutive impact of the three television station acquisitions Cosmos completed in
the second half of 1998, higher policyholder benefit costs in Liberty Life, and
a reduction in operating earnings at Liberty Insurance Services. Net income
(loss) reflects after-tax realized investment losses of $5.4 million in the
first quarter of 1999 compared with gains of $2.0 million in 1998.
8
<PAGE> 9
The Liberty Corporation and Subsidiaries Quarter ended March 31, 1999
Management's Discussion and Analysis of Operations
<TABLE>
<CAPTION>
First Quarter
1999 1998
--------- ---------
<S> <C> <C>
Insurance revenues $ 93,080 $ 133,026
Broadcasting revenues 39,866 32,367
--------- ---------
Total revenues (excluding realized gains and losses) 132,946 165,393
========= =========
Insurance operating earnings $ 5,386 $ 10,760
Broadcasting operating earnings 2,515 3,734
--------- ---------
Total operating earnings 7,901 14,494
Net realized investment gains (losses) (5,381) 2,002
Loss on sale of subsidiary -- (18,919)
--------- ---------
Net income (loss) $ 2,520 $ (2,423)
========= =========
</TABLE>
Consolidated revenues (excluding realized gains and losses) decreased $32.4
million (20%) compared to the first quarter of 1998. Adjusting to exclude the
first quarter revenues of Pierce National Life Insurance Company, which was sold
in April 1998, and excluding realized investment gains and losses, first-quarter
revenues increased 5 percent compared with the first quarter of 1998. Pro-forma
insurance revenues were level with the comparable prior-year period while
broadcasting revenues increased 23% (3% excluding the impact of the three
stations acquired during 1998).
Insurance operating earnings of $5.4 million for the quarter were down $5.4
million (50%) from the comparable prior year quarter. On a pro forma basis
(adjusting for the sale of Pierce and the use of the sale proceeds) operating
earnings declined approximately $3.1 million as compared to the prior year first
quarter.
Liberty Life operating earnings were down $2.6 million compared with the first
quarter of 1998 as higher benefit costs reduced earnings $1.8 million and
investment income declined $0.5 million. The increased mortality cost combined
with lower investment income contributed to a decline in agency pre-tax
earnings. In addition to increased mortality cost, LibertyDirect experienced
increased expenses in its direct marketing operations, as compared to the prior
year first quarter.
Liberty Insurance Services' (LIS) contribution to first quarter 1999 operating
earnings was $1.1 million lower than the first quarter of 1998. LIS's
fluctuation reflects lower earnings from incremental client services in first
quarter 1999 compared with the prior-year first quarter.
The broadcasting operations reported operating earnings of $2.5 million, down
$1.2 million from the $3.7 million reported in the prior-year first quarter. The
decline in earnings is attributable to higher levels of non-cash amortization
expense and additional financing costs related to the 1998 station acquisitions.
9
<PAGE> 10
The Liberty Corporation and Subsidiaries Quarter ended March 31, 1999
Management's Discussion and Analysis of Operations
INVESTMENTS
As of March 31, 1999, Liberty's consolidated investment portfolio was carried at
$1.3 billion. Approximately 70% of consolidated invested assets were in fixed
maturity securities (bonds and redeemable preferred stocks), 16% were in
mortgage loans, 7% in policy loans, with the balance consisting of equity
securities (3%), real estate (2%), and other long term investments (2%).
The overall average credit rating of fixed maturity securities as of March 31,
1999 was A. Less than investment grade securities comprised 5.4% of the fixed
maturity portfolio at March 31, 1999, compared with 4.9% at December 31, 1998.
In accordance with the provisions of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities", the Company reported an unrealized
gain of $19.2 million on fixed maturity securities available for sale and equity
securities as of March 31, 1999. This compares with an unrealized gain of $26.7
million at December 31, 1998. Due to the requirements of SFAS No. 115,
shareholders' equity will be subject to future volatility from the effects of
interest rate fluctuations on the fair value of fixed maturity securities.
CAPITAL, FINANCING, AND LIQUIDITY
At March 31, 1999 the Company's borrowings and notes payable amounted to $278.0
million, a decrease of $7.0 million from the $285.0 million outstanding at
December 31, 1998.
Other Company commitments are shown in Note 4 contained in the accompanying
financial statements. Additional detail as to commitments and financing is
contained in the Notes to the Consolidated Financial Statements in the Company's
annual report on Form 10K for the year ended December 31, 1998.
Further discussion of investments and valuation is contained in Notes 1 and 2 to
the Consolidated Financial Statements in the Company's annual report on Form 10K
for the year ended December 31, 1998.
CASH FLOWS
The Company's net cash flow from operating activities was $6.7 million for the
first three months of 1999 compared to $9.8 million for the same period of 1998.
The Company's net cash used in investing activities was $2.9 million in 1999
compared with $49.9 million in 1998. The decrease in net cash used in investing
activities resulted from a decrease in the purchasing of investment securities.
In the first quarter of 1998 investment securities were purchased using the
proceeds received from Fortis during 1997 when it acquired 21% of Pierce's
common stock for approximately $37.2 million. Cash flow used in financing
activities was $3.6 million 1999, compared with $2.2 million provided in 1998.
10
<PAGE> 11
The Liberty Corporation and Subsidiaries Quarter ended March 31, 1999
Management's Discussion and Analysis of Operations
IMPACT OF 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 95% complete on the remediation phase, 75%
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 June 30, 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 July 31, 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 has asked its
critical vendors to provide, in written form, documentation relating to their
Year 2000 compliance. The Company has received responses from over 75% of those
sent. Certain of the responses were not deemed acceptable, and follow up
procedures are currently being performed on these vendors, and those that have
not yet replied. 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.
11
<PAGE> 12
The Liberty Corporation and Subsidiaries Quarter ended March 31, 1999
Management's Discussion and Analysis of Operations
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 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 $16.3 million of these costs.
ACCOUNTING DEVELOPMENTS
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.
MARKET RISK EXPOSURES
With respect to the Company's exposure to market risks, see management's
comments under the Fixed Maturity Securities heading in the Company's annual
report included in its 1998 Form 10-K.
12
<PAGE> 13
The Liberty Corporation and Subsidiaries Quarter ended March 31, 1999
Management's Discussion and Analysis of Operations
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, is or may
be viewed as forward looking. Although the Company has used appropriate care in
developing any such forward looking information, forward looking information
involves risks and uncertainties that could significantly impact actual results.
These risks and uncertainties include, but are not limited to, the following:
changes in general economic conditions, including the performance of financial
markets and interest rates; competitive, regulatory, or tax changes that affect
the cost of or demand for the Company's products; and adverse litigation
results. The Company undertakes no obligation to publicly update or revise any
forward looking statements, whether as a result of new information, future
developments, or otherwise.
13
<PAGE> 14
PART II, ITEM 6. Exhibit and Reports on Form 8-K
(a) A list of the exhibits filed with this report is included in the
Index to Exhibits filed herewith.
INDEX TO EXHIBITS
EXHIBIT 11 Consolidated Earnings Per Share Computation (included in
Note 3 of Notes to Consolidated and Condensed Financial
Statements)
EXHIBIT 27 Financial Data Schedule (Electronic Filing Only)
14
<PAGE> 15
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 thereunto duly authorized.
THE LIBERTY CORPORATION Date: May 14, 1999
- -----------------------
(Registrant)
/s/ Kenneth W. Jones
- --------------------
Kenneth W. Jones
Corporate Controller
/s/ Martha G. Williams
- ----------------------
Martha G. Williams
Vice President, General Counsel and Secretary
15
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