Filed Pursuant to Rule 424(b)(3)
Registration No. 33-88824
THE COLONIAL GROUP, INC.
One Financial Center
Boston, Massachusetts 02111
Dear Fellow Stockholder:
As you may know, The Colonial Group, Inc. and Liberty Financial Companies,
Inc. have entered into a definitive merger agreement through which we will
combine our companies to create a broadly diversified asset management
organization. If the merger is approved, Colonial will become a wholly- owned
subsidiary of Liberty Financial. We believe that, as a result of the merger,
Colonial will have additional financial strength and other resources to
provide the enhanced quality and breadth of services mutual fund investors
and their financial advisers will need in the years ahead.
After careful review, your Board of Directors feels that the merger is in the
best interests of The Colonial Group and its stockholders. Therefore, the
Board unanimously recommends that you vote to adopt and approve the merger
agreement.
As a stockholder, you have the opportunity to voice your opinion on the
proposal. Your vote is important. Please be sure to complete, sign, and
return the proxy card in the enclosed postage- prepaid envelope as promptly
as practicable. We have engaged the services of a proxy solicitation firm,
Shareholder Communications Corporation. If we do not receive your proxy,
they may call to assist you in the voting process.
You should read the attached Prospectus/Proxy Statement carefully for more
detailed information about the merger. If you take no action, upon approval
of the merger, each of your shares of Colonial common stock will
automatically convert into the right to receive one share of Liberty
Financial common stock. If you prefer, you may instead elect to receive for
each share of Colonial common stock either, but not both, of $40 in cash or
0.77 shares of Liberty Financial preferred stock for some or all of your
shares of Colonial common stock. To make such an election, you must fill out
the accompanying Election Form and return it no later than March 17, 1995 to
Bank of Boston (as paying agent) in the postage-prepaid envelope provided,
together with either (a) your stock certificates or (b) an appropriate
guaranty of delivery of such certificates, all as described in the
accompanying Prospectus/Proxy Statement. Any stockholder who fails to make a
proper election will receive only shares of Liberty Financial common stock in
the merger.
The total amount of cash payable in the merger is limited to $100 million.
The total number of shares of preferred stock issuable in the merger is
limited to 1,040,000 shares. Please note that, if elections by stockholders
would cause these limits to be exceeded, shares of Colonial common stock with
respect to which you elected to receive cash or preferred stock, as the case
may be, will (on a pro rata basis with other stockholders making the same
election) be converted into the right to receive Liberty Financial common
stock until such time as the limits are no longer exceeded.
Thank you in advance for your participation and prompt attention. We believe
the merger represents a significant opportunity for Colonial to build on our
strengths in today's marketplace and enhance our future business.
If you have any questions regarding the proposed merger, or the merger
consideration election process, please call Shareholder Communications
Corporation toll free at (800) 733-8481, ext. 430 or collect at (212)
805-7000.
Sincerely,
[Signature of John A. McNeice, Jr.]
John A. McNeice, Jr.
Chairman
February 10, 1995
<PAGE>
THE COLONIAL GROUP, INC.
One Financial Center
Boston, Massachusetts 02111
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
March 21, 1995
TO THE STOCKHOLDERS OF
THE COLONIAL GROUP, INC.
A Special Meeting of Stockholders (the "Special Meeting") of The Colonial
Group, Inc. ("Colonial") will be held at One Financial Center, Second Floor,
Room B, Boston, Massachusetts on March 21, 1995 at 1:00 p.m., local time, for
the following purposes:
1. To consider and vote upon a proposal to adopt and approve the Agreement
and Plan of Merger dated as of October 12, 1994, as amended and restated on
February 8, 1995 (the "Merger Agreement"), by and among Liberty Financial
Companies, Inc. ("Parent"), New LFC, Inc. ("Liberty Financial"), Apple Merger
Corporation ("Merger Subsidiary"), a wholly-owned subsidiary of Liberty
Financial, and Colonial, providing for, among other things, the merger of
Merger Subsidiary with and into Colonial, as described in the accompanying
Prospectus/Proxy Statement; and
2. The transaction of such other business as may properly come before the
Special Meeting, or any adjournment(s) or postponement(s) thereof.
Only stockholders of record at the close of business on January 27, 1995 will
be entitled to receive notice of and to vote at the Special Meeting.
A copy of the Merger Agreement is attached as Appendix I to the
Prospectus/Proxy Statement.
If the action proposed in paragraph 1 above is approved by the stockholders
at the Special Meeting and effected by Colonial, any holder of Common Stock
of Colonial (1) who files with Colonial before the taking of the vote on the
approval of such action written objection to the proposed action stating that
he intends to demand payment for his shares if the action is taken and (2)
whose shares are not voted in favor of such action, has or may have the right
to demand in writing from Colonial (as the surviving corporation in the
merger), within twenty days after the date of mailing to him of notice in
writing that such action has become effective, payment for his shares and an
appraisal of the value thereof. Colonial and any such stockholder shall in
such cases have the rights and duties and shall follow the procedure set
forth in sections 85 to 98, inclusive, of chapter 156B of the General Laws of
Massachusetts. A copy of such sections is attached as Appendix IV to the
Prospectus/Proxy Statement.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, YOU ARE URGED TO COMPLETE,
SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD IN THE ENVELOPE PROVIDED AS
SOON AS POSSIBLE. AN ABSTENTION OR FAILURE TO VOTE HAS THE SAME EFFECT AS A
VOTE AGAINST THE MERGER.
By Order of the Board of Directors,
Arthur O. Stern
Clerk
Boston, Massachusetts
February 10, 1995
<PAGE>
PROXY STATEMENT
OF
THE COLONIAL GROUP, INC.
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON MARCH 21, 1995
PROSPECTUS
OF
NEW LFC, INC.
(to be renamed
"LIBERTY FINANCIAL COMPANIES, INC."
in connection with the Merger described below)
UP TO 8,254,543 SHARES
COMMON STOCK
(PAR VALUE $.01 PER SHARE)
AND
UP TO 1,040,000 SHARES
SERIES A CONVERTIBLE PREFERRED STOCK
(PAR VALUE $.01 AND FACE AMOUNT $50 PER SHARE)
This Prospectus/Proxy Statement is being furnished to holders of Class A
Common Stock, par value $.10 per share ("Class A Common Stock"), and to
holders of Class B Common Stock, par value $.10 per share ("Class B Common
Stock," and, together with the Class A Common Stock, "Common Stock"), of The
Colonial Group, Inc., a Massachusetts corporation ("Colonial"), in connection
with the solicitation of proxies by the Board of Directors of Colonial (the
"Colonial Board") for use at a Special Meeting of Stockholders of Colonial to
be held at 1:00 p.m., local time, on March 21, 1995, at One Financial Center,
Second Floor, Room B, Boston, Massachusetts and at any adjournments or
postponements thereof (the "Colonial Meeting"). At the Colonial Meeting, the
holders of Common Stock will consider and vote upon a proposal to adopt and
approve an Agreement and Plan of Merger dated as of October 12, 1994, as
amended and restated on February 8, 1995 (the "Merger Agreement"), by and
among Colonial, Liberty Financial Companies, Inc. (to be renamed "LFC
Holdings, Inc." in connection with the Merger described below) ("Parent"),
New LFC, Inc. (to be renamed "Liberty Financial Companies, Inc." in
connection with the Merger described below), a wholly-owned subsidiary of
Parent ("Liberty Financial"), and Apple Merger Corporation, a wholly-owned
subsidiary of Liberty Financial ("Merger Subsidiary"), pursuant to which,
among other things, Merger Subsidiary will merge with and into Colonial and
Colonial will be the surviving corporation and a wholly-owned subsidiary of
Liberty Financial (the "Merger").
As a result of the Merger, unless the holders of Common Stock elect otherwise
as described below, each share of Common Stock (other than Dissenting Shares,
as hereinafter defined, and certain shares owned by Liberty Financial,
Colonial or their subsidiaries) issued and outstanding immediately prior to
the effective time of the Merger (the "Effective Time") will be converted
into the right to receive one share of common stock, $.01 par value, of
Liberty Financial ("LFC Common Stock"). A stockholder may elect to have any
or all of the shares of Common Stock held by such holder converted into
either, but not both, of (i) the right to receive $40.00 in cash for each
share of Common Stock, or (ii) the right to receive 0.77 shares of Series A
Convertible Preferred Stock, $.01 par value and $50 face amount per share, of
Liberty Financial ("LFC Preferred Stock," and, together with the LFC Common
Stock, the "LFC Stock") for each share of Common Stock ($38.50 face amount
per share of Common Stock). To make such an election, a stockholder must fill
out the accompanying Letter of Transmittal and Election Form and return it no
later than March 17, 1995 to The First National Bank of Boston (as paying
agent) in the postage-prepaid envelope provided, together with either (a)
such stockholder's stock certificates or (b) an appropriate guaranty of
delivery of such stock certificates (provided that such certificates are in
fact delivered within five (5) Nasdaq trading days of the date of delivery of
the guaranty), all as described in this Prospectus/Proxy Statement. Any
stockholder who fails to make a proper election will receive only shares of
LFC Common Stock in the Merger.
<PAGE>
In choosing whether to make an election, and, if so, which election to make,
stockholders should be aware that the three forms of consideration available
in the Merger were not designed to have equal value per share of Common
Stock. See "BACKGROUND AND REASONS FOR THE MERGER--Opinions of Colonial
Financial Advisers." In addition, neither Liberty Financial nor Colonial can
predict the trading prices of the LFC Stock following the Merger, which will
be determined by the market and will be influenced by factors beyond their
control, and may well be substantially less than the $40 per share of Common
Stock available under the cash election. See "SUMMARY--The Merger--Opinions
of Colonial Financial Advisers" for a summary of a certain valuation analysis
of the Merger consideration performed by Merrill Lynch. In light of this, as
of the date of this Prospectus/Proxy Statement, Liberty Financial and
Colonial believe that the likelihood is remote that the option to elect cash
will not be oversubscribed. Consequently, holders of Common Stock making such
an election should expect to receive LFC Common Stock for some of their
shares. Similarly, if the option to elect LFC Preferred Stock is
oversubscribed, holders of Common Stock making an election to receive LFC
Preferred Stock will receive LFC Common Stock for some of their shares. As of
the date of this Prospectus/Proxy Statement, Liberty Financial and Colonial
do not believe that they can predict accurately the extent (if any) to which
the option to elect LFC Preferred Stock will be elected or oversubscribed. In
light of the foregoing, it is critical for stockholders to make their own
valuation of each element of the consideration available in the Merger
(including the tax consequences to them of each such element) and to make or
forego making an election accordingly.
The aggregate cash paid to stockholders electing to receive cash will be
limited to $100 million and the total number of shares of LFC Preferred Stock
issued to stockholders electing to receive LFC Preferred Stock will be
limited to 1,040,000 shares. If the number of shares subject to elections to
receive cash or LFC Preferred Stock would result in more than $100 million in
cash being paid and/or more than 1,040,000 shares of LFC Preferred Stock
being issued, then, in either case, the number of shares of Common Stock
subject to such election shall be reduced ratably, on a whole Common Stock
share basis, based on the number of shares of Common Stock elected to be so
treated by each stockholder until the aggregate cash consideration being paid
no longer exceeds $100 million and/or the aggregate number of shares of LFC
Preferred Stock no longer exceeds 1,040,000, respectively. Each share of
Common Stock not receiving the consideration for which an election was made
as a result of such reduction will be converted into the right to receive one
share of LFC Common Stock.
The foregoing amounts of LFC Common Stock, cash and LFC Preferred Stock to be
received by Colonial stockholders may be reduced under certain circumstances.
See "THE MERGER--Conversion of Common Stock--Adjustment of Merger
Consideration."
Holders who elect to receive LFC Preferred Stock may also elect (but shall
not be required) to become parties to a Stockholders Agreement, as described
under "THE MERGER--Conversion of Common Stock."
This Prospectus/Proxy Statement also constitutes a prospectus of Liberty
Financial with respect to the LFC Common Stock and the LFC Preferred Stock to
be issued in connection with the Merger in exchange for the Common Stock.
Liberty Financial has filed a Registration Statement on Form S-4 (together
with any amendments, schedules and exhibits thereto, the "Registration
Statement") with the SEC under the Securities Act of 1933, as amended (the
"Securities Act"), registering an aggregate of 8,254,543 shares of LFC Common
Stock and of 1,040,000 shares of LFC Preferred Stock that may be issued in
connection with the Merger. This Prospectus/Proxy Statement does not cover
any resales of LFC Stock that will be received by Colonial's stockholders in
connection with the Merger, and no person is authorized to make any use of
this Prospectus/Proxy Statement in connection with any such resale. All
information contained in this Prospectus/Proxy Statement relating to Liberty
Financial has been supplied by Liberty Financial and all information relating
to Colonial has been supplied by Colonial.
Liberty Financial is a newly-formed, wholly-owned subsidiary of Parent.
Parent formed Liberty Financial in connection with the Merger, and
immediately prior to the Effective Time Parent will contribute substantially
all of its assets to Liberty Financial in exchange for 22,812,200 additional
shares of LFC Common Stock and the assumption by Liberty Financial of all of
Parent's liabilities in existence immediately prior to such contribution.
Parent is an indirect subsidiary of Liberty Mutual Insurance
2
<PAGE>
Company ("Liberty Mutual"). Following the consummation of the Merger, based
on shares outstanding as of February 8, 1995, assuming that all holders of
Common Stock receive only shares of LFC Common Stock in the Merger, Liberty
Mutual will own approximately 75.4% of the outstanding LFC Common Stock
(approximately 83.0% of the voting power of the LFC Stock if the maximum
amount of cash is paid and the maximum number of shares of LFC Preferred
Stock is issued in the Merger). Prior to the Merger, there has been no public
market for the LFC Stock. The LFC Common Stock has been approved for listing
on the New York Stock Exchange under the symbol "L", subject to a condition
as to the minimum number of holders thereof and to official notice of
issuance. If such condition as to the number of stockholders is not met, the
LFC Common Stock will be included on the Nasdaq National Market ("Nasdaq")
and listed on the Boston Stock Exchange.The LFC Preferred Stock will not be
listed on any stock exchange or on Nasdaq and it is not anticipated that any
public market will develop for the LFC Preferred Stock.
See "RISK FACTORS" for a discussion of certain factors that the existing
holders of Colonial Common Stock should consider in evaluating the Merger,
including their prospective investment in shares of LFC Stock.
This Prospectus/Proxy Statement and the accompanying proxy card and letter of
transmittal and election form regarding the Merger consideration are first
being mailed to stockholders of Colonial on or about February 14, 1995.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROSPECTUS/PROXY STATEMENT HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus/Proxy Statement is February 10, 1995.
3
<PAGE>
FOR NORTH CAROLINA INVESTORS: THE OFFERING OF LFC STOCK IN CONNECTION WITH
THE MERGER HAS NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF
INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER RULED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS/PROXY STATEMENT.
Liberty Financial has insurance subsidiaries organized under the laws of the
State of Rhode Island. Rhode Island law prohibits any person from directly or
indirectly acquiring control of any domestic insurer unless such person has
provided certain required information to the state insurance commission and
such acquisition of control has been approved by the state's insurance
commissioner. Under these insurance laws, any person acquiring 10% or more of
the outstanding voting stock of a corporation is presumed to have acquired
control of that corporation and its subsidiaries. Consequently, no person may
acquire, directly or indirectly, 10% or more of the voting stock or voting
power of Liberty Financial outstanding after the Merger unless such person
has provided such required information to the Rhode Island insurance
commission and such acquisition is approved by the insurance commissioner of
such state.
Liberty Financial's Restated Articles of Organization (the "LFC Restated
Articles") include provisions limiting the voting power of shares of Liberty
Financial's Voting Stock (as defined in the LFC Restated Articles) held by
holders of 20% or more of the such Voting Stock (other than Liberty Mutual
and its subsidiaries and affiliates) in certain circumstances. These
provisions are designed to prevent, under certain circumstances, a deemed
assignment under the Investment Advisers Act of 1940, as amended (the
"Advisers Act"), or the Investment Company Act of 1940, as amended (the
"Investment Company Act"), of investment advisory contracts to which certain
of Liberty Financial's subsidiaries are or may become parties. See "Risk
Factors--Regulation," "Certain Information Regarding Liberty
Financial--Business--Regulation" and "Comparison of Stockholders' Rights and
Description of LFC Capital Stock--General Provisions Regarding LFC Common
Stock and LFC Preferred Stock; Description of Series A Convertible Preferred
Stock."
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS/PROXY STATEMENT, AND, IF GIVEN OR MADE, ANY
SUCH INFORMATION OR REPRESENTATION SHOULD NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY COLONIAL OR LIBERTY FINANCIAL. THIS PROSPECTUS/PROXY STATEMENT
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
PURCHASE, THE SECURITIES OFFERED BY THIS PROSPECTUS/PROXY STATEMENT, OR THE
SOLICITATION OF A PROXY, IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH AN OFFER, SOLICITATION OF AN OFFER, OR PROXY SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS/PROXY STATEMENT NOR ANY DISTRIBUTION OF THE
SECURITIES OFFERED PURSUANT TO THIS PROSPECTUS/PROXY STATEMENT SHALL, UNDER
ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE INFORMATION SET FORTH HEREIN OR INCORPORATED BY REFERENCE OR IN THE
AFFAIRS OF COLONIAL OR LIBERTY FINANCIAL OR ANY OF THEIR RESPECTIVE
SUBSIDIARIES SINCE THE DATE OF THIS PROSPECTUS/PROXY STATEMENT OR THAT THE
INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
However, if any material change occurs during the period that this
Prospectus/Proxy Statement is required to be delivered, this Prospectus/Proxy
Statement will be amended and supplemented accordingly.
4
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
AVAILABLE INFORMATION 8
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE 9
SUMMARY 10
The Companies 10
Colonial 10
Liberty Financial 11
The Merger 12
Reasons for the Merger 12
Recommendation of the Colonial Board 13
Opinions of Colonial Financial Advisers 13
Interests of Certain Persons in the Merger 14
Terms of the Merger 15
Waiver and Amendment; Revisions to Transaction 18
Securities to be Issued by Liberty Financial in the Merger 19
Certain Federal Income Tax Consequences of the Transactions Contemplated by the
Merger Agreement 19
Accounting Treatment of the Merger 19
Listing of LFC Stock 20
Appraisal Rights 20
The Colonial Meeting 20
Date, Time and Place 20
Purpose of the Meeting 20
Record Date; Shares Entitled to Vote; Number of Record Holders 20
Votes Required; Election Form 21
MARKET PRICE OF COLONIAL COMMON STOCK; COLONIAL CASH DIVIDENDS; PRINCIPAL COLONIAL
STOCKHOLDERS 23
SUMMARY FINANCIAL DATA 25
INTRODUCTION 31
RISK FACTORS 31
THE COMPANIES 39
Colonial 39
Liberty Financial 40
THE COLONIAL MEETING 42
Date, Time and Place 42
Purpose of the Meeting 42
Shares Outstanding and Entitled to Vote; Record Date 42
Votes Required 42
Voting, Solicitation and Revocation of Proxies 42
Independent Accountants 43
Other Matters 43
Adjournment of Colonial Meeting 43
BACKGROUND AND REASONS FOR THE MERGER 44
Background of the Merger 44
Reasons for the Merger; Recommendation of Colonial Board 48
Opinions of Colonial Financial Advisers 48
Merrill Lynch Opinion 48
Berkshire Capital Opinion 54
THE MERGER 57
General 57
Conversion of Colonial Stock 57
Conversion of Colonial Stock; Elections Pertaining to Merger Consideration 57
5
<PAGE>
Adjustment of Merger Consideration 58
Election Forms 59
Treatment of Fractional Shares 59
Dissenting Shares; Appraisal Rights 59
Terms of Liberty Financial Series A Convertible Preferred Stock 60
Stockholders Agreement 60
Procedures for Exchange of Certificates 61
Manner of Exchange 61
Rights of Holders of Common Stock Prior to Surrender 61
Lost, Stolen or Destroyed Certificates 62
Conversion of Liberty Financial Stock 62
Conduct of Business Pending Merger 63
Colonial 63
Liberty Financial 64
No Solicitations; Fiduciary Duties 65
Best Efforts to Consummate Merger 65
Conditions to the Merger 65
Interests of Certain Persons in the Merger 68
Indemnification 68
Officers' and Directors' Liability Insurance 68
Voting Agreement 69
Registration Rights Agreement 69
Employment Contracts 70
Employee Benefits 71
Directorships 72
Effects of the Merger on Colonial Employee Benefits 72
Colonial Stock Option Plans 72
Colonial ESOP 72
Colonial Profit Sharing Plan 72
Other Colonial Benefit Plans 72
Retention Program 73
Right of the Colonial Board to Withdraw its Recommendation 73
Termination of the Merger Agreement; Fee 73
Termination 73
Termination Fee 73
Waiver and Amendment; Revisions to Transaction 74
Effective Time 74
Expenses of Transaction 74
Listing of LFC Common Stock 74
Resales of LFC Common Stock and LFC Preferred Stock After the Merger 75
Delisting and Deregistration of Colonial Common Stock 75
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTIONS CONTEMPLATED BY THE MERGER
AGREEMENT 75
In General 75
Tax Treatment of Holders of Common Stock 76
Exchange of Common Stock Solely for LFC Common Stock 76
Exchange of Common Stock Solely for Cash 76
Exchange of Common Stock for a Combination of Cash and LFC Common Stock 76
Exchange of Common Stock for LFC Preferred Stock or for a Combination of
LFC Common Stock and LFC Preferred Stock 76
Cash Received in Lieu of Fractional Shares of LFC Common Stock 77
6
<PAGE>
Tax Consequences to Holders of Common Stock if the Merger Qualifies as a Tax-Free
Reorganization 77
Backup Withholding 77
Tax Treatment of Liberty Financial, Colonial and Merger Subsidiary 77
APPRAISAL RIGHTS 77
CERTAIN INFORMATION REGARDING LIBERTY FINANCIAL 79
General 79
Corporate Structure and History 79
Dividend Policy 80
Selected Financial Data 82
Management's Discussion and Analysis of Results of Operations and
Financial Condition 85
Business 101
Management 131
Principal Stockholders 146
Relationships with Liberty Mutual 147
SHARES ELIGIBLE FOR FUTURE SALE 152
COMPARISON OF STOCKHOLDERS' RIGHTS AND DESCRIPTION
OF LFC CAPITAL STOCK 155
Voting Rights 155
Stock Transfer Restrictions 156
Other Provisions Pertaining to a Change in Control 156
Exculpation and Indemnification for Officers and Directors 158
Certain Other Massachusetts Law Provisions 159
General Provisions Regarding LFC Common Stock and LFC Preferred Stock; Description of
Series A Convertible Preferred Stock 160
Transfer Agent and Registrar 167
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION 168
LEGAL MATTERS 176
EXPERTS 176
BY-LAW AMENDMENT 176
GLOSSARY OF CERTAIN INSURANCE TERMS 177
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF LIBERTY FINANCIAL
COMPANIES, INC. AND BALANCE SHEET OF NEW LFC, INC. F-1
APPENDICES
I. Form of Amendment and Restatement of the Agreement and Plan of Merger among Liberty
Financial Companies, Inc., New LFC, Inc., Apple Merger Corporation and
The Colonial Group, Inc. I-1
II. Fairness Opinion of Merrill Lynch II-1
III. Fairness Opinion of Berkshire Capital III-1
IV. Massachusetts Appraisal Rights Statute--Sections 85 through 98
of the Massachusetts Business Corporation Law IV-1
</TABLE>
7
<PAGE>
AVAILABLE INFORMATION
Colonial is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and
Exchange Commission (the "SEC"). Liberty Financial is not currently subject
to the informational requirements of the Exchange Act. Liberty Financial has
filed with the SEC the Registration Statement (File No. 33-88824) under the
Securities Act covering the LFC Common Stock and the LFC Preferred Stock to
be issued pursuant to the Merger Agreement. This Prospectus/Proxy Statement
does not contain all of the information set forth in the Registration
Statement and in the exhibits and schedules thereto, to which reference
hereby is made, as permitted by the rules and regulations of the SEC. The
Registration Statement, as well as the reports and other information filed
with the SEC by Colonial under the Exchange Act, may be inspected and copied
at prescribed rates at the public reference facilities maintained by the SEC
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, DC 20549,
and at the regional offices of the SEC located at Seven World Trade Center,
13th Floor, New York, New York 10048, and Room 1400, Northwest Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60621. Copies of such
materials may also be obtained at prescribed rates from the Public Reference
Section of the SEC at 450 Fifth Street, N.W., Washington, DC 20549. The
Colonial Class A Common Stock is listed on the Boston Stock Exchange and
Nasdaq, and all materials filed by Colonial are available for inspection at
the offices of the Boston Stock Exchange, One Boston Place, Boston,
Massachusetts 02108, or at the offices of The Nasdaq Stock Market, 1735 K
Street, N.W., Washington, DC 20006.
Following the Merger, Liberty Financial will become subject to the Exchange
Act and in accordance therewith will file periodical reports, proxy
statements and other information with the SEC. The LFC Common Stock has been
approved for listing on the New York Stock Exchange, subject to a condition
as to the minimum number of holders thereof and to official notice of
issuance. If the LFC Common Stock is listed on the New York Stock Exchange,
such information will also be available for inspection at the offices at the
New York Stock Exchange, 20 Broad Street, New York, New York 10005. If the
condition as to the minimum number of stockholders is not met, the LFC Common
Stock will be included on Nasdaq and listed on the Boston Stock Exchange, and
all materials filed by Liberty Financial will be available for inspection at
the offices of the Boston Stock Exchange, or at the offices of The Nasdaq
Stock Market, at the applicable address listed above.
Statements contained in this Prospectus/Proxy Statement or in any document
incorporated herein by reference as to the contents of any contract or other
document referred to herein or therein are not necessarily complete and, in
each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement or such other
document incorporated herein by reference. Each such statement is qualified
in its entirety by such reference.
8
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, all of which were previously filed with the SEC by
Colonial pursuant to the Exchange Act, are hereby incorporated by reference
in this Prospectus/Proxy Statement:
(1) Colonial's Annual Report on Form 10-K for the year ended December 31,
1993;
(2) Colonial's 1993 Annual Report to Stockholders;
(3) Colonial's Quarterly Report on Form 10-Q for the quarter ended March 31,
1994;
(4) Colonial's Quarterly Report on Form 10-Q for the quarter ended June 30,
1994;
(5) Colonial's Quarterly Report on Form 10-Q for the quarter ended September
30, 1994, as amended by Form 10-Q/A dated January 24, 1995;
(6) Colonial's Current Report on Form 8-K dated June 15, 1994;
(7) Colonial's Current Report on Form 8-K dated October 13, 1994, as amended
by Form 8-K/A dated October 25, 1994; and
(8) Colonial's Current Report on Form 8-K dated February 1, 1995.
Colonial's Exchange Act file number is 1-9054.
The information relating to Colonial contained in this Prospectus/Proxy
Statement does not purport to be comprehensive and should be read together
with the information in the documents incorporated by reference herein. The
documents incorporated by reference herein are not being delivered to
stockholders with this Prospectus/Proxy Statement, but are available upon
request as provided below.
All documents filed by Colonial under Section 13(a), 13(c), 14 or 15(d) of
the Exchange Act after the date of this Prospectus/Proxy Statement and prior
to the date of the Colonial Meeting shall be deemed to be incorporated by
reference in this Prospectus/Proxy Statement and to be a part hereof from the
date of filing such documents. Any statement contained herein or in a
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus/Proxy Statement to the extent that
a statement contained herein or in any other subsequently filed document
which is also incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this
Prospectus/Proxy Statement.
THIS PROSPECTUS/PROXY STATEMENT INCORPORATES CERTAIN DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS
(WITHOUT EXHIBITS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY
REFERENCE IN THIS PROSPECTUS/PROXY STATEMENT) ARE AVAILABLE WITHOUT CHARGE TO
EACH PERSON, INCLUDING ANY BENEFICIAL OWNER OF COMMON STOCK, TO WHOM A COPY
OF THIS PROSPECTUS/PROXY STATEMENT IS DELIVERED, UPON WRITTEN OR ORAL REQUEST
AND WILL BE SENT BY FIRST CLASS MAIL OR OTHER EQUALLY PROMPT MEANS WITHIN ONE
BUSINESS DAY OF RECEIPT OF SUCH REQUEST. REQUESTS FOR SUCH DOCUMENTS SHOULD
BE DIRECTED TO THE COLONIAL GROUP, INC., ONE FINANCIAL CENTER, BOSTON,
MASSACHUSETTS 02111, ATTENTION: CLERK, TELEPHONE: (617) 426-3750. TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE AT LEAST FIVE
BUSINESS DAYS BEFORE THE SCHEDULED DATE OF THE COLONIAL MEETING.
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SUMMARY
The following is a summary of certain information contained elsewhere in this
Prospectus/Proxy Statement. The summary is qualified in its entirety by, and
should be read in conjunction with, the more detailed information and
financial statements, including the notes thereto, appearing elsewhere in
this Prospectus/Proxy Statement, in its Appendices and in the documents
referred to herein or incorporated by reference. Stockholders should
carefully read this Prospectus/Proxy Statement and the attached Appendices in
their entirety, and in particular should consider the factors set forth in
"Risk Factors." Liberty Financial is a newly-formed, direct wholly-owned
subsidiary of Liberty Financial Companies, Inc. (to be renamed "LFC Holdings,
Inc." immediately prior to the Effective Time) ("Parent"), which in turn is
an indirect subsidiary of Liberty Mutual. Immediately prior to the Effective
Time of the Merger, Parent will contribute all of its assets (other than (i)
its existing equity interest in Liberty Financial and (ii) a promissory note
of a wholly-owned subsidiary of Parent in the principal amount of $30.0
million held by Parent) to Liberty Financial in exchange for 22,812,200
additional shares of LFC Common Stock and the assumption by Liberty Financial
of all of Parent's liabilities (including, without limitation, all unknown,
contingent or otherwise inchoate liabilities) in existence immediately prior
to such contribution (collectively, the "Parent Contribution"). See "Certain
Information Regarding Liberty Financial--Corporate Structure and History" for
a further description of the Parent Contribution and related matters. Unless
otherwise indicated herein or the context otherwise requires, all references
to Liberty Financial contained in this Prospectus/Proxy Statement give effect
to the Parent Contribution and include Liberty Financial, its predecessors
and its subsidiaries, and all references to the Consolidated Financial
Statements of Liberty Financial shall be deemed references to the
consolidated financial statements of Parent and its subsidiaries. All Liberty
Financial share and per share information in this Prospectus/Proxy Statement
(except that contained in Summary Financial Data, Selected Financial Data,
and Liberty Financial Companies, Inc.'s Consolidated Financial Statements)
has been adjusted to give effect to (i) the Effective Time Adjustment (as
such term is defined below under "THE MERGER--Conversion of Liberty Financial
Stock") pertaining to Liberty Financial's outstanding stock options, (ii) the
filing of the LFC Restated Articles and (iii) the filing of a certificate of
designation of 1,040,000 shares of LFC Preferred Stock, each of which is to
be effected immediately prior to the Effective Time in accordance with the
Merger Agreement. All financial information set forth herein is presented in
accordance with generally accepted accounting principles ("GAAP"), unless
otherwise noted. See "Glossary of Certain Insurance Terms" for the
definitions of certain terms used herein.
The Companies
Colonial
Colonial acts as investment manager or sub-adviser for 31 open-end and 5
closed-end investment companies included in the Colonial family of mutual
funds, and to 6 open-end investment companies which are funding vehicles for
variable annuity contracts issued by certain affiliates of Liberty Financial.
Colonial provides administrative services to each of the Colonial funds,
along with distribution and shareholder services to the Colonial open-end
funds. Colonial also distributes, on an agency basis, such variable annuity
contracts. As of September 30, 1994, Colonial managed or acted as a
sub-adviser for funds having approximately $14.2 billion in assets
(approximately $13.5 billion as of December 31, 1994) and approximately
648,000 shareholders. As of September 30, 1994, approximately 41% of such
assets were invested in tax-exempt bond funds, 38% in taxable bond and money
market funds and 21% in equity funds. Colonial and its predecessors or
affiliates have been in the investment management business for approximately
64 years, and have provided these or similar services since 1931.
Colonial distributes its open-end funds primarily through securities
brokerage firms, banking institutions, financial planners and independent
brokers. Most of the Colonial funds offer investors a choice of two pricing
options: a traditional front-end load option, in which the investor pays a
sales charge at the time of purchase, and a back-end load option, in which
the investor pays no sales charge at the time of purchase, but is subject to
an asset-based sales charge paid by the fund for eight years after purchase
and a declining contingent deferred sales charge paid by the investor if
shares are redeemed within six years after purchase. Certain Colonial funds
also offer a level-load option, in which the investor pays a small initial
sales charge, and is subject to an on-going asset-based sales charge paid by
the fund and a small contingent deferred sales charge paid by the investor if
shares are redeemed within one year after purchase.
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The investment management and advisory services provided by Colonial to the
funds generally consist of managing the investment of each fund's assets in
accordance with its investment objectives and policies and purchasing and
selling securities on behalf of the fund, all subject to the supervision of
the fund's Board of Trustees. Administrative services generally include
portfolio pricing, accounting and legal services, preparation of shareholder
reports and fund tax returns and the provision of office space, facilities
and personnel. Marketing and distribution services include preparation and
distribution of fund advertising and sales literature and promotion of the
funds within each distribution channel. Transfer agent and shareholder
services include maintaining records of fund share ownership, recording of
fund share transactions and responding to shareholder inquiries.
Colonial conducts most of its business activities through three wholly-owned
subsidiaries. Fund investment management, administration and marketing are
conducted through Colonial Management Associates, Inc., which is registered
as an investment adviser under the Advisers Act. Fund distribution is
conducted through Colonial Investment Services, Inc., which is registered as
a broker-dealer under the Exchange Act and is a member of the National
Association of Securities Dealers, Inc. Transfer agency and shareholder
service activities are conducted through Colonial Investors Service Center,
Inc., which is registered as a transfer agent under the Exchange Act.
As of December 31, 1994, Colonial managed or acted as sub-adviser for funds
having approximately $13.5 billion in assets. The average fund assets under
Colonial's management for the year ended December 31, 1994 were $14.5 billion
as compared to $13.5 billion for the year ended December 31, 1993. Gross fund
sales for the fourth quarter of 1994 and for the year ended December 31, 1994
were $201 million and $1.6 billion, respectively. Colonial experienced net
redemptions of $502 million for the fourth quarter of 1994 and $742 million
for the fiscal year ended December 31, 1994. Colonial's revenues for the
fourth quarter of 1994 were $38.2 million, representing a decrease of $4.2
million from the fourth quarter of 1993. Colonial's revenues were
approximately $161.2 million for 1994, compared to $150.8 million in 1993.
Colonial's net income was approximately $11.8 in 1994, compared to $20.0
million for 1993. Colonial's 1994 operating expenses included non-recurring
expenses of $4.6 million and acceleration of stock option expenses of $2.5
million related to the Merger. The effect of these items on net income, after
tax benefits, was $4.0 million and $1.5 million, respectively.
For a discussion of various business relationships between Liberty Financial
and Colonial maintained during the periods for which financial statements are
presented or incorporated by reference in this Prospectus/Proxy Statement,
see "CERTAIN INFORMATION REGARDING LIBERTY FINANCIAL-- Business--Business
Relationships with Colonial."
Colonial's principal executive offices are located at One Financial Center,
Boston, Massachusetts 02111 (telephone (617) 426-3750).
Liberty Financial
Liberty Financial is a diversified and integrated asset management
organization providing insurance and investment products to individuals and
institutions through multiple distribution channels. Liberty Financial has
combined product development, asset management and customer service through
Keyport Life Insurance Company ("Keyport"), a specialist in single premium
fixed and variable annuities, and Stein Roe & Farnham Incorporated ("Stein
Roe"), a diversified investment advisory firm. Liberty Financial has also
distributed products through the Liberty Financial Bank Group (the "Bank
Marketing Group"), a specialist in the design and implementation of bank
marketing programs for insurance and investment products and services. As of
September 30, 1994, Liberty Financial managed approximately $28.9 billion of
assets (approximately $25.6 billion at December 31, 1994).
Liberty Financial's strategy is to increase its assets under management
through product innovation, customer service, multiple distribution channels,
and focused marketing efforts. Historically, Liberty Financial's largest
source of revenues has been the net investment income derived from the
investments which support Keyport's fixed annuity business and its closed
block of single premium whole life insurance. Liberty Financial also derives
income from fee-based assets under management, including private managed
accounts, mutual funds, and variable annuities. Liberty Financial seeks to
diversify further its sources of income by increasing its fee-based assets
under management. The Merger is in furtherance of this strategy. See "The
Companies--Liberty Financial--Liberty Financial's Reasons for the Merger."
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Keyport. Keyport offers a diversified line of fixed and variable annuities
designed to serve the growing retirement savings market. Annuities are
long-term savings vehicles that are particularly attractive to customers
seeking tax-deferred savings products to supplement retirement income.
Keyport issued more than $800.0 million of fixed annuities in each of the
last three years and approximately $868.1 million of fixed annuities during
the nine months ended September 30, 1994. Liberty Financial's current
profitability is substantially dependent on Keyport's ability to manage
effectively its investment spread (the difference between the net investment
income derived from Keyport's general account investments and the interest
credited to policyholders). Keyport seeks to manage its investment spread
through, among other things, the reset (typically annual) of crediting rates
paid to policyholders and the imposition of surrender charges upon early
withdrawal. At September 30, 1994, the interest crediting rates with respect
to 96.7% (approximately $6.5 billion) of fixed annuity policyholder account
balances were to be reset within the succeeding twelve months. As of
September 30, 1994, 86.5% (approximately $5.8 billion) of fixed annuity
policyholder liabilities were subject to surrender charges. Keyport also
sells variable annuities, which provide management fee income.
Keyport is rated "A+" (Superior) by A.M. Best Company, Inc. ("A.M. Best"), an
independent insurance industry rating agency. See "Glossary of Certain
Insurance Terms" for a description of A.M. Best rating categories. Standard &
Poor's Corporation has rated Keyport's claims-paying ability "AA-," and
Moody's Investors Service, Inc. has rated Keyport's claims-paying ability
"A1." These ratings are not "market" ratings or recommendations to use or
invest in Keyport or Liberty Financial and are directed toward the protection
of policyholders, not investors.
Stein Roe. Stein Roe was founded in 1932 as an investment counselor to
wealthy individuals. The firm has evolved into a diversified investment
adviser which seeks to provide quality investment management and client
service to individuals and institutions. As of September 30, 1994, Stein Roe
had approximately $26.2 billion of assets under management (approximately
$22.9 billion at December 31, 1994), including $8.8 billion relating to
Keyport's products, $4.1 billion for private investment counsel clients
(primarily wealthy individuals and families), $7.2 billion for unaffiliated
institutional investors, and $6.1 billion in no-load and load mutual funds.
Bank Distribution Channel. In the past ten years, banks have emerged as an
important distribution channel for insurance and investment products and
services. During 1993 and the nine months ended September 30, 1994, this
channel (including the Bank Marketing Group) accounted for 38.1% and 39.7%,
respectively, of Liberty Financial's total proprietary annuity and mutual
fund product sales and 77.7% and 70.0%, respectively, of Keyport's annuity
sales.
Liberty Financial developed the Bank Marketing Group as a proprietary
distribution vehicle for its products and services. The Bank Marketing Group
designs and implements programs which provide both proprietary and
third-party sponsored products, licenses and trains sales personnel, and
provides administrative support to meet the evolving needs of banks and their
customers. Each of Keyport and Colonial has a wholesaling group dedicated to
expanding further the distribution of its products through third party bank
marketers and through direct distribution relationships with banks. Following
the Merger, Liberty Financial may explore opportunities to consolidate
marketing efforts in the bank channel.
Liberty Financial's principal executive offices are located at 600 Atlantic
Avenue, 24th Floor, Boston, Massachusetts 02210-2214 (telephone (617)
722-6000).
See "THE COMPANIES--Liberty Financial" for a description of Liberty
Financial's reasons for the Merger.
The Merger
Reasons for the Merger
The Colonial Board has unanimously approved the Merger Agreement. The
Colonial Board has determined that the Merger is in the best interests of
Colonial and its stockholders and unanimously recommends that the
stockholders of Colonial vote FOR the adoption and approval of the Merger
Agreement. In reaching its decision to approve the Merger, the Colonial Board
considered a number of factors. These included the advice of Colonial's
financial advisers, the terms of the Merger Agreement,
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historical and prospective financial information regarding Liberty Financial,
the advantages of the proposed Merger to the business of Colonial, the
expectation that the Merger will be tax-free for federal income tax purposes,
the effect of the Merger on Colonial's relationships with its mutual fund
clients and employees and the risks of prolonging the merger negotiation
process further. See "Background and Reasons for the Merger."
Recommendation of the Colonial Board
THE BOARD OF DIRECTORS OF COLONIAL HAS UNANIMOUSLY ADOPTED AND APPROVED THE
MERGER AGREEMENT AND DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF
COLONIAL AND THE COLONIAL STOCKHOLDERS AND UNANIMOUSLY RECOMMENDS A VOTE FOR
THE PROPOSAL TO ADOPT AND APPROVE THE MERGER AGREEMENT. For a discussion of
the factors considered by the Colonial Board in reaching its decision, see
"Background and Reasons for the Merger--Reasons for the Merger;
Recommendation of Colonial Board."
Opinions of Colonial Financial Advisers
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and
Berkshire Capital Corporation ("Berkshire Capital") have each delivered their
written opinions dated October 12, 1994 to the Colonial Board to the effect
that, as of such date, the proposed consideration to be received by the
holders of Colonial's Common Stock pursuant to the Merger, taken as a whole,
was fair to such stockholders from a financial point of view. The opinions of
Merrill Lynch and Berkshire Capital are directed only to the fairness, from a
financial point of view, of the consideration to be paid to Colonial's
stockholders in the Merger and do not constitute a recommendation to any
Colonial stockholder as to how such stockholder should vote at the Colonial
Meeting. Such opinions were delivered as of October 12, 1994, and,
necessarily, are based on economic, market, financial and other conditions as
they existed on October 12, 1994, and upon such information made available to
Merrill Lynch and Berkshire Capital as of such date. No attempt has been made
to update such opinions. In considering whether to approve the Merger,
Colonial stockholders should consider the fact that the opinions of Merrill
Lynch and Berkshire Capital have not been updated since October 12, 1994.
The Merger Agreement does not require that the fairness opinions rendered to
each party from its own financial advisers on October 12, 1994 be confirmed
as of the date of this Prospectus/Proxy Statement or as of the closing of the
Merger. Colonial's senior management does not believe that, as of the date of
this Prospectus/Proxy Statement, taking into account all developments since
October 12, 1994 known to Colonial's senior management with respect to both
Colonial, on the one hand, and Liberty Financial, on the other hand, the
terms of the Merger should be adjusted in order to ensure that the same are
fair, from a financial point of view, to the shareholders of Colonial. In
light of the terms of the Merger Agreement and the foregoing belief of
Colonial's senior management, Colonial decided not to seek an update of the
opinions rendered by its financial advisers on October 12, 1994.
As described in more detail under "BACKGROUND AND REASONS FOR THE
MERGER--Opinions of Colonial's Financial Advisers," Merrill Lynch performed
several financial analyses of Colonial, Liberty Financial, the combined
companies and the Merger consideration. One such analysis, based upon
estimated pro forma projected earnings of the combined Liberty
Financial/Colonial entity, certain transaction adjustments and certain
assumptions, arrived at an estimated implied value for the LFC Common Stock
of $32.82 per share of fully diluted Common Stock. In addition, as described
thereunder, based upon the same valuation analysis, Merrill Lynch arrived at
an estimated value for the LFC Preferred Stock of $38.50 per share of fully
diluted Common Stock. The analysis of Merrill Lynch is subject to numerous
assumptions with respect to future industry performance, general economic
conditions and other matters, many of which are beyond the control of Liberty
Financial and Colonial. Such analysis was for the purpose of assessing the
overall fairness of the transaction from a financial point of view and was
not intended to, and is not necessarily indicative of, actual values
(including the post-Merger trading prices of the LFC Stock). Moreover, such
analysis was calculated as of October 12, 1994, the date the fairness
opinions were rendered to the Colonial Board, and no attempt has been made to
update those valuations to reflect, among other things, current market
conditions or the subsequent financial results of Colonial and LFC. Because
such analysis was inherently subject to uncertainty, no person (including,
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without limitation, Liberty Financial or Colonial, their respective Boards of
Directors or managements, or Colonial's financial advisers) assumes
responsibility if future events do not conform to judgments reflected in such
analysis. In particular, no assurance can be given that the post-Merger
trading prices of the LFC Stock will reflect values implied by the analysis
of Merrill Lynch. See "RISK FACTORS--No Available Market Valuation of Liberty
Financial or Prior Public Market."
Any summary of the opinions of Colonial's financial advisers set forth in
this Prospectus/Proxy Statement is qualified in its entirety by reference to
the full text of the opinions. COPIES OF THE OPINIONS OF MERRILL LYNCH AND
BERKSHIRE CAPITAL ARE ATTACHED HERETO AS APPENDICES II AND III, RESPECTIVELY.
THE OPINIONS SHOULD BE READ IN THEIR ENTIRETY FOR DESCRIPTIONS OF THE
PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND QUALIFICATIONS
AND LIMITATIONS ON THE REVIEWS UNDERTAKEN, BY MERRILL LYNCH AND BERKSHIRE
CAPITAL, RESPECTIVELY. See "Background and Reasons for the Merger--Opinions
of Colonial Financial Advisers."
Interests of Certain Persons in the Merger
The Merger Agreement provides that Liberty Financial and Colonial, as the
surviving corporation in the Merger (the "Surviving Corporation"), will
provide certain indemnification for Colonial's directors and will maintain,
for a period of six years, Colonial's directors' and officers' liability
insurance.
In connection with the Merger Agreement, Messrs. McNeice, Emilson, Cogger,
Scoon and Stern have agreed with Liberty Financial in their individual
capacities as stockholders of Colonial that, at any meeting of the
stockholders of Colonial called for the purpose of voting upon the Merger,
all of the respective shares of Common Stock held by each of them
individually and by certain of their transferees (an aggregate of 1,848,558
shares, or 25.75%, of Class A Common Stock and 143,717 shares, or 76.46%, of
Class B Common Stock as of the record date for the Colonial Meeting) will be
voted in favor of the Merger. Each of Messrs. McNeice, Emilson, Cogger, Scoon
and Stern has also agreed, in his capacity as a stockholder of Colonial that,
until the earlier of the consummation of the Merger and the termination of
the Merger Agreement, such shares will not be voted for the approval of any
other agreement or transaction providing for a merger, consolidation, sale of
assets or other business combination of Colonial or any of its subsidiaries
with any person or entity other than Liberty Financial. This agreement
expires on the earlier of (i) the Effective Time or (ii) the termination of
the Merger Agreement in accordance with its terms.
In connection with the Merger, Liberty Financial has granted to Messrs.
McNeice and Emilson (the "Principals") certain registration rights concerning
the LFC Common Stock to be acquired by such persons in the Merger. Liberty
Financial has agreed that, between the first and the second anniversary of
the closing date of the Merger, Liberty Financial will, upon the request of
the Principals, register under the Securities Act any of the shares of LFC
Common Stock acquired directly or indirectly by the Principals for sale
pursuant to a registration statement on Form S-3 (but only if Liberty
Financial is then eligible to use such form), and will take such other
actions necessary to permit the sale thereof under applicable state law. The
Principals will have the right to request only one such registration. The
Principals also will have the right, which they may exercise at any time and
from time to time in the future, to include the shares of LFC Common Stock
held directly or indirectly by them in certain other registrations of common
equity securities of Liberty Financial initiated by Liberty Financial on its
own behalf. Liberty Financial will be required to pay substantially all of
the costs and expenses in connection with each such registration. See "The
Merger--Interests of Certain Persons in the Merger--Registration Rights
Agreement" for a discussion of the factors considered by Liberty Financial in
granting such registration rights to the Principals.
In connection with the Merger, each of Messrs. Cogger, Scoon and Stern will
enter into three-year employment contracts with the Surviving Corporation. As
of the Effective Time, Messrs. McNeice, Emilson and Cogger will be elected as
directors of Liberty Financial.
Certain of the directors and executive officers of Colonial have a financial
interest in the completion of the Merger because of their rights under
various Colonial employee benefits plans, agreements and programs. Some of
these plans, agreements and programs contain provisions that are activated
upon a sale of all or substantially all assets of Colonial or any other
similar transaction, which would occur if the Merger is completed. The Merger
Agreement creates a retention bonus program, not previously in
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effect for Colonial employees, and provides for certain changes in
pre-existing Colonial employee benefits plans, agreements and programs.
See "The Merger--Interests of Certain Persons in the Merger" and "--Effects
of the Merger on Colonial Employee Benefits."
Terms of the Merger
General
The Merger Agreement provides that, subject to the satisfaction or waiver of
certain conditions, at the Effective Time, Merger Subsidiary, a wholly-owned
subsidiary of Liberty Financial, will be merged with and into Colonial. Upon
consummation of the Merger, the stockholders of Colonial who receive LFC
Stock in the Merger, without the taking of any action, will become
stockholders of Liberty Financial.
Conversion of Colonial Stock; Elections Pertaining to Merger Consideration
The Merger Agreement provides that each share of Common Stock issued and
outstanding at the Effective Time (other than Dissenting Shares and certain
shares held by Colonial or any of its subsidiaries or by Liberty Financial,
Merger Subsidiary or any of Liberty Financial's other subsidiaries), unless
an election for such share is made as described below, shall be converted
into the right to receive one share of LFC Common Stock. Each holder of
shares of Common Stock may elect to receive, instead of LFC Common Stock, for
all or part of the Common Stock held by such holder either, but not both, of
(i) $40.00 in cash for each share of Common Stock held by such holder or (ii)
0.77 shares of LFC Preferred Stock for each share of Common Stock held by
such holder ($38.50 face amount per share of Common Stock). The foregoing
amounts of LFC Common Stock, cash and LFC Preferred Stock to be received by
Colonial stockholders may be reduced under certain circumstances. See "The
Merger--Conversion of Colonial Stock--Adjustment of Merger Consideration."
Any holder of Common Stock who holds the Common Stock in two or more
different names may make different elections with respect to the Common Stock
held in each name. Holders who elect to receive LFC Preferred Stock may also
elect, but shall not be required, to become a party to a Stockholders
Agreement. The Stockholders Agreement provides, among other things, for
certain restrictions on transfer of the LFC Preferred Stock and that any
person who continues to hold LFC Preferred Stock on the fifth anniversary of
the closing date of the Merger may at any time during the first 60 days after
the fifth anniversary elect to sell to Liberty Mutual and Liberty Mutual
shall be obligated to purchase all, but not less than all, of the LFC
Preferred Stock then owned by such person at a price of $50.00 per share
(i.e., the face amount per share of LFC Preferred Stock), plus accrued but
unpaid dividends through the date of purchase. See "The Merger--Stockholders
Agreement."
A Colonial stockholder who wishes to receive cash or LFC Preferred Stock in
exchange for all or a portion of his or her shares of Common Stock must
complete and sign the Election Form enclosed with this Prospectus/Proxy
Statement and return it to The First National Bank of Boston, as paying agent
(the "Paying Agent"), in the enclosed postage-prepaid envelope together with
his or her stock certificate(s) representing the shares of Common Stock to be
exchanged or an appropriate guaranty of delivery of such certificate(s) in
the form customarily used in transactions of this nature from a member of a
registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or a commercial bank or trust company
in the United States (provided such certificate is or certificates are in
fact delivered within five (5) Nasdaq trading days of the date of delivery of
the guaranty). Such documents must be delivered to the Paying Agent on or
prior to March 17, 1995. Any Colonial stockholder who fails to comply with
the procedures set forth herein and in the Election Form will receive only
LFC Common Stock in the Merger. See "THE MERGER--Conversion of Colonial
Stock--Election Forms." In choosing whether to make an election, and, if so,
which election to make, stockholders should be aware that the three forms of
consideration available in the Merger were not designed to have equal value
per share of Common Stock. See "BACKGROUND AND REASONS FOR THE
MERGER--Opinions of Colonial Financial Advisers." In addition, neither
Liberty Financial nor Colonial can predict the trading prices for the LFC
Stock following the Merger, which will be determined by the market and will
be influenced by factors beyond their control, and may well be substantially
less than the $40 per share of Common Stock available under the cash
election. In light of this, as of the date of this Prospectus/Proxy
Statement, Liberty Financial and Colonial believe that the likelihood is
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remote that the option to elect cash will not be oversubscribed.
Consequently, holders of Common Stock making such an election should expect
to receive LFC Common Stock for some of their shares. Similarly, if the
option to elect LFC Preferred Stock is oversubscribed, holders of Common
Stock making an election to receive LFC Preferred Stock will receive LFC
Common Stock for some of their shares. As of the date of this
Prospectus/Proxy Statement, Liberty Financial and Colonial do not believe
that they can predict accurately the extent (if any) to which the option to
elect LFC Preferred Stock will be elected or oversubscribed. In light of the
foregoing, it is critical for stockholders to make their own valuation of
each element of the consideration available in the Merger (including the tax
consequences to them of each such element) and to make or forego making an
election accordingly.
If the number of shares of Common Stock subject to elections to receive cash
or LFC Preferred Stock would result in the payment of aggregate cash in
excess of $100 million or in the issuance of more than 1,040,000 shares of
LFC Preferred Stock, then the amount of cash or LFC Preferred Stock payable
to each holder making such election will be reduced ratably, without further
action by the holder, based on the number of shares of Common Stock elected
to be so treated by each stockholder and on a whole Common Stock share basis,
until the aggregate cash consideration being paid no longer exceeds $100
million and/or the aggregate number of shares of LFC Preferred Stock being
issued no longer exceeds 1,040,000, respectively. Holders electing to receive
cash or LFC Preferred Stock will not be given the opportunity to change their
elections in the event that the number of shares of Common Stock subject to
elections to receive cash or LFC Preferred Stock would otherwise have
exceeded such maximum aggregate limits. Each share of Common Stock not
receiving the consideration for which an election was made as a result of the
reduction described in the first sentence of this paragraph will be converted
into the right to receive one share of LFC Common Stock. If all holders of
Common Stock properly elect to receive cash for each share of Common Stock
held by such holders, based on the number of shares of Common Stock
outstanding as of the Record Date, each Colonial stockholder would
effectively receive, for each share of Common Stock, $13.57 in cash and 0.66
shares of LFC Common Stock pursuant to the Merger.
As indicated above, to be effective, an election to receive cash or LFC
Preferred Stock must be made prior to the Colonial Meeting in the manner
described below under "The Merger-- Conversion of Colonial Stock--Election
Forms." Each share of Common Stock for which no such timely election is
received will be converted into the right to receive one share of LFC Common
Stock. The shares of Common Stock held by holders who perfect appraisal
rights will not be so converted. See "Appraisal Rights."
Adjustment of Merger Consideration
The number of shares of LFC Common Stock issuable in exchange for each share
of Common Stock, the amount of cash payable for each share of Common Stock
and the number of shares of LFC Preferred Stock issuable in exchange for each
share of Common Stock (collectively, the "Consideration") are each subject to
downward adjustment in the manner specified in the Merger Agreement. The
adjustment, which is technical and complex as contained in the Merger
Agreement, can be summarized as follows: The adjustment would be triggered by
a 15% or greater decline in the value of certain assets managed by Colonial
as of October 12, 1994 (the date of the original Merger Agreement) as
compared to the value of the corresponding managed accounts two days prior to
the closing date of the Merger. However, fluctuations in the market value of
portfolio assets in such accounts (positive or negative) are to be factored
out in calculating whether such a decline has occurred. Section 2.1(c)(VIII)
of the Merger Agreement (Appendix I hereto) sets forth the terms of the
adjustment, including the detailed mathematical formula for calculating the
amount of the adjustment and the related defined terms. Exhibit D to the
Merger Agreement (which appears as part of Appendix I hereto) sets forth a
number of examples of how the adjustment would be calculated if specified
hypothetical declines in asset values occur. As illustrated in Exhibit D, a
15% decline would result in (i) the share exchange ratio of Common Stock for
LFC Common Stock being reduced from 1.0:1.0 to 0.919:1.0, (ii) the cash
Consideration per share of Common Stock being reduced from $40.00 to $36.06,
and (iii) the share exchange ratio of Common Stock for LFC Preferred Stock
being reduced from 0.77:1.0 to 0.708:1.0. Declines greater than 15% would
result in greater reductions in the Consideration to be received. The maximum
amount of cash payable and
16
<PAGE>
the maximum amount of shares of LFC Preferred Stock issuable in the Merger
also would be reduced proportionately. If the decline in asset values
(calculated in accordance with Section 2.1(c)(VIII)) were to exceed 25%, then
there would be no further reduction in the Consideration, but the Merger
Agreement could be terminated by Liberty Financial. As of January 27, 1995,
there had occurred since October 12, 1994 a 3.25% decline in the value of the
relevant accounts (determined in accordance with the Section 2.1(c)(VIII)
formula). See "The Merger--Conversion of Colonial Stock--Adjustment of Merger
Consideration."
No Solicitations; Fiduciary Duties
Colonial has agreed in the Merger Agreement that, except as described below,
neither Colonial nor any of its subsidiaries shall permit any officer,
director, employee, or any investment banker, attorney or other advisor or
representative of Colonial or any of its subsidiaries to, directly or
indirectly, (i) solicit, initiate or encourage the submission of any proposal
with respect to a merger, consolidation, share exchange or similar
transaction involving Colonial or any subsidiary of Colonial, or any purchase
of all or any significant portion of the assets of Colonial or any subsidiary
of Colonial, or any equity interest in Colonial or any subsidiary of Colonial
other than the transactions contemplated by the Merger Agreement (an
"Acquisition Proposal") or (ii) participate in any discussions or
negotiations regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal.
Colonial has also agreed pursuant to the Merger Agreement that the Colonial
Board shall not (i) withdraw or modify, or propose to withdraw or modify, in
a manner adverse to Liberty Financial or Merger Subsidiary, the approval or
recommendation by the Colonial Board of the Merger Agreement or the Merger,
(ii) approve or recommend, or propose to approve or recommend, any
Acquisition Proposal or (iii) enter into any agreement with respect to any
Acquisition Proposal, unless Colonial receives an Acquisition Proposal and
the Colonial Board determines in good faith, following consultation with
outside counsel, that in order to comply with its fiduciary duties to
stockholders under applicable law it is necessary for the Colonial Board to
withdraw or modify its approval or recommendation of the Merger Agreement or
the Merger, approve or recommend such Acquisition Proposal, enter into an
agreement with respect to such Acquisition Proposal or terminate the Merger
Agreement. In the event that the Colonial Board makes such a determination,
Colonial, any of its subsidiaries or any officer, director or employee of, or
any investment banker, attorney or other advisor or representative of,
Colonial or any of its subsidiaries, may participate in negotiations
regarding such Acquisition Proposal. Colonial will, upon demand by Liberty
Financial, pay a termination fee to Liberty Financial in such an event. See
"The Merger--No Solicitations; Fiduciaries Duties" and "--Termination of
Merger Agreement; Fee."
Conditions to the Merger
The respective obligations of Colonial and Liberty Financial to effect the
Merger are subject to the satisfaction or waiver prior to the Effective Time
of certain conditions specified in the Merger Agreement, including the
following:
(a) The Merger Agreement and the Merger shall have been approved and adopted
by the holders of two-thirds of the outstanding shares of Class A Common
Stock and the holders of two-thirds of the outstanding shares of Class B
Common Stock and in compliance with the Massachusetts Business Corporation
Law and other applicable law.
(b) All filings required to be made prior to the Effective Time with, and all
consents, approvals, permits and authorizations required to be obtained prior
to the Effective Time from governmental agencies or regulatory authorities,
in connection with the execution and delivery of the Merger Agreement and the
consummation of the transactions contemplated thereby by Colonial, Liberty
Financial and Merger Subsidiary shall have been made or obtained (as the case
may be).
(c) The waiting period (and any extension thereof) applicable to the Merger
under the Hart-Scott- Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act"), shall have been terminated or shall have otherwise expired.
(d) No temporary restraining order, preliminary or permanent injunction or
other order issued by any court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Merger shall be
in effect.
17
<PAGE>
(e) Certain approvals of the boards of trustees and the shareholders of
certain mutual funds advised by Colonial and its subsidiaries shall have been
obtained and certain other regulatory requirements with respect to such funds
under the Investment Company Act shall have been satisfied.
(f) The Registration Statement on Form S-4 covering the LFC Stock to be
issued in the Merger shall not be the subject of any stop order or
proceedings seeking a stop order.
(g) Colonial and Liberty Financial shall have received from their respective
tax counsel favorable opinions dated the closing date concerning the tax
consequences of the transactions contemplated by the Merger Agreement.
The conditions described in paragraphs (b) and (c) above have been satisfied
in full with respect to requirements of applicable law as in effect as of the
date of this Prospectus/Proxy Statement.
The obligations of Liberty Financial, on the one hand, and Colonial, on the
other hand, are also subject to the satisfaction of certain further
conditions set forth in the Merger Agreement. See "The Merger--Conditions to
the Merger."
Termination of the Merger Agreement; Fee
Termination. The Merger Agreement may be terminated at any time prior to the
Effective Time, as follows:
(a) by the mutual written consent of Liberty Financial and Colonial;
(b) by either Colonial or Liberty Financial if:
(i) any required approval of the stockholders of Colonial, upon a vote at a
duly held stockholders meeting or any adjournment thereof, shall not have
been obtained; or
(ii) the Merger shall not have been consummated on or before June 30, 1995,
unless the failure to consummate the Merger is the result of a willful and
material breach of the Merger Agreement by the party seeking to terminate the
Merger Agreement; or
(iii) any governmental authority shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the consummation of the Merger and such order, decree,
ruling or other action has become final and nonappealable; or
(iv) if the Colonial Board has (A) withdrawn or modified, or proposed to
withdraw or modify, in a manner adverse to Liberty Financial or Merger
Subsidiary, the approval or recommendation by the Colonial Board of the
Merger Agreement or the Merger, (B) approved or recommended, or proposed to
approve or recommend, any Acquisition Proposal or (C) entered into any
agreement with respect to any Acquisition Proposal, after determining, upon
the basis of written advice of outside counsel, that such action is necessary
in the exercise of its fiduciary obligation under applicable law.
(c) by Liberty Financial, if the value of portfolio assets in certain of
Colonial's managed accounts declines below a specified level. See "The
Merger--Conversion of Colonial Stock--Adjustment of Merger Consideration."
Fee. Under the Merger Agreement, Colonial has agreed to pay to Liberty
Financial on demand $8,000,000, plus up to an additional $1,000,000 for
certain expenses of Liberty Financial incurred in connection with the Merger,
if an Acquisition Proposal is commenced, publicly proposed or communicated to
Colonial (or the willingness of any person to make an Acquisition Proposal is
publicly disclosed or communicated by Colonial) and (i) the Colonial Board
withdraws or modifies its approval or recommendation of the Merger Agreement
or the Merger, approves or recommends such Acquisition Proposal, enters into
an agreement with respect to such Acquisition Proposal or terminates the
Merger Agreement, or (ii) the requisite approval of Colonial's stockholders
for the Merger Agreement is not obtained at the meeting of Colonial
stockholders called for such purpose.
Waiver and Amendment; Revisions to Transaction
The Merger Agreement provides that it may be amended by an instrument in
writing by mutual consent of the parties thereto; provided, however, that
after the approval of the Merger by the
18
<PAGE>
stockholders of Colonial, no amendment may be made which reduces the
consideration payable in the Merger or adversely affects the rights of
Colonial's stockholders without the approval of such stockholders. Colonial
will notify (and seek the approval of) the holders of Common Stock of any
such amendment which reduces the consideration payable in the Merger or
adversely affects the rights of stockholders under the Merger Agreement. At
any time prior to the Effective Time, the parties may, by written instrument,
(a) extend the time for performance of any of the obligations or other acts
of the other parties, (b) waive any inaccuracies in the representations and
warranties of the other parties contained in the Merger Agreement or in any
document delivered pursuant thereto or (c) waive compliance with any of the
agreements or conditions of the other parties contained in the Merger
Agreement. As of the date of this Prospectus/Proxy Statement, neither
Colonial nor Liberty Financial is aware of any material agreements or
conditions contained in the Merger Agreement that are likely to be waived or
amended in any material respect prior to the Effective Time; however, there
can be no assurance that waivers or amendments will not occur. Stockholders
will be notified of any material waivers or amendments which are made prior
to the Colonial Meeting. The Colonial Board does not intend to notify
stockholders of any other waiver or amendment of the Merger Agreement
(subject to the limitations on amendments to the Merger Agreement described
above).
Securities to be Issued by Liberty Financial in the Merger
The Merger Agreement provides that each share of Common Stock issued and
outstanding at the Effective Time (other than Dissenting Shares and certain
shares held by Colonial or any of its subsidiaries or by Liberty Financial or
any of its subsidiaries), unless an election for such share is made as
described below, shall be converted into the right to receive one share of
LFC Common Stock. Each holder of shares of Common Stock may elect to receive,
instead of LFC Common Stock, for all or part of the Common Stock held by such
holder either, but not both, of (i) $40.00 in cash for each share of Common
Stock held by such holder or (ii) 0.77 shares of LFC Preferred Stock for each
share of Common Stock held by such holder ($38.50 face amount per share of
Common Stock). Holders who elect to receive LFC Preferred Stock may also
elect, but shall not be required, to become a party to a Stockholders
Agreement. See "Comparison of Stockholders' Rights and Description of LFC
Capital Stock" for a description of the LFC Stock and the Stockholders
Agreement.
Prior to the Merger, there has been no public market for the LFC Stock. The
LFC Common Stock has been approved for listing on the New York Stock
Exchange, subject to a condition as to the minimum number of holders thereof
and to official notice of issuance. If such condition as to the number of
stockholders is not met, the LFC Common Stock will be included on Nasdaq. The
LFC Preferred Stock will not be listed on any stock exchange or on Nasdaq and
it is not anticipated that any public market will develop for the LFC
Preferred Stock.
Certain Federal Income Tax Consequences of the Transactions Contemplated by
the Merger Agreement
Consummation of the Merger is conditioned upon delivery to Liberty Financial
and Colonial of opinions from their respective tax counsel substantially to
the effect that on the basis of certain facts and representations, for
federal income tax purposes the Parent Contribution and the transfer of stock
of Colonial by its stockholders pursuant to the Merger, taken together,
constitute an integrated exchange of property for stock described in Section
351 of the Code as to which no gain or loss shall be recognized, except, in
the case of holders of Common Stock, with respect to cash received by such
holders in accordance with the Merger Agreement (including cash received by
the holders of Dissenting Shares).
BECAUSE CERTAIN TAX CONSEQUENCES OF THE MERGER MAY VARY DEPENDING UPON THE
PARTICULAR CIRCUMSTANCES OF EACH STOCKHOLDER, IT IS RECOMMENDED THAT COLONIAL
STOCKHOLDERS CONSULT THEIR TAX ADVISERS CONCERNING THE FEDERAL (AND ANY
STATE, LOCAL, AND FOREIGN) TAX CONSEQUENCES OF THE MERGER TO THEM IN THEIR
PARTICULAR CIRCUMSTANCES.
Accounting Treatment of the Merger
Liberty Financial intends to treat the Merger as a "purchase" for accounting
and financial statement reporting purposes.
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<PAGE>
Listing of LFC Stock
Under the Merger Agreement, it is a condition precedent that the LFC Common
Stock to be issued in the Merger shall have been (i) approved for listing on
the New York Stock Exchange or (ii) approved for inclusion on Nasdaq and for
listing on the Boston Stock Exchange. The LFC Common Stock has been approved
for listing on the New York Stock Exchange, subject to a condition as to the
minimum number of holders and to official notice of issuance. If this
condition is not met, the LFC Common Stock will be listed on Nasdaq and the
Boston Stock Exchange. The LFC Preferred Stock will not be listed on any
exchange or on Nasdaq and it is not anticipated that any public market will
develop for the LFC Preferred Stock.
Appraisal Rights
Under Massachusetts law, holders of Common Stock who comply with the
requirements of Massachusetts law are entitled to appraisal rights with
respect to their shares of Common Stock. See "Appraisal Rights."
The Colonial Meeting
Date, Time and Place
The Colonial Meeting will be held on March 21, 1995 at 1:00 p.m., local time,
at One Financial Center, Second Floor, Room B, Boston, Massachusetts.
Purpose of the Meeting
The purpose of the Colonial Meeting is to consider and vote on a proposal to
adopt and approve the Merger Agreement, pursuant to which Colonial will
become a wholly-owned subsidiary of Liberty Financial and an indirect
majority-owned subsidiary of Liberty Mutual. Each share of Common Stock
(other than Dissenting Shares and certain shares owned by Liberty Financial,
Colonial or their subsidiaries) issued and outstanding immediately prior to
the Effective Time will be converted into the right to receive one share of
LFC Common Stock, unless an election is made otherwise by holders of Common
Stock. If a Colonial stockholder so elects, any or all of the shares of
Common Stock held by such holder shall be converted into either, but not
both, of (i) the right to receive $40.00 in cash for each share of Common
Stock, or (ii) the right to receive 0.77 shares of LFC Preferred Stock for
each share of Common Stock ($38.50 face amount per share of Common Stock).
Notwithstanding the foregoing, the total cash paid to Colonial stockholders
electing to receive cash will be limited to $100 million and the total number
of shares of LFC Preferred Stock to be issued to stockholders electing to
receive LFC Preferred Stock will be limited to 1,040,000 shares. If the
number of shares subject to elections to receive cash or LFC Preferred Stock
would result in more than $100 million in cash being paid and/or more than
1,040,000 shares of LFC Preferred Stock being issued, then, in either case,
the number of shares of Common Stock subject to such election shall be
reduced ratably, on a whole Common Stock share basis, based on the number of
shares of Common Stock elected to be so treated by each stockholder until the
aggregate cash consideration being paid no longer exceeds $100 million and/or
the aggregate number of shares of LFC Preferred Stock being issued no longer
exceeds 1,040,000, respectively. Each share of Common Stock not receiving the
consideration for which an election was made as a result of such reduction
will be converted into the right to receive one share of LFC Common Stock.
Holders who elect to receive shares of LFC Preferred Stock also may elect,
but shall not be required, to become parties to a Stockholders Agreement
described below under "THE MERGER--Stockholders Agreement." The foregoing per
share and aggregate amounts of LFC Common Stock, cash and LFC Preferred Stock
to be received by Colonial stockholders may be reduced under certain
circumstances. See "THE MERGER--Conversion of Colonial Stock--Adjustment of
Merger Consideration."
Record Date; Shares Entitled to Vote; Number of Record Holders
Holders of record of shares of Class A Common Stock at the close of business
on January 27, 1995 (the "Record Date") will be entitled to vote as a class
at the Colonial Meeting. As of such date, there were approximately 186
holders of record of Class A Common Stock and 7,179,173 shares of Class A
Common Stock outstanding. Holders of record of shares of Class B Common Stock
at the close of business on January 27, 1995 will be entitled to vote as a
class at the Colonial Meeting. As of such date, there were 15 holders of
record of Class B Common Stock and 187,967 shares of Class B Common Stock
20
<PAGE>
outstanding. Stockholders of record on the Record Date are entitled to one
vote per share of Class A Common Stock, and one vote per share of Class B
Common Stock, held by them on such date.
Votes Required; Election Form
The affirmative vote of the holders of two-thirds of the shares of Class A
Common Stock outstanding on the Record Date and the holders of two-thirds of
the shares of Class B Common Stock outstanding on the Record Date, voting as
separate classes, is required to adopt and approve the Merger Agreement.
Since the requisite votes are required with respect to all outstanding shares
of each class of Common Stock, an abstention will have the same effect as a
vote against approval of the Merger Agreement. As of the Record Date,
directors and officers of Colonial and its subsidiaries as a group were
entitled to vote 37.11% of the outstanding shares of Class A Common Stock and
90.82% of the outstanding shares of Class B Common Stock. Directors and
officers of Colonial (and certain transferees thereof) owning in the
aggregate 25.75% of the outstanding Class A Common Stock and 76.46% of the
outstanding Class B Common Stock as of such date have agreed with Liberty
Financial to vote their Common Stock in favor of the Merger at the Colonial
Meeting. See "THE MERGER--Interests of Certain Persons in the Merger-- Voting
Agreement." As a result of such agreement, Colonial believes that the
requisite approval of the holders of the Class B Common Stock will be
obtained. Unless the Merger Agreement is adopted and approved by the Colonial
stockholders, Colonial will not consummate the Merger.
A proxy card for use at the Colonial Meeting accompanies this
Prospectus/Proxy Statement. Proxies may be solicited by using the mails and
by means of personal interview, telephone and wire. The cost of soliciting
proxies from the holders of Common Stock will be borne by Colonial (except
that the expenses incurred in connection with the printing and mailing of
this Prospectus/Proxy Statement will be shared equally by Colonial and
Liberty Financial). Colonial has retained Shareholder Communications
Corporation to assist in the solicitation of proxies, and the fee to be paid
to such firm is not expected to exceed $5,000, plus reimbursement for
reasonable out-of-pocket costs and expenses. Shareholder Communications
Corporation also provides proxy solicitation services for certain Colonial
mutual funds. Proxies may also be solicited by officers and other employees
of Colonial. Officers and other employees of Colonial will not receive
additional compensation for the solicitation of proxies. Colonial will
reimburse brokers, fiduciaries, custodians and other nominees for reasonable
out-of-pocket expenses incurred in sending this Prospectus/Proxy Statement
and other proxy materials to, and obtaining instructions relating to such
materials from, beneficial owners of Common Stock. A holder of Common Stock
may use his or her proxy if he or she does not attend the Colonial Meeting or
wishes to have his or her shares voted by proxy even if he or she does attend
the Colonial Meeting. The proxy may be revoked in writing by the person
giving it at any time before it is exercised by notice of such revocation to
the Clerk of Colonial, or by submitting a proxy having a later date, or by
such person appearing at the Colonial Meeting and electing to vote in person.
All proxies validly submitted and not revoked will be voted in the manner
specified therein. IF NO SPECIFICATION IS MADE, THE PROXIES WILL BE VOTED IN
FAVOR OF THE PROPOSAL TO ADOPT AND APPROVE THE MERGER AGREEMENT.
Also accompanying this Prospectus/Proxy Statement is a letter of transmittal
and election form and other related materials (collectively, the "Election
Form") pursuant to which each holder of Common Stock may elect, subject to
the terms described herein, to receive cash or LFC Preferred Stock in the
Merger. An election by a holder of Colonial shares to receive cash or LFC
Preferred Stock shall have been duly made only if the Paying Agent shall have
received by 5:00 p.m., New York City time, on the day which is two business
days prior to the Colonial Meeting (Friday, March 17, 1995) (the "Election
Deadline"), a properly completed and duly executed Election Form accompanied
by either (i) the certificate or certificates of Common Stock covered by such
Election Form duly endorsed or otherwise acceptable for transfer or (ii) an
appropriate guaranty of delivery of such certificate or certificates
(provided that such certificates are in fact delivered within five (5) Nasdaq
trading days of the date of delivery of the guaranty). Liberty Financial
shall have the right to make reasonable determinations and to establish
reasonable procedures in guiding the Paying Agent in its determination as to
the validity of Election Forms and of any revisions, revocation or withdrawal
thereof. Any stockholder who has made an election may change or revoke that
election at any time prior to the Election Deadline by submitting a revised
Election Form or a notice of revocation, as the case may be, to the Paying
Agent prior to such deadline. Any
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<PAGE>
stockholder who fails to make a proper election prior to the Election
Deadline will be entitled to receive only LFC Common Stock in the Merger.
In choosing whether to make an election, and, if so, which election to make,
stockholders should be aware that the three forms of consideration available
in the Merger were not designed to have equal value per share of Common
Stock. See "BACKGROUND AND REASONS FOR THE MERGER--Opinions of Colonial
Financial Advisers." In addition, neither Liberty Financial nor Colonial can
predict the trading prices for the LFC Stock following the Merger, which will
be determined by the market and will be influenced by factors beyond their
control, and may well be substantially less than the $40 per share of Common
Stock available under the cash election. In light of this, as of the date of
this Prospectus/Proxy Statement, Liberty Financial and Colonial believe that
the likelihood is remote that the option to elect cash will not be
oversubscribed. Consequently, holders of Common Stock making such an election
should expect to receive LFC Common Stock for some of their shares.
Similarly, if the option to elect LFC Preferred Stock is oversubscribed,
holders of Common Stock making an election to receive LFC Preferred Stock
will receive LFC Common Stock for some of their shares. As of the date of
this Prospectus/ Proxy Statement, Liberty Financial and Colonial do not
believe that they can predict accurately the extent (if any) to which the
option to elect LFC Preferred Stock will be elected or oversubscribed. In
light of the foregoing, it is critical for stockholders to make their own
valuation of each element of the consideration available in the Merger
(including the tax consequences to them of each such element) and to make or
forego making an election accordingly.
Two or more holders of Common Stock who are determined to own constructively
the Common Stock owned by each other by virtue of Section 318(i) of the Code
and who so certify to the Paying Agent's satisfaction, and any single holder
of Common Stock who holds such holder's Common Stock in two or more different
names and who so certifies to the Paying Agent's satisfaction, may submit a
joint Election Form covering the aggregate Common stock owned by all such
holders who are a single holder, as the case may be. Each such group of
holders which, and each such single holder who, submits a joint Election Form
shall be treated as a single holder of Common Stock.
Record holders of Common Stock who are nominees only may submit a separate
Election Form for each beneficial owner for whom such record holder is a
nominee; provided, however, that at the request of the Paying Agent, such
record holder shall certify to the satisfaction of the Paying Agent that such
record holder holds such Common Stock as nominee for the beneficial owner
thereof. Each beneficial owner for which an Election form is submitted will
be treated as a separate holder of Common Stock, subject, however, to the
immediately preceding paragraph dealing with joint Election Forms.
Holders of Common Stock should not send stock certificates with their
proxies. Holders of common stock who wish to elect to receive cash or LFC
Preferred Stock, however, are required to send stock certificates (or
appropriate guaranties of delivery) with their election forms, as described
above. See "The Merger--Conversion of Colonial Stock--Election Forms."
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<PAGE>
MARKET PRICE OF COLONIAL COMMON STOCK; COLONIAL CASH DIVIDENDS;
PRINCIPAL COLONIAL STOCKHOLDERS
Colonial's Class A Common Stock is traded on Nasdaq (symbol "COGRA") and is
listed on the Boston Stock Exchange. The table below sets forth, for the
quarters indicated, the high and low sale prices of the Class A Common Stock
as reported on Nasdaq. There is no public market for Colonial's Class B
Common Stock. The table below also sets forth, for the quarters indicated,
cash dividends paid by Colonial on its Class A Common Stock and Class B
Common Stock.
<TABLE>
<CAPTION>
Cash Dividends
High Low Per Share
<S> <C> <C> <C>
Fiscal 1995
1st Quarter (through February 7, 1995) $34.50 $32.25 $0.15(1)
Fiscal 1994
4th Quarter $37.00 $28.75 $0.15
3rd Quarter 31.75 25.50 0.15
2nd Quarter 27.00 22.50 0.15
1st Quarter 29.25 23.38 0.15
Fiscal 1993
4th Quarter $32.63 $28.00 $0.15
3rd Quarter 32.00 25.00 0.15
2nd Quarter 26.00 23.75 0.15
1st Quarter 27.50 23.50 0.15
Fiscal 1992
4th Quarter $26.25 $21.25 $0.15
3rd Quarter 22.25 18.50 0.15
2nd Quarter 19.75 18.00 0.15
1st Quarter 20.50 15.75 0.15
</TABLE>
(1) Payable on February 22, 1995 to shareholders of record as of February 8,
1995.
On October 12, 1994, the last business day immediately prior to the date on
which the Merger was publicly announced, the last reported sale price of the
Class A Common Stock was $32.25 per share. On February 7, 1995, the last
reported sale price of the Class A Common Stock was $33.06 per share.
Colonial stockholders are urged to obtain current market quotations for the
Class A Common Stock.
Security Ownership of Certain Beneficial Owners and Management of Colonial
The following table sets forth the number of shares of Class A and Class B
Common Stock beneficially owned as of January 1, 1995 by (i) each stockholder
who is known by Colonial to own beneficially more than 5% of the outstanding
Common Stock, (ii) certain of Colonial's directors and executive officers and
(iii) all Colonial executive officers and directors as a group. Except as
otherwise indicated, to Colonial's knowledge, all shares are beneficially
owned, and sole investment and voting power is held, by the persons named as
owners.
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<PAGE>
<TABLE>
<CAPTION>
Class B Common Stock (Voting) Class A Common Stock (Non-Voting)
Name Number of Shares Percent Number of Shares Percent
<S> <C> <C> <C> <C>
Harold W. Cogger (1) 12,000 6.21% 131,300(2) 1.83%
James C. Emery (3) -- -- 9,500(4) 0.13%
C. Herbert Emilson
(1)(5) 43,780 22.65% 653,170(6)(7) 9.11%
Gordon B. Greer (3) -- -- 236,791(4)(7) 3.30%
John A. McNeice, Jr.
(1)(8) 110,437 57.15% 1,933,170(6)(7) 26.96%
Davey S. Scoon (1)(8) 13,500 6.98% 264,733(9)(10) 3.69%
William W. Treat (3) -- -- 10,000(4)(11) 0.14%
Eagle Asset Management,
Inc. -- -- 958,755(12) 13.37%
Heine Securities Corp. -- -- 714,200(13) 9.96%
James H. Orr, Jr. -- -- 399,765 5.58%
Arthur O. Stern 3,000 1.55% 78,758(14) 1.10%
All Executive Officers
and Directors as a
Group (eight persons) 170,717(15) 88.35% 2,689,261(16) 37.50%
</TABLE>
(1) The address of Messrs. Cogger, Emilson, McNeice, Scoon and Stern is c/o
The Colonial Group, Inc., One Financial Center, Boston, MA 02111.
(2) Includes exercisable options to purchase 61,800 shares granted under
Colonial's 1986 Stock Option Plan, as amended.
(3) The address of Mr. Emery is P.O. Box 2971, Carmel, CA 93921, the address
of Mr. Greer is c/o Bingham, Dana & Gould, 150 Federal Street, Boston, MA
02110 and the address of Mr. Treat is P.O. Box 800, Stratham, NH 03885.
(4) Includes, for each of Messrs. Emery, Greer and Treat, exercisable options
to purchase 4,500 shares granted under Colonial's 1986 Stock Option Plan, as
amended, and 4,000 shares under Colonial's Director Stock Option Plan.
(5) Includes 157,036 shares of Class A Common Stock and 15,000 shares of
Class B Common Stock owned of record by Pauline V. Emilson, as to which
shares C. Herbert Emilson disclaims any beneficial ownership.
(6) Includes exercisable options to purchase 65,300 shares granted under
Colonial's 1986 Stock Option Plan, as amended.
(7) Includes 63,000 shares held in trust under the C. Herbert Emilson and
Pauline V. Emilson Charitable Remainder Unitrust, and 161,291 shares held in
trust under the C. Herbert Emilson and Pauline V. Emilson Charitable Annuity
Trust, as to which shares Mr. Greer, Mr. McNeice and Mrs. Emilson, as
trustees, share voting and investment power and disclaim any beneficial
ownership.
(8) Includes 179,579 shares of Class A Common Stock and 12,000 shares of
Class B Common Stock held in trust under the Irrevocable Trust Agreement for
Children dated September 24, 1985 (of C. Herbert Emilson), as to which shares
Messrs. McNeice, Scoon and Linda S. Dalby, as trustees, share voting and
investment power and disclaim any beneficial ownership.
(9) Includes exercisable options to purchase 68,600 shares granted under
Colonial's 1986 Stock Option Plan, as amended.
(10) Includes 16,054 shares owned by Kristine L. Scoon and 500 shares owned
by Davey S. Scoon as custodian for Jessica Scoon under UTMA, as to which
shares Davey S. Scoon disclaims beneficial ownership.
(11) Includes 1,000 shares owned by Savoy Capital of which Mr. Treat is a
General Partner.
(12) The address of Eagle Asset Management, Inc. is 880 Carillon Parkway, St.
Petersburg, FL 33733-0520. The number of shares of Common Stock held is as
reported on a Schedule 13G dated February 8, 1994.
(13) The address of Heine Securities Corp. is 51 JFK Parkway, Short Hills, NJ
07078. The number of shares of Common Stock held is as reported on a Schedule
13G dated May 5, 1994.
(14) Includes exercisable options to purchase 62,200 shares granted under
Colonial's 1986 Stock Option Plan, as amended.
(15) Includes (without duplication of beneficial ownership) 12,000 shares
held under the Irrevocable Trust Agreement for Children dated September 24,
1985 (of C. Herbert Emilson), as to which shares Messrs. McNeice, Scoon and
Linda S. Dalby, as trustees, share voting and investment power and disclaim
any beneficial ownership, and (ii) 15,000 shares held of record by Pauline V.
Emilson, as to which shares C. Herbert Emilson disclaims any beneficial
ownership.
(16) Includes (without duplication of beneficial ownership) (i) 179,579
shares held in trust under the Irrevocable Trust Agreement for Children dated
September 24, 1985 (of C. Herbert Emilson), 63,000 shares held in trust under
the C. Herbert Emilson and Pauline V. Emilson Charitable Remainder Unitrust
and 161,291 shares held in trust under the C. Herbert Emilson and Pauline V.
Emilson Charitable Remainder Annuity Trust, (ii) 157,036 shares held of
record by Pauline V. Emilson and (iii) exercisable options to purchase
348,700 shares granted under Colonial's 1986 Stock Option Plan, as amended.
See footnotes (2), (4), (5), (6), (7), (8), (9), (10) and (11) above.
24
<PAGE>
SUMMARY FINANCIAL DATA
The following tables captioned "Liberty Financial Companies, Inc.--Summary
Financial Data" and "The Colonial Group, Inc.--Summary Financial Data" set
forth a summary of historical financial data for Liberty Financial and
Colonial for each of the five years in the period ended December 31, 1993 and
for the nine month periods ended September 30, 1993 and 1994. The per share
data set forth in "Liberty Financial Companies, Inc.--Summary Financial Data"
have not been adjusted for the Parent Contribution which is to be effected
immediately prior to the Effective Time of the Merger.
Historical summary financial data has not been presented for New LFC, Inc. as
it was formed on January 26, 1995. Parent will contribute (immediately prior
to the Effective Time) all of its assets (other than (i) its existing equity
interest in Liberty Financial and (ii) a promissory note of a wholly-owned
subsidiary of Parent in the principal amount of $30.0 million held by Parent)
to Liberty Financial in exchange for 22,812,200 additional shares of LFC
Common Stock and the assumption by Liberty Financial of all of Parent's
liabilities (including, without limitation, all unknown, contingent or
otherwise inchoate liabilities) in existence immediately prior to such
contribution. See "CERTAIN INFORMATION REGARDING LIBERTY FINANCIAL--Corporate
Structure and History." The transfer of such assets and liabilities will be
recorded at historical cost and will be accounted for as if it were a
pooling-of-interests. As of the Effective Time, the historical consolidated
financial statements of Parent and its subsidiaries will effectively become
those of Liberty Financial and its subsidiaries.
The following table captioned "Liberty Financial Companies, Inc.--Pro Forma
Condensed Consolidated Summary Financial Data" sets forth pro forma condensed
consolidated summary financial data for the year ended December 31, 1993 and
for the nine-month period ended September 30, 1994 and as of September 30,
1994, giving effect to the Merger on the basis described in the notes to the
unaudited pro forma condensed consolidated financial statements included
elsewhere in this Prospectus/Proxy Statement. Certain pro forma consolidated
summary financial data are derived from the unaudited pro forma condensed
consolidated financial statements included elsewhere in this Prospectus/Proxy
Statement and should be read in conjunction with those statements. See
"Unaudited Pro Forma Condensed Consolidated Financial Information." Pro forma
per share amounts are presented based on the exchange ratio of one share of
LFC Common Stock for each outstanding share of Colonial Common Stock. The pro
forma data set forth in the tables do not reflect expenses anticipated to be
incurred in connection with the Merger by Liberty Financial and Colonial or
the cost savings that may result from the Merger. The pro forma data may not
be indicative of the results that actually would have occurred if the Merger
had been in effect during periods presented or which may be attained in the
future. See Notes to Unaudited Pro Forma Condensed Consolidated Financial
Information.
25
<PAGE>
SUMMARY FINANCIAL DATA
(in millions, except per share data)
Liberty Financial Companies, Inc.--Summary Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1989 1990 1991 1992 1993 1993 1994
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data(1)
Revenues:
Net investment income $ 542.4 $ 627.3 $ 692.9 $ 710.0 $ 675.3 $ 511.7 $513.0
Investment management
revenues and other
fees(2) 62.5 72.3 81.8 94.1 106.0 78.0 77.6
Securities commissions
and other revenues(3) 42.1 39.8 64.3 67.0 88.5 64.3 72.9
Realized investment
gains (losses) (16.6) (4.9) 8.6 3.4 10.6 11.6 2.9
Total revenues 630.4 734.5 847.6 874.5 880.4 665.6 666.4
Expenses:
Interest credited to
policyholders 431.1 503.9 568.9 569.6 501.1 381.4 352.2
Operating expenses(4) 126.7 136.8 162.4 181.0 215.6 155.3 165.8
Option plan
compensation
expense(5) -- -- .2 -- 22.1 1.5 6.7
Amortization of value
of insurance in force
and deferred policy
acquisition costs 36.7 42.9 47.1 49.8 62.5 46.7 53.2
Amortization of
intangible assets(6) 22.4 24.3 25.6 42.3 15.0 13.4 4.4
Guaranty fund
expense(7) .2 .1 3.2 35.0 3.7 2.7 5.4
Interest expense(8) 12.7 .4 .2 --- --- --- 2.7
Total expenses 629.8 708.4 807.6 877.7 820.0 601.0 590.4
Income (loss) before
income taxes(9) 0.6 26.1 40.0 (3.2) 60.4 64.6 76.0
Provision for income
taxes 11.4 12.0 19.1 9.3 29.1 23.3 27.0
Net income (loss) $ (10.8) $ 14.1 $ 20.9 $ (12.5) $ 31.3 $ 41.3 $ 49.0
Per Share Data(10)
Net income (loss)(11) $ (1.20) $ 1.57 $ 2.32 $ (1.39) $ 3.33 $ 4.59 $ 5.24
Book value(12) 31.94 50.22 68.84 68.08 70.98 72.53 71.92
December 31, September 30, 1994
1989 1990 1991 1992 1993
Balance Sheet Data(1)
Total investments $5,550.9 $6,444.2 $6,929.8 $8,151.6 $ 8,411.7 $ 8,804.0
Intangible assets(13) 105.1 118.0 92.5 50.2 35.2 30.8
Total assets 6,657.7 7,778.1 8,954.4 9,798.3 10,325.0 10,858.3
Long-term debt(8) 148.0 -- -- -- -- --
Stockholder's equity(8) 287.5 452.0 619.6 612.7 638.8 647.4
</TABLE>
26
<PAGE>
Liberty Financial Companies, Inc.--Summary Financial Data (continued)
( 1) Liberty Financial commenced operations in its present form as of January
1, 1990 when Liberty Mutual contributed to Liberty Financial Liberty Mutual's
ownership interest in its financial services subsidiaries. See "Certain
Information Regarding Liberty Financial--General." Accordingly, the 1989
financial data have been combined to reflect the historical financial
information for such subsidiaries as if Liberty Financial had been in
existence and Liberty Mutual had contributed to Liberty Financial its
interests in such subsidiaries on the dates on which Liberty Mutual initially
acquired ownership thereof. The combined financial data for 1989 are
unaudited.
( 2) Investment management revenues and other fees for the nine months ended
September 30, 1994 include $1.1 million related to certain client
relationships that were terminated during the period. See "Certain
Information Regarding Liberty Financial--Management's Discussion and Analysis
of Results of Operations and Financial Condition."
( 3) Security commissions for the nine months ended September 30, 1994
include $21.3 million (including one bank client's commissions of $17.3
million) related to certain bank relationships that were terminated during
the period. In addition, other revenues include $4.1 million of payments
received in connection with one of the terminated programs. Other revenues
are comprised of premium income and policyholder assessments and other
revenues which, collectively, include surrender charges, mortality charges,
policy fees earned, contract fees assessed and premiums on life-contingent
supplementary contracts and immediate annuities. See "Certain Information
Regarding Liberty Financial--Management's Discussion and Analysis of Results
of Operations and Financial Condition."
( 4) Operating expenses are comprised of operating expenses, policy benefits
and claims and commission expense.
( 5) See "Certain Information Regarding Liberty Financial--Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Option Plan Compensation Expense" for a discussion of option plan
compensation expense.
( 6) In 1992, Liberty Financial changed its estimate of the carrying value of
certain intangible assets related to Stein Roe which resulted in additional
amortization expense of $21.0 million in 1992. See "Certain Information
Regarding Liberty Financial--Management's Discussion and Analysis of Results
of Operations and Financial Condition--Amortization Charge."
( 7) In 1992, Keyport accrued $28.2 million for anticipated guaranty fund
assessments in connection with the failure of certain insurance companies.
See "Risk Factors--Guaranty Fund Assessments" and "Certain Information
Regarding Liberty Financial--Management's Discussion and Analysis of Results
of Operations and Financial Condition."
( 8) In 1990, the decrease in long-term debt and interest expense, and the
increase in stockholder's equity, reflect the contribution to the capital of
Liberty Financial by Liberty Mutual of previously outstanding indebtedness of
approximately $145.0 million. The increase in stockholder's equity in 1991
reflects an additional capital contribution from Liberty Mutual of $142.5
million. See "Certain Information Regarding Liberty Financial--Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
( 9) For a discussion relating to Liberty Financial's income taxes, see
"Certain Information Regarding Liberty Financial--Management's Discussion and
Analysis of Results of Operations and Financial Condition--Provision for
Income Taxes" and Note 7 of Notes to Liberty Financial's Consolidated
Financial Statements.
(10) The per share data have not been adjusted for the Parent Contribution
that is to be effected immediately prior to the Effective Time of the Merger.
(11) Based on the weighted average number of shares of LFC Common Stock and
common stock equivalents outstanding during each of the periods.
(12) Book value per share is computed by dividing total stockholder's equity
(including intangible assets) by the 9,000,000 shares of LFC Common Stock
outstanding at the end of the respective periods, except September 30, 1994,
when 9,001,000 shares were outstanding.
(13) Intangible assets represent intangible assets acquired through business
combinations accounted for as a purchase.
27
<PAGE>
The Colonial Group, Inc.--Summary Financial Data
(in millions, except per share data)
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1989 1990 1991 1992 1993 1993 1994
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data
Revenues:
Investment management
revenues and other fees(1) $61.2 $59.9 $64.3 $ 76.9 $104.1 $ 75.0 $ 85.1
Securities commissions and
other revenues(2) 12.5 15.8 22.2 28.7 46.7 33.4 37.9
Total revenues 73.7 75.7 86.5 105.6 150.8 108.4 123.0
Expenses:
Operating expenses 55.0 57.8 65.7 75.8 93.4 67.9 69.4
Amortization of deferred
sales commissions(3) 1.1 1.8 2.5 5.7 20.0 13.2 23.8
Interest (income) expense(4) (2.0) (2.6) (2.1) (1.1) 4.5 2.9 5.3
Total expenses 54.1 57.0 66.1 80.4 117.9 84.0 98.5
Income before income taxes 19.6 18.7 20.4 25.2 32.9 24.4 24.5
Provision for income taxes 7.4 7.1 8.1 9.9 12.9 9.7 10.7
Net income $12.2 $11.6 $12.3 $ 15.3 $ 20.0 $ 14.7 $ 13.8
Per Share Data
Net income(5) $1.53 $1.45 $1.58 $ 2.03 $ 2.65 $ 1.95 $ 1.79
Dividends declared .40 .40 .50 .60 .60 .45 .45
Book value 5.99 6.93 7.70 8.82 11.24 10.42 12.71
December 31, September 30,
1989 1990 1991 1992 1993 1994
(unaudited)
Balance Sheet Data
Total assets $73.6 $83.0 $94.8 $138.9 $243.4 $239.0
Long-term debt(4) 1.1 2.4 2.4 21.7 102.6 100.0
Stockholders' equity 47.3 54.6 57.6 63.7 82.2 93.5
</TABLE>
(1) Investment management revenues and other fees are comprised primarily of
mutual fund management fees and transfer agency fees.
(2) Securities commissions and other revenues are comprised primarily of
sales commissions and asset-based sales charges and service fees.
(3) In May, 1992, Colonial began actively marketing a second class of mutual
fund shares ("Class B" shares) that feature a contingent deferred sales
charge and an asset-based sales charge in lieu of the typical sales charge at
the time of purchase by the shareholder. Prior thereto, only a limited number
of Colonial mutual funds had contingent deferred sales charges. Accordingly,
deferred sales commissions and the amortization of deferred sales commissions
related to Class B share sales increased substantially in 1992 and
thereafter.
(4) The introduction of Class B shares in May, 1992 resulted in the issuance
of indebtedness to finance commissions pertaining to sales of Class B shares.
The related interest expense exceeded the recorded amounts of interest income
in 1993 and thereafter.
(5) Based on the weighted average number of common and common stock
equivalents outstanding during each of the periods.
28
<PAGE>
SUMMARY FINANCIAL DATA
(in millions, except per share data)
Liberty Financial Pro Forma Condensed Consolidated Summary Financial Data(1)
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, 1993 September 30, 1994
(unaudited)
<S> <C> <C>
Statement of Operations Data
Revenues:
Net investment income $ 675.3 $ 513.0
Investment management revenues and other fees 210.1 162.7
Securities commissions and other revenues 135.2 110.8
Realized investment gains 10.6 2.9
Total revenues 1,031.2 789.4
Expenses:
Interest credited to policyholders 501.1 352.2
Operating expenses 309.0 235.2
Option plan compensation expense 22.1 6.7
Amortization of value of insurance in force and
deferred policy acquisition costs 62.5 53.2
Amortization of intangible assets 38.3 21.9
Amortization of deferred sales commissions 3.4 4.0
Guaranty fund expense 3.7 5.4
Interest expense 15.4 16.2
Total expenses 955.5 694.8
Income before income taxes 75.7 94.6
Provision for income taxes 29.1 27.0
Net income $ 46.6 $ 67.6
Per Share Data
Net income $ 1.68 $ 2.44
Book value 28.50
Ratio of earnings to combined fixed charges and
preferred stock dividends(2) 3.31x 4.19x
Balance Sheet Data SEPTEMBER 30, 1994
Total investments $ 8,823.8
Intangible assets 315.1
Total assets 11,254.5
Long-term debt 230.0
Stockholders' equity 750.1
</TABLE>
(1) These pro forma condensed consolidated summary financial data were
derived from the Unaudited Pro Forma Condensed Consolidated Financial
Information contained elsewhere in this Prospectus/Proxy Statement.
(2) For purposes of computing the earnings to combined fixed charges and
preferred stock dividends: (i) earnings consist of pro forma income before
income taxes and fixed charges; and (ii) fixed charges consist of pro forma
interest on borrowings, the amount of pro forma pre-tax income necessary to
cover preferred stock dividends and accretion of preferred stock carrying
amount to redemption amount, and the portion of pro forma rent expense
representative of an interest factor.
29
<PAGE>
COMPARATIVE PER SHARE DATA
(Unaudited)
The following table sets forth for the year ended December 31, 1993 and the
nine-month period ended September 30, 1994 selected historical per share data
of Liberty Financial and Colonial and the corresponding pro forma amounts
giving effect to the Merger. The data presented are based upon the
consolidated financial statements of Liberty Financial included in this
Prospectus/Proxy Statement, the consolidated financial statements of Colonial
incorporated herein by reference, and the unaudited pro forma condensed
consolidated financial information, appearing elsewhere herein. This
information should be read in conjunction with such historical and pro forma
consolidated financial statements and information. These data are not
necessarily indicative of the results of the future operations of the
combined companies subsequent to the Merger.
<TABLE>
<CAPTION>
Liberty Financial Pro Forma
Parent As Historical Consolidated
Historical Adjusted(1) Colonial(2) Liberty Financial
<S> <C> <C> <C> <C>
Net income per share:
Year ended December 31, 1993 $ 3.33 $ 1.32 $ 2.65 $ 1.68
Nine months ended September 30, 1994 5.24 2.08 1.79 2.44
Book value per common share:
December 31, 1993 70.98 28.00 11.24 N/A
September 30, 1994 71.92 28.38 12.71 28.50
Cash dividends per common share:
Year ended December 31, 1993 -- -- 0.60 0.60(3)
Nine months ended September 30, 1994 -- -- 0.45 0.45(3)
</TABLE>
(1)Adjusted to reflect the effect of the Parent Contribution and the
resultant issuance of 22,816,494 shares of LFC Common Stock immediately prior
to the Effective Time.
(2)Colonial's per share historical amounts are not adjusted, as the exchange
of Common Stock for LFC Common Stock will be on a one-for-one basis.
(3)Amounts represent Colonial's historical dividends per share.
ORGANIZATIONAL STRUCTURE OF LIBERTY FINANCIAL FOLLOWING THE MERGER
Set forth below is a functional organizational chart of Liberty Financial
following the Effective Time reflecting management controls and reporting
lines, as opposed to legal structures of direct and indirect
parent/subsidiary relationships. Such legal structures are disclosed on
Exhibit 21.1 of the Registration Statement.
[REPRESENTATION OF GRAPHICAL FLOWCHART]
[Liberty Mutual] [Liberty Financial] [Former Colonial Stockholders]
[Keyport]
[Stein Roe] [Colonial] [Bank Marketing Group] [Other Business]
30
<PAGE>
INTRODUCTION
This Prospectus/Proxy Statement is being furnished to stockholders of
Colonial in connection with the solicitation by the Colonial Board of proxies
for use at the Colonial Meeting to be held at the time and place noted below.
This Prospectus/Proxy Statement is also furnished in connection with the
registration under the Securities Act of the LFC Stock being offered to the
Colonial stockholders in connection with the Merger.
RISK FACTORS
In addition to the other information contained in this Prospectus/Proxy
Statement, Colonial stockholders should carefully consider the following
factors in determining whether to approve the Merger Agreement and the
transactions contemplated thereby. Except as otherwise indicated, cross
references in this section are to the applicable discussion under "Certain
Information Regarding Liberty Financial" below.
Keyport's Investment Performance and Interest Rate Risk. Net investment
income and interest credited to annuity and life insurance policyholders are
Liberty Financial's largest revenue and expense items, respectively. For
1992, 1993 and the nine months ended September 30, 1994, net investment
income of approximately $710.0 million, $675.3 million and $513.0 million,
respectively, accounted for 81.2%, 76.7% and 77.0%, respectively, of total
revenues, and interest credited to policyholders of approximately $569.6
million, $501.1 million and $352.2 million, respectively, accounted for
64.9%, 61.1% and 59.7%, respectively, of total expenses. The amount by which
net investment income exceeds interest credited to policyholders is the
"investment spread." Liberty Financial's results of operations and financial
condition are substantially dependent on Keyport's ability to manage
effectively its investment spread. Although to date Keyport's investment
spread has been positive, there can be no assurances that Keyport will
continue to realize investment spreads at levels necessary for Liberty
Financial to remain profitable. See "Business--Keyport--General Account
Investments."
Interest rate risk occurs when interest rate changes cause asset cash flows
(general account investment income, principal payments and calls) and general
account liability cash flows (policyholder benefits) to react differently
than Keyport had anticipated. Keyport seeks to manage this risk through,
among other things, its setting of renewal rates and by investment portfolio
actions designed to address the interest rate sensitivity of asset cash flows
in relation to liability cash flows. Portfolio actions used to manage
interest rate risk include managing the effective duration of the portfolio
securities, investing in variable rate securities and utilizing interest rate
swaps and caps. Interest rate swaps and caps involve, to varying degrees,
elements of credit and market risk which are not reflected in Liberty
Financial's consolidated financial statements. Such instruments are entered
into for hedging (as opposed to investment or speculative) purposes in
connection with the management of Keyport's general account portfolio, and
from time to time Keyport incurs gains or losses on such instruments. There
can be no assurance that such portfolio actions will adequately limit
interest rate risk. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity and Capital Resources" and Note
3 of Notes to Liberty Financial's Consolidated Financial Statements for
additional information regarding such gains and losses. During a period of
declining interest rates, if Keyport's investments are prematurely sold,
called, prepaid or redeemed, Keyport would be unable to reinvest the proceeds
in securities with comparable rates of return. If interest rates were to
decrease, Keyport's inability to lower its crediting rates to policyholders
below its guaranteed minimum crediting rates could adversely affect Keyport's
ability to earn its targeted investment spread. Conversely, during a period
of rising interest rates, Keyport may not be able to restructure effectively
its investment portfolio and therefore would not be able to increase its
crediting rates to remain competitive with market rates while still
maintaining its targeted investment spreads. If Keyport does not increase its
crediting rates on existing policies, surrender levels may increase which, in
turn, could require Keyport to sell investments at times when the market
values of such investments are less than their carrying values. Keyport's
analysis as of September 30, 1994 shows that, based on currently anticipated
levels of investment spread and surrender rates, the present value of
Keyport's in force business would decrease if interest rates were to rise
materially. See "--Surrenders" and "Business--Keyport--General Account
Investments."
31
<PAGE>
Control by Liberty Mutual; Potential Conflicts of Interest. Following the
Merger, based upon shares outstanding as of February 8, 1995, Liberty Mutual
will own, indirectly through a wholly-owned subsidiary, approximately 75.4%
of the LFC Common Stock assuming that all holders of Common Stock receive
only shares of LFC Common Stock in the Merger (approximately 83.0% of the
voting power of the LFC Stock if the maximum amount of cash is paid and the
maximum number of shares of LFC Preferred Stock is issued in the Merger).
Liberty Mutual will have the power to elect the entire Board of Directors and
to approve any action requiring shareholder approval, including adopting
amendments to the LFC Restated Articles and, subject to receipt of necessary
government approvals, approving mergers or sales of all or substantially all
of the assets of Liberty Financial or its subsidiaries. If Liberty
Financial's public stockholders become dissatisfied with management of
Liberty Financial, they will be unable to effect a change in control as long
as Liberty Mutual continues to own a majority of Liberty Financial's shares.
Twenty of Liberty Financial's 22 current non-employee directors are also
directors of Liberty Mutual. However, as of the Effective Time of the Merger,
John A. McNeice, Jr., C. Herbert Emilson and Harold W. Cogger, each of whom
is currently a director of Colonial, will be elected as directors of Liberty
Financial.
Liberty Financial is a party to various agreements with Liberty Mutual and
certain of its affiliates. For financial reporting purposes, Liberty Mutual
will include its share of Liberty Financial's net income or loss in its
combined financial statements. The members of Liberty Financial's Board of
Directors who are affiliated with Liberty Mutual may consider both the
short-term and long-term impact of operating decisions on Liberty Financial
as well as the impact of decisions on the consolidated financial results of
Liberty Mutual. During any period in which Liberty Mutual owns, directly or
indirectly, at least 50% of the voting power of the outstanding capital stock
of Liberty Financial, Liberty Financial must obtain Liberty Mutual's prior
written consent to any significant changes in Liberty Financial's accounting
principles. Liberty Financial provides certain asset management services to
or for the benefit of Liberty Mutual or its affiliates for a fee. The
aggregate amount of these fees in 1993 and the nine months ended September
30, 1994 were $6.2 million and $4.6 million, respectively. Such services may
be terminated at any time. In addition, based on its controlling interest in
Liberty Financial, Liberty Mutual could, if it so desired, cause the fees
payable to Liberty Financial for such services to be reduced at any time. The
existing agreements between Liberty Financial and Liberty Mutual may be
modified in the future and additional agreements or transactions may be
entered into between Liberty Financial and Liberty Mutual. Conflicts of
interest could arise between Liberty Financial and Liberty Mutual with
respect to any of the foregoing, or any future agreements or arrangements
between them. Neither Liberty Mutual nor Liberty Financial has instituted, or
has any current plans to institute, any formal plan or arrangement to address
any possible conflicts of interest. From time to time Liberty Financial has
received capital contributions and loans and advances from Liberty Mutual.
After the Merger, Liberty Mutual will have no obligation to make further
capital contributions or loans or advances or otherwise provide credit
support to Liberty Financial. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Liquidity and Capital
Resources," "Management," "Principal Stockholders" and "Relationships with
Liberty Mutual".
Industry and Competitive Factors. The insurance and investment management
businesses are highly competitive. Liberty Financial competes with a large
number of insurance companies, investment management firms, mutual fund
companies, commercial banks and others, many of which are larger and have
greater financial and other resources than Liberty Financial. Liberty
Financial believes that the most important factors affecting competition for
clients are: the abilities, performance records and reputations of insurance
companies and investment managers, marketing, access to distribution, product
innovation, ratings, customer service and pricing policies. Liberty
Financial's ability to retain and increase assets under management could be
adversely affected if client accounts underperform the market or those of
Liberty Financial's competitors. The ability of Liberty Financial's
investment management subsidiaries to compete with other firms also is
dependent, in part, on the relative attractiveness of the types of investment
products such subsidiaries offer and their investment philosophies and
strategies under prevailing market conditions. See "Business--Competition."
Reliance on the Bank Distribution Channel and Certain Distributors. A
substantial percentage of Liberty Financial's insurance and mutual fund
products is currently sold through the bank distribution channel (including
the Bank Marketing Group). During 1993 and the nine months ended September
30,
32
<PAGE>
1994, such distribution channel accounted for 38.1% and 39.7%, respectively,
of Liberty Financial's proprietary annuity and mutual fund product sales and
77.7% and 70.0%, respectively, of Keyport's annuity sales. In 1993 and for
the nine months ended September 30, 1994, three third-party bank marketers
(James Mitchell & Co., Invest Financial Corp. and I.F. Agencies Inc.)
accounted for 35.9% and 25.8%, respectively, of Keyport's SPDA sales. The
Bank Marketing Group accounted for 19.2% and 15.0%, respectively, of Liberty
Financial's total proprietary annuity and mutual fund product sales in 1993
and the nine months ended September 30, 1994. The distribution of products
through banks is subject to, among other things, economic factors impacting
the banking industry (including consolidation within the industry and an
emphasis on internalizing fee-generating businesses). Substantially all of
the Bank Marketing Group's agreements with client banks may be terminated by
such banks at any time upon short notice (typically 30 to 60 days). As of
September 30, 1994, Liberty Financial had 57 bank marketing relationships in
27 states, compared to 67 bank marketing relationships in 30 states as of
December 31, 1993. A significant loss of access to the bank distribution
channel could have a material adverse effect on Liberty Financial's results
of operations. The distribution of products through banks is heavily
regulated and from time to time proposals are made to impose additional
regulation in this area. No assurances can be given that future regulation,
or a change in the interpretation of existing regulations, will not have a
material adverse effect on Liberty Financial's ability to sell products
through the bank channel. See "Business--Keyport--Marketing and
Distribution," "Business--Bank Marketing Group" and "Regulation."
Competition is increasing among sponsors of load mutual funds to access and
maintain wholesaling relationships with third party distribution firms.
Liberty Financial believes that the most important factors affecting
competition for such relationships are the performance records and
reputations of the fund sponsor, the degree of marketing support and other
services the fund sponsor provides to the distribution firm and its customers
(fund shareholders), the scope of the fund sponsor's product line, and the
fund sponsor's pricing structure. See "Business--Competition." A substantial
percentage of Colonial's gross mutual fund sales currently are made through a
relatively small number of third party distribution firms. During 1993 and
the nine months ended September 30, 1994, ten firms accounted for
approximately 55.3% and 52.7%, respectively, of such sales. As of September
30, 1994, client accounts with these ten firms represented approximately
53.7% of Colonial's total assets under management. In January, 1995, the firm
which has been Colonial's largest distributor (Edward D. Jones, & Co., Inc.
("E.D. Jones")), accounting for approximately 18.0% and 14.1% of Colonial's
gross mutual fund sales during 1993 and the nine months ended September 30,
1994, respectively, and for approximately 18.4% of its assets under
management as of September 30, 1994, removed Colonial from its list of
preferred providers. However, Colonial will continue to maintain a sales
agreement with E.D. Jones. Among other things, preferred provider status
allowed Colonial to have frequent direct contacts with E.D. Jones' sales
force for purposes such as product training and other marketing support. The
loss of preferred provider status can be expected to reduce significantly
Colonial's future sales through E.D. Jones, and over time, to produce
redemptions of Colonial fund shares held in E.D. Jones client accounts. Three
other firms (Merrill Lynch Pierce Fenner & Smith Incorporated, A.G. Edwards &
Sons, Inc. and BA Investments (for 1993) and PaineWebber Incorporated (for
the nine months ended September 30, 1994)) accounted for approximately 18.6%
and 20.0% of Colonial's sales during 1993 and the nine months ended September
30, 1994, respectively, and approximately 19.9% of Colonial's assets under
management as of September 30, 1994. Additional impairment of Colonial's
significant distribution relationships could have a material adverse effect
on Colonial's mutual fund sales and redemptions and, consequently, on Liberty
Financial.
Litigation is pending in Florida regarding regulations proposed by the
Florida Department of Insurance which would prohibit banks from selling
annuities regardless of whether bank personnel or third parties are used. If
such regulations take effect, Keyport would be prevented from selling
annuities in Florida through its bank distribution channel, and the Bank
Marketing Group would be prohibited from selling annuities at Florida banks.
Keyport's sales through Florida banks in 1993 and the nine months ended
September 30, 1994, were $212.2 million and $94.4 million, respectively, of
which $5.9 million and $3.3 million, respectively, were through the Bank
Marketing Group. There can be no assurance that such regulations will not
take effect or that other states will not seek to promulgate similar
regulations. See "Business--Regulation--Bank Distribution."
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For the year ended December 31, 1993 and the nine months ended September 30,
1994, three firms (A.G. Edwards & Sons, Inc., Dean Witter Reynolds, Inc. and
PaineWebber Incorporated) accounted for 36.0% and 42.0%, respectively, of the
third party sales of Keyport's products which were not made through the bank
distribution channel. Sales of Keyport's products through these firms are
made pursuant to written agreements which are terminable by either party upon
60 days' written notice. If Keyport's relationship with any of such firms
were to terminate or any of such firms were to cease selling a substantial
amount of Keyport's products and Keyport were not able to establish similar
arrangements with comparable firms or alternative distribution sources,
Liberty Financial's product sales and results of operations could be
materially adversely affected. See "Business--Keyport--Marketing and
Distribution."
Importance of Credit Ratings for Annuities. Keyport competes with other
insurance companies, financial intermediaries and other institutions on the
basis of a number of factors, including the ratings assigned by A.M. Best and
the claims-paying ability ratings assigned by nationally recognized
statistical rating organizations. Keyport is currently rated "A+" (Superior)
by A.M. Best. Ratings by A.M. Best for the industry currently range from
"A++" (Superior) to "F" (In Liquidation) and some companies are not rated.
See "Glossary of Certain Insurance Terms" for a description of A.M. Best's
ratings categories. At present, Keyport is rated "AA-" by Standard & Poor's
Corporation ("S&P") and "A1" by Moody's Investors Service, Inc. ("Moody's").
These ratings are not "market" ratings or recommendations to use or invest in
Keyport or Liberty Financial, but merely reflect the opinion of the rating
company as to the relative financial strength of Keyport and Keyport's
ability to meet its contractual obligations to its policyholders. Many
financial institutions and broker-dealers focus on the claims-paying ability
rating of an insurer in determining whether to market the insurer's
annuities. If any of Keyport's ratings were downgraded from their current
levels or if the ratings of Keyport's competitors improved and Keyport's did
not, sales of Keyport's products (and the level of surrenders on existing
policies) could be materially adversely affected. No assurance can be given
that Keyport will be able to maintain its financial ratings. See
"Business--Keyport--Financial Ratings."
Surrenders. Keyport's annuity policies provide for surrender charges which
are assessed on policyholder withdrawals of accumulated values at declining
rates, typically during the first five to seven years of the policies' lives,
and which cease to apply after a specified period (other than policies
included in the 1987 Block (as defined below) and policies issued in
replacement of 1987 Block policies, which have relatively high and stable
surrender charge schedules which expire, typically, after the fifth year). If
the actual rate of surrenders is materially in excess of the levels
anticipated by Keyport, Liberty Financial's operations and liquidity could be
materially adversely affected. Premature surrender of an annuity policy
results in the loss of anticipated investment earnings related to the annuity
deposit and in the accelerated recognition of policy acquisition costs which
are otherwise recoverable over the life of the policy. Single premium
deferred fixed annuity ("SPDA") policyholder withdrawals during 1992, 1993
and the nine months ended September 30, 1994 were $512.1 million, $1,124.0
million and $649.0 million, respectively. The higher withdrawals in the year
ended December 31, 1993 and the nine months ended September 30, 1994 related
primarily to the expiration of the surrender charge for a portion of a $2.6
billion block of annuities sold by Keyport from 1987 through 1989 (the "1987
Block"). Keyport's experience is that the rate of termination by
policyholders increases materially following the expiration of the surrender
charge period. As of September 30, 1994, Keyport had approximately $913.6
million of policyholder accumulated values (13.5% of its total fixed SPDA
values) which were no longer subject to surrender charges and approximately
$643.0 million of policyholder accumulated values as to which the surrender
charge will cease to apply during the balance of 1994 and 1995. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources" and
"Business--Keyport--Products."
Guaranty Fund Assessments. Under the insurance guaranty fund laws existing in
each state, insurers licensed to do business in the state can be assessed for
certain obligations of insolvent insurance companies to policyholders and
claimants. The amounts actually assessed to and paid by Keyport for 1991,
1992 and 1993 and the nine months ended September 30, 1994 were approximately
$2.1 million, $6.2 million, $7.3 million and $2.7 million, respectively.
Because such assessments are typically not made for several years after an
insurer fails and depend upon the final outcome of liquidation
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or rehabilitation proceedings, Keyport cannot accurately determine the
precise amount or timing of its exposure to known insurance company
insolvencies at this time. However, based in part on industry estimates
compiled by the National Organization of Life and Health Insurance Guaranty
Associations ("NOLHGA"), Keyport increased its reserves in 1992 by $28.2
million, reflecting Keyport's estimate of the future assessments with respect
to such known insolvencies. During 1991, 1992, 1993 and the nine months ended
September 30, 1994, Keyport recorded $3.2 million, $35.0 million (which
amount includes the $28.2 million reserve referred to above), $3.7 million
and $5.4 million, respectively, of provisions for state guaranty fund
association expenses. Based on information provided by NOLHGA in January,
1994 with respect to aggregate assessments related to known insolvencies, the
range of future assessments with respect to known insolvencies is estimated
by Keyport to be between $19.0 million and $28.0 million, taking into account
the NOLHGA information as well as Keyport's own estimate of its potential
share of such aggregate assessments. At September 30, 1994, Keyport's reserve
for such assessments was $27.2 million. No assurances can be given that the
reserve will be adequate. The reserve does not include any provision for
future assessments related to unknown failures or to known failures for which
no estimate of Keyport's exposure can currently be made. Liberty Financial is
not aware of any significant insurance company insolvencies for which an
estimate of Keyport's guaranty fund assessments has not been made. The
insolvency of large life insurance companies in future years could result in
additional material assessments to Keyport by state guaranty funds that could
have a material adverse impact on Liberty Financial's future earnings and
liquidity. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and "Business--Regulation--Insurance Activities."
Illiquid or Restricted Securities. Keyport's investment portfolio includes
certain securities (including those acquired in private placements) for which
there is either no, or a limited, trading market. As of September 30, 1994,
Keyport's investment portfolio included approximately $2.0 billion in
securities which were not freely tradeable under the Securities Act or which
were otherwise illiquid. If Keyport sought to sell such securities, it might
be unable to do so at the then current carrying values and might have to
dispose of such securities over extended periods of time at uncertain values.
In the absence of registration under the Securities Act, Keyport would be
required to dispose of its restricted securities pursuant to an exemption
from such registration. Keyport's inability to dispose of illiquid and/or
restricted securities at desired times and prices could have a material
adverse effect on Keyport's investment spread and Liberty Financial's
liquidity. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and "Business--Keyport--General Account
Investments."
Reliance on Key Personnel. Liberty Financial's ability to attract and retain
clients is dependent, to a large extent, on its ability to attract and retain
key employees, including experienced portfolio managers. Certain of these
employees are responsible for significant client relationships. In general,
Liberty Financial's employees are not subject to non-compete arrangements. In
July, 1990, Liberty Financial acquired the remaining minority equity
interests in Stein Roe. The Stein Roe employees who sold such interests
entered into a purchase agreement which, among other things, included certain
non- competition provisions. These provisions prohibited them from (i)
competing with Stein Roe and (ii) soliciting Stein Roe's clients or
personnel. The provisions of the agreement which prohibited competition
terminated on December 31, 1993, while the provisions which prohibit
solicitation of Stein Roe's clients or employees will continue until the
expiration of the two-year period following the termination of any such
person's employment with Stein Roe. From January 1, 1994 to the date of this
Prospectus/Proxy Statement, nine individuals who were executives of Stein Roe
as of December 31, 1993 departed Stein Roe. Stein Roe's assets under
management were $26.2 billion as of September 30, 1994, compared to $28.7
billion as of December 31, 1993. A significant portion of the reduction in
assets under management was due to such departures. Since September 30, 1994,
there has been a further reduction of assets under management associated with
these departures. In addition, Stein Roe intends to implement a comprehensive
reorganization of its research and investment management activities and its
administrative operations and procedures. As is the case with any
reorganization of this nature, there is a risk that it could lead to
additional resignations of key employees and losses of client relationships.
Further loss of key personnel could have a material adverse effect on Liberty
Financial. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition" and "Business--Stein Roe." Liberty Financial does
not maintain any "key man" life insurance.
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Termination Provisions of Investment Management Agreements. Virtually all of
Liberty Financial's investment management revenues are derived from
investment management agreements with clients that are terminable at any time
or upon 30 to 60 days' notice. Any termination of agreements representing a
significant portion of assets under management could have a material adverse
impact on Liberty Financial. See "Business--Investment Management Agreements
and Fees."
Holding Company Structure; Dividend Restrictions. Liberty Financial is a
holding company whose principal assets (and source of funds for the payment
of operating expenses, redemption of stock and the making of dividend
distributions) consist of its equity interests in Keyport, Stein Roe and its
other subsidiaries. Current Rhode Island insurance law applicable to Keyport
permits the payment of dividends or distributions which, together with
dividends or distributions paid during the preceding 12 months, do not exceed
the lesser of (i) 10% of Keyport's statutory surplus as of the preceding
December 31 or (ii) Keyport's statutory net gain from operations for the
preceding fiscal year. Any proposed dividend in excess of this amount is
called an "extraordinary dividend" and may not be paid until it has been
approved by the Commissioner of Insurance of the State of Rhode Island.
Keyport has not paid any dividends since its acquisition by Liberty Mutual in
December, 1988. As of September 30, 1994, the amount of dividends that
Keyport could pay without such approval was $51.7 million. Stein Roe is also
subject to certain regulatory restrictions on the payment of dividends. As of
December 31, 1994, Stein Roe exceeded the most restrictive of these standards
by approximately $0.4 million. The terms of Colonial's current senior credit
facility place certain limitations on the ability of Colonial to pay
dividends. See "Dividend Policy" and "Business--Regulation."
Fluctuation in Operating Results; Possible Volatility of Stock Price. Liberty
Financial's results of operations have, in certain cases, fluctuated
significantly from quarter to quarter. Such fluctuations have been due, among
other things, to amortization of acquired intangibles, activities associated
with the management of Keyport's investment spread, the level of surrenders
of annuity policies, guaranty fund assessments, the level of realized
investment gains and losses and the impact of the performance of the capital
markets on Keyport's general account investments and Liberty Financial's
fee-based assets under management. The level of net cash inflows or outflows
from period to period at Stein Roe also affects these results. Liberty
Financial's future results of operations may also fluctuate significantly
from quarter to quarter. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition" and Note 12 of Notes to Liberty
Financial's Consolidated Financial Statements. The stock market in general
and financial service stocks in particular have from time to time experienced
significant price and volume fluctuations that may be unrelated to the
operating performance of particular companies.
No Available Market Valuation of Liberty Financial or Prior Public Market.
Prior to the Effective Time, there has been no public market for Liberty
Financial or shares of the LFC Stock. Thus, no market valuations of Liberty
Financial or the LFC Stock were available to Colonial or its financial
advisers in connection with negotiating or evaluating the terms of the Merger
or the LFC Stock. The manner in which Colonial's financial advisers valued
Liberty Financial for purposes of rendering their respective fairness
opinions on October 12, 1994 is described below under "Background And Reasons
For The Merger--Opinions of Colonial Financial Advisers." The analyses of
such financial advisers are subject to numerous assumptions with respect to
industry performance, general economic conditions and other matters, many of
which are beyond the control of Liberty Financial and Colonial. Such analyses
are not necessarily indicative of actual values (including the post-Merger
trading prices of the LFC Stock). Moreover, such analyses were calculated as
of October 12, 1994, the date the fairness opinions were rendered to the
Colonial Board, and no attempt has been made to update those valuations.
Because such analyses are inherently subject to uncertainty, no person
(including, without limitation, Liberty Financial or Colonial, their
respective Boards of Directors or managements, or Colonial's financial
advisers) assumes responsibility if future events do not conform to judgments
reflected in such analyses. In particular, no assurance can be given that the
post-Merger trading prices of the LFC Stock will reflect values implied by
the analyses of Colonial's financial advisers.
In choosing whether to make an election, and, if so, which election to make,
stockholders should be aware that the three forms of consideration available
in the Merger were not designed to have equal
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value per share of Common Stock. See "BACKGROUND AND REASONS FOR THE
MERGER--Opinions of Colonial Financial Advisers." In addition, neither
Liberty Financial nor Colonial can predict the trading prices for the LFC
Stock following the Merger, which will be determined by the market and will
be influenced by factors beyond their control, and may well be substantially
less than the $40 per share of Common Stock available under the cash
election. In light of this, as of the date of this Prospectus/Proxy
Statement, Liberty Financial and Colonial believe that the likelihood is
remote that the option to elect cash will not be oversubscribed.
Consequently, holders of Common Stock making such an election should expect
to receive LFC Common Stock for some of their shares. Similarly, if the
option to elect LFC Preferred Stock is oversubscribed, holders of Common
Stock making an election to receive LFC Preferred Stock will receive LFC
Common Stock for some of their shares. As of the date of this Prospectus/
Proxy Statement, Liberty Financial and Colonial do not believe that they can
predict accurately the extent (if any) to which the option to elect LFC
Preferred Stock will be elected or oversubscribed. In light of the foregoing,
it is critical for stockholders to make their own valuation of each element
of the consideration available in the Merger (including the tax consequences
to them of each such element) and to make or forego making an election
accordingly.
The LFC Common Stock has been approved for listing on the New York Stock
Exchange, subject to a condition as to the minimum number of holders and to
official notice of issuance. In the event that this condition is not met, the
LFC Common Stock will be listed on Nasdaq and the Boston Stock Exchange.
However, no assurance can be given that an active public market will develop
for the LFC Common Stock or that, if such market develops, it will be
sustained. The LFC Preferred Stock will not be listed on any exchange or on
Nasdaq, and it is not expected that any public market will develop for the
LFC Preferred Stock.
Regulation. Keyport is subject to various laws and regulations which, among
other things, grant supervisory agencies broad administrative power with
respect to granting and revoking licenses, regulating trade practices,
licensing agents, approving policy forms, setting reserve requirements,
determining the form and content of statutory financial statements and
prescribing the type and amount of investments. These powers give the
regulatory agencies the ability to limit or restrict such businesses if they
fail to comply with applicable laws and regulations. Keyport is regulated by
insurance regulators in Rhode Island as well as in other jurisdictions in
which it is licensed or authorized to do business. Insurance laws and
regulations, among other things, establish minimum capital requirements and
limit the amount of dividends and other payments insurance companies can make
without prior regulatory approval, and impose restrictions on the amount and
type of investments such companies may hold. These regulations are designed
primarily to insure the financial stability of insurance companies and
otherwise to protect policyholders, not stockholders. The insurance
regulatory structure, including transactions between a holding company and
its insurance subsidiaries, has been subjected to increased scrutiny in
recent years by the National Association of Insurance Commissioners (the
"NAIC"), federal and state legislative bodies and state regulatory
authorities. Liberty Financial cannot predict, and no assurances can be given
as to, the effect that any NAIC recommendations or proposed or future
regulations or changes in the interpretation of existing regulations, may
have on the financial condition or operations of Liberty Financial. See
"Business--Regulation."
Liberty Financial's investment management businesses and the Bank Marketing
Group are also subject to extensive regulation, including the Exchange Act,
the Advisers Act, and various other federal and state securities and banking
laws and regulations. Such laws and regulations generally grant supervisory
agencies and bodies broad administrative powers. The broker-dealer subsidiary
of Liberty Financial that operates the Bank Marketing Group is also subject
to regulation by the National Association of Securities Dealers, Inc. In
addition, the recent growth in sales of mutual funds, annuities and other
non-bank investments through or at banks has prompted increased scrutiny by
federal and state bank regulators and the SEC. Liberty Financial expects that
the sale of insurance and investment products through the bank distribution
channel may become subject to additional regulation in the future. Liberty
Financial cannot predict, and no assurances can be given as to, the effect
that future regulation may have on the financial condition or operations of
Liberty Financial. See "Business--Regulation."
As required by the Investment Company Act and the Advisers Act, Liberty
Financial's investment advisory agreements provide that the agreements
terminate automatically upon their "assignment." The Investment Company Act
and the Advisers Act define the term "assignment" to include any "direct or
indirect
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transfer" of a "controlling block of the voting securities" of the issuer's
outstanding voting securities. The Investment Company Act presumes that any
person holding more than 25% of the voting stock of any person "controls"
such person. Following completion of the Merger, sales by Liberty Mutual or
other stockholders or new issuances of Liberty Financial capital stock by
Liberty Financial, among other things, may raise issues relating to
assignments of Liberty Financial's investment advisory agreements. The LFC
Restated Articles provide that no person or group deemed to be a beneficial
owner (as defined therein) of the voting stock of Liberty Financial may vote
more than 20% of the total voting shares outstanding. These provisions do not
apply to Liberty Mutual, subsidiaries or affiliates of Liberty Mutual, direct
or indirect subsidiaries of Liberty Financial and certain employee plans
established or to be established by Liberty Financial. Liberty Financial's
Board of Directors may approve the exemption of other persons or groups from
the provisions described above. While this voting limitation is in place to
reduce the likelihood, under certain circumstances, of inadvertent
terminations of Liberty Financial's advisory agreements as a result of
"assignments" thereof, there can be no assurances that this limitation will
prevent such a termination from occurring. In addition, such limitation could
be deemed to have an anti-takeover effect and to make changes in management
more difficult. See "Business--Regulation" and "Comparison of Stockholders'
Rights and Description of LFC Capital Stock--Other Provisions Pertaining to a
Change in Control."
Tax Legislation. Under the Code, income tax payable by annuity policyholders
on current investment earnings is deferred during the accumulation period of
certain annuity products, such as those offered by Keyport. Taxes, if any,
are payable by the policyholder on the accumulated tax-deferred earnings when
the annuity benefits are actually paid or to be paid, in accordance with the
provisions of the Code. From time to time, legislation has been proposed, but
not enacted, which would tax currently investment earnings as they are
credited to the policyholder. No assurances can be given that these or other
similar tax proposals will not be enacted in the future. If the Code were to
be amended to eliminate or reduce the tax-deferred status of annuity
products, including the products offered by Keyport, market demand for such
products could be materially adversely affected. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Federal Income
Taxes" and "Business--Keyport--Products."
Anti-Takeover Provisions. Certain provisions of the LFC Restated Articles and
By-laws and the Massachusetts Business Corporation Law ("MBCL") could
increase the difficulty of effecting a change in control of Liberty
Financial. These include "blank check" preferred stock, a classified board of
directors, certain limitations on voting rights and other corporate
governance provisions. See "Comparison of Stockholders' Rights and
Description of LFC Capital Stock--Other Provisions Pertaining to a Change in
Control." The insurance laws and regulations of Rhode Island also may impede
or delay a business combination involving Liberty Financial or Keyport. See
"--Regulation" and "Business--Regulation--Insurance Activities."
Shares Eligible for Future Sale. The sale of substantial shares of LFC Common
Stock held directly or indirectly by Liberty Mutual after the Merger, or the
perception that such sales could occur, could materially adversely affect the
prevailing market price of the LFC Common Stock. It could also make it more
difficult for Liberty Financial to sell newly issued equity securities in the
future at a time and price which it deems appropriate. As of the closing of
the Merger, there will be 22,813,200 shares of LFC Common Stock outstanding
and held indirectly by Liberty Mutual, all of which will be "restricted"
shares (the "Restricted Shares") under the Securities Act. The shares of LFC
Common Stock issued under the Merger Agreement, the Restricted Shares and
3,294 shares of LFC Common Stock held by persons who have exercised options
granted under Liberty Financial's 1990 Stock Option Plan will represent all
of the outstanding LFC Common Stock immediately following the Merger. The
shares of LFC Stock issuable to Colonial stockholders in the Merger will be
registered under the Securities Act. Upon issuance, such shares will be
freely tradeable under the Securities Act, except for shares issued to any
person who may be deemed an "affiliate" of Colonial (the "Colonial Affiliate
Shares") within the meaning of Rule 145 promulgated under the Securities Act,
and except for other shares of LFC Preferred Stock issued to any person who
elects to become a party to the Stockholders Agreement described below. See
"The Merger--Resales of LFC Common Stock and LFC Preferred Stock After the
Merger." The Restricted Shares and the Colonial Affiliate Shares will first
become eligible for sale in the public market pursuant to Rule 144
promulgated under the Securities Act 90 days after the date of this
Prospectus/Proxy Statement. Such shares will then be subject to certain volume
and other resale restrictions pursuant to
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Rule 144. In addition, approximately (i) 983,295 shares of LFC Common Stock
issuable upon the exercise of stock options outstanding as of the date of this
Prospectus/Proxy Statement under Liberty Financial's 1990 Stock Option Plan
and (ii) 827,900 shares issuable under Colonial stock option plans to be
assumed on a share-for-share basis by Liberty Financial pursuant to the
Merger Agreement, which are currently exercisable or which will become
exercisable within 90 days following the date of this Prospectus/Proxy
Statement, will become eligible for sale in the public market (subject to
limitations under Rule 144 with respect to persons who are affiliates of
Liberty Financial) beginning on the effective date of registration statements
on Form S-8, which Liberty Financial expects to file with the SEC promptly
following the Effective Time of the Merger. See "The Merger--Interests of
Certain Persons in the Merger," "Management--Executive Compensation,"
"Principal Stockholders" and "Shares Eligible for Future Sale." Liberty
Financial has granted to Liberty Mutual certain rights to have all of its
shares registered for sale under the Securities Act. These registration
rights include multiple demand registrations, which become exercisable
commencing 180 days from the effective date of the Merger, as well as
so-called "piggy-back" registrations. See "Relationships with Liberty
Mutual--Registration Rights Agreement" for a more detailed description of the
terms and conditions of these registration rights. These registration rights
could result in secondary offerings of significant share amounts by Liberty
Mutual. Liberty Financial is not aware of any current plans by Liberty Mutual
to exercise its registration rights. Liberty Financial also has granted to
John A. McNeice, Jr. and C. Herbert Emilson certain rights to have shares of
LFC Common Stock which such individuals own directly or indirectly registered
for sale under the Securities Act. See "The Merger--Interests of Certain
Persons in the Merger--Registration Rights Agreement," "Relationships with
Liberty Mutual--Registration Rights Agreement" and "Shares Eligible for
Future Sale."
THE COMPANIES
Colonial
Colonial acts as investment manager or sub-adviser for 31 open-end and 5
closed-end investment companies included in the Colonial family of mutual
funds, and to 6 open-end investment companies which are funding vehicles for
variable annuity contracts issued by certain affiliates of Liberty Financial.
Colonial provides administrative services to each of the Colonial funds,
along with distribution and shareholder services to the Colonial open-end
funds. Colonial also distributes, on an agency basis, such variable annuity
contracts. As of September 30, 1994, Colonial managed or acted as a
sub-adviser for funds having approximately $14.2 billion in assets
(approximately $13.5 billion as of December 31, 1994) and approximately
648,000 shareholders. As of September 30, 1994, approximately 41% of such
assets were invested in tax-exempt bond funds, 38% in taxable bond and money
market funds and 21% in equity funds. Colonial and its predecessors or
affiliates have been in the investment management business for approximately
64 years, and have provided these or similar services since 1931.
Colonial distributes its open-end funds primarily through securities
brokerage firms, banking institutions, financial planners and independent
brokers. Most of the Colonial funds offer investors a choice of two pricing
options: a traditional front-end load option, in which the investor pays a
sales charge at the time of purchase, and a back-end load option, in which
the investor pays no sales charge at the time of purchase, but is subject to
an asset-based sales charge paid by the fund for eight years after purchase
and a declining contingent deferred sales charge paid by the investor if
shares are redeemed within six years after purchase. Certain Colonial funds
also offer a level-load option, in which the investor pays a small initial
sales charge, and is subject to an on-going asset-based sales charge paid by
the fund and a small contingent deferred sales charge paid by the investor if
shares are redeemed within one year after purchase.
The investment management and advisory services provided by Colonial to the
funds generally consist of managing the investment of each fund's assets in
accordance with its investment objectives and policies and purchasing and
selling securities on behalf of the fund, all subject to the supervision of
the fund's Board of Trustees. Administrative services generally include
portfolio pricing, accounting and legal services, preparation of shareholder
reports and fund tax returns and the provision of office space, facilities
and personnel. Marketing and distribution services include preparation and
distribution of fund advertising and sales literature and promotion of the
funds within each distribution channel.
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Transfer agent and shareholder services include maintaining records of fund
share ownership, recording of fund share transactions and responding to
shareholder inquiries.
Colonial conducts most of its business activities through three wholly-owned
subsidiaries. Fund investment management, administration and marketing are
conducted through Colonial Management Associates, Inc., which is registered
as an investment adviser under the Advisers Act. Fund distribution is
conducted through Colonial Investment Services, Inc., which is registered as
a broker-dealer under the Exchange Act and is a member of the National
Association of Securities Dealers, Inc. Transfer agency and shareholder
service activities are conducted through Colonial Investors Service Center,
Inc., which is registered as a transfer agent under the Exchange Act.
As of December 31, 1994, Colonial managed or acted as sub-adviser for funds
having approximately $13.5 billion in assets. The average fund assets under
Colonial's management for the year ended December 31, 1994 were $14.5 billion
as compared to $13.5 billion for the year ended December 31, 1993. Gross fund
sales for the fourth quarter of 1994 and for the year ended December 31, 1994
were $201 million and $1.6 billion, respectively. Colonial experienced net
redemptions of $502 million for the fourth quarter of 1994 and $742 million
for the fiscal year ended December 31, 1994. Colonial's revenues for the
fourth quarter of 1994 were $38.2 million, representing a decrease of $4.2
million from the fourth quarter of 1993. Colonial's revenues were
approximately $161.2 million for 1994, compared to $150.8 million in 1993.
Colonial's net income was approximately $11.8 million in 1994, compared to
$20.0 million for 1993. Colonial's 1994 operating expenses included
non-recurring expenses of $4.6 million and acceleration of stock option
expenses of $2.5 million related to the Merger. The effect of these items on
net income, after tax benefits, was $4.0 million and $1.5 million,
respectively.
For a discussion of various business relationships between Liberty Financial
and Colonial maintained during the periods for which financial statements are
presented or incorporated by reference in this Prospectus/Proxy Statement,
see "Certain Information Regarding Liberty Financial-- Business--Business
Relationships with Colonial."
Liberty Financial
Liberty Financial is a diversified and integrated asset management
organization providing insurance and investment products to individuals and
institutions through multiple distribution channels. Liberty Financial has
combined product development, asset management and customer service through
Keyport, a specialist in single premium fixed and variable annuities, and
Stein Roe, a diversified investment advisory firm. Liberty Financial also has
distributed products through the Bank Marketing Group, a specialist in the
design and implementation of bank marketing programs for insurance and
investment products. As of September 30, 1994, Liberty Financial managed
approximately $28.9 billion of assets (approximately $25.6 billion as of
December 31, 1994).
Liberty Financial's strategy is to increase its assets under management
through product innovation, customer service, multiple distribution channels,
and focused marketing efforts. Historically, Liberty Financial's largest
source of revenues has been the net investment income derived from the
investments which support Keyport's fixed annuity business and its
closed-block of single premium whole life insurance. Liberty Financial also
derives income from fee-based assets under management, including private
managed accounts, mutual funds and variable annuities. Liberty Financial
seeks to diversify further its sources of income by increasing its fee-based
assets under management. The Merger is in furtherance of this strategy. See
"--Liberty Financial's Reasons for the Merger."
The appeal of certain insurance and investment products varies according to
an individual's age, income, risk tolerance and financial goals. Liberty
Financial offers a diversified product line designed to serve these needs at
various stages of an individual's life and earnings cycle. For example,
Keyport's variable annuities appeal to individuals during their net savings
years, while its fixed annuities appeal to older, more conservative customers
who seek a more stable source of income in their retirement. Stein Roe offers
a variety of mutual funds designed to appeal to a range of financial
objectives and risk tolerances. Stein Roe also provides private account
management for wealthy individuals and institutions. Liberty Financial
believes that it has established a mix of products that will appeal to
customers under a variety of economic and market conditions.
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Keyport. Keyport offers a diversified line of fixed and variable annuities
designed to serve the growing retirement savings market. Annuities are
long-term savings vehicles that are particularly attractive to customers
seeking tax-deferred savings products to supplement retirement income.
Keyport issued more than $800.0 million of fixed annuities in each of the
last three years and approximately $868.1 million of fixed annuities during
the nine months ended September 30, 1994. Liberty Financial's current
profitability is substantially dependent on Keyport's ability to manage
effectively its investment spread (the difference between the net investment
income derived from Keyport's general account investments and the interest
credited to policyholders). Keyport seeks to manage its investment spread
through, among other things, the reset (typically annual) of crediting rates
paid to annuity holders and the imposition of surrender charges upon early
withdrawal of policyholder account balances. At September 30, 1994, the
interest crediting rates with respect to 96.7% (approximately $6.5 billion)
of fixed annuity policyholder account balances were to be reset within the
succeeding twelve months. As of September 30, 1994, 86.5% (approximately $5.8
billion) of fixed annuity policyholder liabilities were subject to surrender
charges. Keyport also sells variable annuities, which provide management fee
income.
Keyport's distribution strategy employs multiple channels to achieve a broad
market presence. In recent years, Keyport has emphasized distribution through
the bank channel, using third-party bank marketers and direct relationships
with banks as well as the Bank Marketing Group. Keyport products are also
distributed through broker-dealers, a channel in which Liberty Financial
believes Colonial's substantial presence may provide greater access for
Keyport following the Merger.
Liberty Financial believes that Keyport has certain competitive advantages
due to its established market presence, reputation for service to
distributors and policyholders, and ability to access Liberty Financial's
other operating units in response to market opportunities. Keyport is rated
"A+" (Superior) by A.M. Best. See "Glossary of Certain Insurance Terms" for a
description of A.M. Best rating categories. S&P has rated Keyport's
claims-paying ability "AA-," and Moody's has rated Keyport's claims-paying
ability "A1." These ratings are not "market" ratings or recommendations to
use or invest in Keyport or Liberty Financial and are directed toward the
protection of policyholders, not investors.
Stein Roe. Stein Roe was founded in 1932 as an investment counselor to
wealthy individuals. The firm has evolved into a diversified investment
adviser which seeks to provide quality investment management and client
service to individuals and institutions. As of September 30, 1994, Stein Roe
had approximately $26.2 billion of assets under management (approximately
$22.9 billion at December 31, 1994).
Stein Roe currently is engaged in an ongoing program to restructure and
streamline its operations, improve efficiency and customer service, enhance
its product offerings, expand its marketing efforts, increase its assets
under management and increase its profitability. Liberty Financial believes
that Stein Roe's reputation and experience as a money manager can be
leveraged to expand its presence in each of the three markets Stein Roe
serves: investment counseling for wealthy individuals and families, private
account asset management for institutions and mutual fund products and
services for retail investors.
Bank Distribution Channel. In the past ten years, banks have emerged as an
important distribution channel for insurance and investment products and
services. During 1993 and the nine months ended September 30, 1994, such
distributon channels (including the Bank Marketing Group) accounted for 38.1%
and 39.7%, respectively, of Liberty Financial's total proprietary annuity and
mutual fund product sales and 77.7% and 70.0%, respectively, of Keyport's
annuity sales.
Liberty Financial developed the Bank Marketing Group as a proprietary
distribution vehicle for its products and services. The Bank Marketing Group
designs and implements programs which provide both proprietary and
third-party sponsored products, licenses and trains sales personnel, and
provides administrative support to meet the evolving needs of banks and their
customers. Each of Keyport and Colonial has a wholesaling group dedicated to
expanding further the distribution of its products through third party bank
marketers and through direct relationships with banks. Following the Merger,
Liberty Financial may explore opportunities to consolidate marketing efforts
in the bank channel.
Liberty Financial's Reasons for the Merger. Liberty Financial seeks to merge
with Colonial in furtherance of its strategy to diversify its sources of
income by increasing its fee-based assets under
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management. Liberty Financial seeks through the Merger to acquire a critical
mass of mutual fund assets and distribution capabilities required to compete
effectively in the financial services industry. Liberty Financial believes
that the benefits to it from the Merger will include increased assets under
management, further diversification of its sources of revenue, increased
distribution for Liberty Financial's existing products, development of new
and enhanced products and services that can be offered to the customers of
both Liberty Financial and Colonial and cost savings which can be realized by
both companies through economies of scale and consolidation of operations.
THE COLONIAL MEETING
Date, Time and Place
The Colonial Meeting will be held on March 21, 1995, at 1:00 p.m., local
time, at One Financial Center, Second Floor, Room B, Boston, Massachusetts.
Purpose of the Meeting
The purpose of the Colonial Meeting is to consider and vote upon a proposal
to adopt and approve the Merger Agreement.
Shares Outstanding and Entitled to Vote; Record Date
The close of business on January 27, 1995 has been fixed by the Colonial
Board as the record date (the "Record Date") for the determination of holders
of shares of Class A Common Stock and Class B Common Stock entitled to notice
of and to vote at the Colonial Meeting. At the close of business on the
Record Date, there were 7,179,173 shares of Class A Common Stock issued and
outstanding held by approximately 186 holders of record and 187,967 shares of
Class B Common Stock issued and outstanding held by 15 holders of record.
Holders of record of Class A Common Stock and Class B Common Stock on the
Record Date are entitled to one vote per share of Class A Common Stock and
one vote per share of Class B Common Stock. Subject to compliance with the
terms of applicable Massachusetts Law, the holders of Colonial stock are
entitled to exercise appraisal rights in connection with the Merger. See
"APPRAISAL RIGHTS."
Votes Required
The affirmative vote of the holders of two-thirds of the shares of Class A
Common Stock outstanding on the Record Date and of the holders of two-thirds
of the shares of Class B Common Stock outstanding on the Record Date, voting
as separate classes, is required to adopt and approve the Merger Agreement.
As of the Record Date, directors and officers of Colonial and its
subsidiaries owned and were entitled to vote an aggregate of 2,664,436 shares
of Class A Common Stock and 170,717 shares of Class B Common Stock,
representing 37.11% and 90.82%, respectively, of the shares of Class A Common
Stock and Class B Common Stock necessary to adopt and approve the Merger
Agreement. John A. McNeice, Jr., Chairman and Chief Executive Officer of
Colonial, C. Herbert Emilson, Vice-Chairman of Colonial, Harold W. Cogger,
President of Colonial and of Colonial Management Associates, Inc., Davey S.
Scoon, Executive Vice-President of Colonial Management Associates, Inc., and
Arthur O. Stern, Executive Vice- President of Colonial Management Associates,
Inc. have executed a voting agreement pursuant to which they have agreed with
Liberty Financial in their individual capacities as stockholders of Colonial
that all shares of Class A Common Stock and Class B Common Stock owned by
them and certain of their transferees (in the aggregate, 1,848,558 shares of
Class A Common Stock and 143,717 shares of Class B Common Stock, or 25.75%
and 76.46%, respectively, of the Class A Common Stock and Class B Common
Stock outstanding on the Record Date) in favor of adoption and approval of
the Merger Agreement at the Colonial Meeting. See "THE MERGER--Interests of
Certain Persons in the Merger-- Voting Agreement."
Voting, Solicitation and Revocation of Proxies
A proxy card for use at the Colonial Meeting accompanies this
Prospectus/Proxy Statement. Proxies may be solicited by using the mails and
by means of personal interview, telephone and wire. The cost of soliciting
proxies from the holders of Common Stock will be borne by Colonial (except
that the expenses incurred in connection with the printing and mailing of
this Prospectus/Proxy Statement will be shared equally by Colonial and
Liberty Financial). Colonial has retained Shareholder Communications
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Corporation to assist in the solicitation of proxies. The fee to be paid to
such firm is not expected to exceed $5,000, plus reimbursement for reasonable
out-of-pocket costs and expenses. Shareholder Communications Corporation also
provides proxy solicitation services for certain Colonial mutual funds.
Proxies may also be solicited by officers and other employees of Colonial.
Officers and other employees of Colonial will not receive additional
compensation for the solicitation of proxies. Colonial will reimburse
brokers, fiduciaries, custodians and other nominees for reasonable
out-of-pocket expenses incurred in sending this Prospectus/Proxy Statement
and other proxy materials to, and obtaining instructions relating to such
materials from, beneficial owners of Common Stock. A holder of Common Stock
may use his or her proxy if he or she does not attend the Colonial Meeting or
wishes to have his or her shares voted by proxy even if he or she does attend
the Colonial Meeting. The proxy may be revoked in writing by the person
giving it at any time before it is exercised by notice of such revocation to
the Clerk of Colonial, or by submitting a proxy having a later date, or by
such person appearing at the Colonial Meeting and electing to vote in person.
Attendance at the Colonial Meeting will not in itself constitute revocation
of a proxy. All proxies validly submitted and not revoked will be voted in
the manner specified therein. IF NO SPECIFICATION IS MADE, THE PROXIES WILL
BE VOTED IN FAVOR OF THE PROPOSAL TO ADOPT AND APPROVE THE MERGER AGREEMENT.
Under the applicable provisions of the Massachusetts Business Corporation Law
(the "MBCL") and Colonial's Articles of Organization and by-laws, the
presence, in person or by proxy, of holders of a majority in interest of each
of (a) the shares of Class A Common Stock outstanding on the Record Date and
(b) the shares of Class B Common Stock outstanding on the Record Date is
necessary to constitute a quorum of stockholders to take action at the
Colonial Meeting. For these purposes, shares which are present, or
represented by proxy, at the Colonial Meeting will be counted for quorum
purposes regardless of whether the holder of the shares or proxy fails to
vote on the Merger Agreement ("abstentions") or whether a broker with
discretionary authority fails to exercise its discretionary authority to vote
shares with respect to the Merger Agreement ("broker non-votes"). For voting
purposes, only shares voted for the adoption and approval of the Merger
Agreement, and neither abstentions nor broker non-votes, will be counted as
voting for adoption and approval in determining whether the Merger Agreement
is adopted and approved by the holders of Common Stock. As a consequence,
abstentions and broker non-votes will have the same effect as votes against
adoption and approval of the Merger Agreement.
Also accompanying this Prospectus/Proxy Statement is a letter of transmittal
and election form and other related materials pursuant to which Colonial
stockholders may, subject to the terms described herein, elect to receive
cash or LFC Preferred Stock in the Merger. See "THE MERGER--Conversion of
Colonial Stock--Election Forms."
Independent Accountants
Representatives of Price Waterhouse LLP, independent accountants for
Colonial, will attend the Colonial Meeting and will have the opportunity to
make a statement if they desire to do so.
Other Matters
The Colonial Board does not know of any matters other than the matters
described in this Prospectus/ Proxy Statement which are expected to be
presented for consideration at the Colonial Meeting. If any other matters are
properly presented for consideration at the Colonial Meeting, the persons
named in the accompanying proxy will have discretion to vote on such matters
in accordance with their best judgment.
Adjournment of Colonial Meeting
It is currently expected that on the scheduled date of the Colonial Meeting
votes will be taken and the polls closed on the proposal to adopt and approve
the Merger Agreement. It is possible, however, that Colonial management may
propose one or more adjournments of the Colonial Meeting, either to allow the
inspectors of election to count and report on the votes cast after the polls
have been closed, or, without closing the polls, in order to permit further
solicitation of proxies with respect to the proposal being considered at such
Colonial Meeting or for other reasons. It is also possible that while votes
could be taken and the polls closed with respect to one class of stock, the
management of Colonial could propose one or more adjournments of the Colonial
Meeting, without closing the polls with respect to the other class of stock,
in order to permit further solicitation of proxies with respect to the
proposal from holders of shares
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of such other class of stock. In order for any such adjournment to be
approved, the votes cast in favor thereof must represent a majority of the
total number of votes entitled to be cast by the holders of all classes of
stock present at the meeting in person or by proxy, voting together as a
single class, each such holder having, for this purpose, one vote per share
irrespective of class. If any adjournment is properly proposed at the Colonial
Meeting on behalf of any person other than management, the persons named as
proxies, acting in such capacity, will have discretion to vote on such
adjournment in accordance with their best judgment.
BACKGROUND AND REASONS FOR THE MERGER
Background of the Merger
At various times during 1992 and 1993, the Colonial Board and Colonial's
senior management discussed generally the possibility of entering into a
strategic alliance that would enhance Colonial's growth opportunities in an
increasingly competitive environment. Certain of Colonial's competitors had
experienced extremely rapid growth, during the late 1980s and early 1990s,
and the difference in economic power and financial leverage between the
largest investment management businesses and other firms had begun to widen.
This difference was beginning to manifest itself in an increasing ability on
the part of the larger firms to direct substantial financial resources to
fund distribution activities. At the same time, given the significant
increase over this period in the number of funds competing for a finite
number of distributor outlets, retail fund distributors such as broker and
dealer firms, banks and financial planners tended to expect increasing levels
of support and service in distributing the funds of a particular fund
complex. As a result, distribution expenses were increasing significantly.
While general discussions occurred during this period among the Colonial
Board, senior management and outside consultants regarding the types of
alliances that might be structured, no definitive decisions were made.
In the Fall of 1993, Colonial's senior management decided to consider
retaining an outside financial advisor to assist in exploring strategic
alternatives for growth. From the Fall of 1993 through February, 1994,
Colonial senior management had several meetings with representatives from
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch")
regarding the various forms such a strategic alliance might take. On February
28, 1994, the Colonial Board formally approved the engagement of Merrill
Lynch to explore a variety of strategic alternatives. Colonial prepared an
information booklet containing key financial data.
During the period of March through June, 1994, Merrill Lynch contacted eight
firms which it believed might have an interest in pursuing a strategic
alliance or relationship with Colonial and which satisfied Colonial's
criteria for such an alliance or relationship. The companies contacted
included insurance companies, banks and other mutual fund and financial
services companies. Various meetings were held during this period between
Colonial representatives and representatives of the firms expressing an
interest in Colonial.
In late May, 1994, Colonial determined to formally solicit written proposals
from four firms (including Liberty Financial) that continued to express a
strong interest in pursuing a transaction or alliance with Colonial. These
firms were specifically requested to describe (i) their strategic vision and
plan, (ii) the structure which an alliance might take, (iii) any issues they
considered to be of critical importance, and (iv) if they proposed a
combination with Colonial, a preliminary valuation or range of valuations for
Colonial.
During June, 1994 and July, 1994, each of these four companies submitted
written proposals expressing their potential interest in a combination with
Colonial describing generally the basis on which they would be willing to
consider such a combination. Following receipt of these proposals, Colonial
and Merrill Lynch conducted discussions with each of these companies and
their financial advisers.
At a special meeting on July 25, 1994, the Colonial Board reviewed with
management and with Merrill Lynch the terms of the four proposals that had
been developed. Each of these proposals contemplated a stock merger between
Colonial and the other company. One proposal in particular appeared, on
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balance, to be the most likely to provide a particularly advantageous
opportunity to Colonial and its stockholders, largely because it appeared
that it would afford the Colonial stockholders, through their interest in the
combined company, greater value than the other proposals. The Colonial Board
directed Colonial management to pursue negotiations with the company that had
made that proposal--a financial services company the common stock of which is
listed on the New York Stock Exchange ("Company A"), while still considering
other proposals. The Colonial Board emphasized the importance of maintaining
the confidentiality of all discussions, because of its belief that widespread
public perception of uncertainty as to Colonial's future (in the absence of
any definitive merger agreement) could be very harmful to the Colonial
organization, including its relationship with distributors and with the
mutual funds managed by Colonial.
On July 27, 1994, one of the three potentially interested companies other
than Company A revised its offer to indicate a possible willingness to afford
a higher amount of consideration to Colonial stockholders than it had
originally indicated, as well as a willingness to allow Colonial stockholders
to choose between cash and stock of the combined entity. Company A refined
its proposal on July 28, 1994, to indicate that Colonial stockholders would
receive publicly traded common stock of Company A intended to be worth a
specified dollar amount per Colonial share. Company A also submitted a draft
merger agreement.
At a special meeting on July 30, 1994, the Colonial Board considered in
detail the four proposals that had been made, including consultation with and
presentations by Colonial's management and financial and legal advisers
regarding the proposals. Based on the presentations by Colonial's management
and its advisers and then available information, it was the unanimous
consensus of the Colonial Board that Company A's proposal appeared to be the
most advantageous to Colonial and its stockholders. That proposal, which was
preliminary and highly contingent, contemplated a stock merger in which each
outstanding share of Colonial Common Stock would be converted into Company A
common stock intended to have a value of $36 per share, although the manner
and timing of determining that value remained to be negotiated. Since Company
A insisted on a 12-day exclusivity agreement as a condition to pursuing
merger negotiations, the Colonial Board approved such an agreement, which was
entered into by Colonial and Company A on July 30, 1994. In the course of
this meeting, the Colonial Board also considered the terms of the proposed
merger agreement that had been received from Company A and gave instructions
to Colonial's management and its financial and legal advisers regarding what
they considered to be the most important issues to be negotiated with Company
A.
At a special meeting on August 5, 1994, Colonial management and its financial
and legal advisers reported to the Colonial Board on the status of merger
negotiations with Company A. They indicated that a number of issues
previously identified by the Colonial Board as significant had not been
resolved, including a satisfactory basis for protecting Colonial stockholders
from a drop in the intended $36 per share value of Company A's stock between
the time of fixing of that value (for purposes of determining the Colonial
stock exchange ratio) and the time of closing of the proposed merger, and
Company A's ability to withdraw from the transaction in the event the market
value of its stock decreased below a specified amount. The Colonial Board
instructed management with respect to its positions on the principal open
issues and directed management and its advisers to communicate those
positions to Company A.
Discussions with representatives of Company A following the August 5 meeting
failed to produce a resolution of the principal open issues on the terms
approved by the Colonial Board, so negotiations terminated prior to the
expiration of the exclusivity period with Company A on August 11, 1994. The
principal issues that were not resolved included the "price protection" issue
described in the preceding paragraph, as well as certain contingencies
required by Company A that were not acceptable to the Colonial Board.
Following expiration of the exclusivity period with Company A, Colonial,
through Merrill Lynch, solicited further proposals from Liberty Financial and
the other two potentially interested companies. Colonial also informed
Company A that it would be prepared to consider further a combination with
Company A, if the outstanding merger agreement issues could be satisfactorily
resolved (depending on the status of Colonial's discussions with the other
potential interested parties). Colonial also entered into confidentiality
agreements with each of the four companies, to the extent it had not already
done so.
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In response to this solicitation, representatives of Company A indicated
during the week of August 15 that Company A would be willing to consider a
"cash election" merger, in which Colonial stockholders would be permitted to
elect cash (subject to an aggregate limit of 50% of the value of Colonial
shares so that the transaction would qualify as a tax-free reorganization) or
Company A stock, in the amount per Colonial share ($36) that Company A had
preliminarily indicated a potential willingness to pay (which it did not
increase from its prior proposal).
During the week of August 22, representatives of Liberty Financial
communicated a revised proposal which would permit Colonial stockholders to
receive $40 in cash per Colonial share, subject to an aggregate limit of $100
million, with the balance of the consideration to consist of preferred stock
(also subject to an aggregate limit) and common stock of the combined entity.
On August 31, 1994, one of the other two potentially interested companies
also submitted a revised proposal, suggesting a certain amount in cash per
Colonial share, subject to an aggregate limit, with the balance of the
consideration to be common shares of the combined entity (for which there was
no prior public trading market).
Early in September, Colonial, through Merrill Lynch, indicated to all four
potentially interested companies that the Colonial Board was likely to decide
on a course of action, whether to pursue discussions with one of the
companies or to discontinue discussions, at a meeting scheduled for September
18, 1994. Each of the companies was advised that, accordingly, any further
proposals or revisions would need to be received by Colonial by then. In
taking this action, Colonial was motivated in part by a concern that rumors
within and without the Colonial organization reflecting uncertainty as to its
future could have a very harmful effect on Colonial, as well as a recognition
of the substantial duration of discussions with each of the four companies.
Prior to the September 18, 1994 Colonial Board meeting, Colonial and each of
the four companies provided to and received from each other substantial
financial information and, with its financial, accounting and legal advisers,
performed due diligence reviews.
In the week preceding the September 18, 1994 Colonial Board meeting, Liberty
Financial and two of the three other potentially interested companies each
submitted revised proposals, or clarified a prior proposal, by letter or
orally.
At its special meeting on September 18, 1994, the Colonial Board consulted
with and considered presentations by Colonial's management and financial and
legal advisers regarding, alternatively, a possible business combination with
each of the four potentially interested companies. Management summarized its
analysis of the relative strengths and advantages each of these companies
would bring to a combination with Colonial, concluding that a combination
with Liberty Financial appeared to be the most potentially advantageous to
the business of Colonial. In reaching this conclusion, management
particularly noted the combination of greater capital resources, existing
strength in the mutual fund business and enhanced diversification through its
other businesses that Liberty Financial would afford, in comparison to other
potentially interested parties. The Colonial Board also reviewed analyses by
Merrill Lynch and by Colonial management of the financial aspects of the four
proposals, which indicated that the Liberty Financial proposal would afford a
higher value to the Colonial stockholders than the other proposals.
Management also discussed the due diligence reviews performed with respect to
the four potentially interested companies. In a separate session not attended
by the employee Directors of Colonial, Colonial's legal advisers reviewed
with the non-employee Directors those aspects of the proposals dealing with
employee benefits arrangements and agreements and their significance.
After considering all of the foregoing, it was the unanimous consensus of the
Colonial Board at the September 18 meeting that negotiations should proceed
with Liberty Financial. Prior to that meeting, Liberty Financial had
submitted a form of exclusivity agreement which it had indicated it would
insist upon as a condition to further negotiations. The proposed agreement
called for an exclusivity period expiring on October 13, 1994 (the day after
the next meeting of the Liberty Financial board of directors) and called for
the payment of a substantial termination fee if a definitive merger agreement
was not reached (unless because of a rejection by the Liberty Financial board
or a mutual determination that a merger was not feasible) and Colonial took
certain steps toward an alternative transaction before a certain date. The
Colonial Board accepted the exclusivity period demanded by Liberty Financial
but rejected the proposed termination fee.
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After discussions, Liberty Financial dropped its demand for that termination
fee and accordingly Liberty Financial and Colonial entered into an
exclusivity agreement expiring October 13, 1994.
Following the September 18 meeting, representatives of Colonial and Liberty
Financial completed their due diligence review of each other and negotiated a
definitive merger agreement and related agreements. During that time,
Colonial was advised that Merrill Lynch was under active consideration by
Liberty Financial's parent, Liberty Mutual, to be the principal underwriter
on a proposed private debt offering by Liberty Mutual. On September 27, 1994,
Colonial retained Berkshire Capital Corporation ("Berkshire Capital") as a
second financial adviser to Colonial solely in connection with the delivery
of a fairness opinion to the Colonial Board on the possible business
combination.
At a special meeting held on October 12, 1994, the Colonial Board considered
the possible business combination with Liberty Financial, consulting with and
considering presentations by Colonial's management and financial and legal
advisers. The Colonial Board was advised that Liberty Financial had proposed
a merger in which Colonial stockholders would receive (a) cash in the amount
of $40 for each outstanding share of Colonial common stock, subject to an
aggregate limit of $100 million; (b) 0.77 shares of Liberty Financial
preferred stock, with a face value of $38.50 per Colonial share equivalent,
subject to an aggregate limit of $52 million; (c) Liberty Financial common
stock at a ratio of one share of Liberty Financial stock for each share of
Colonial stock; or (d) some combination of Liberty Financial common stock and
preferred stock or of cash and Liberty Financial common stock, subject to the
specific election conditions and price reduction provision summarized below
under "THE MERGER--Conversion of Colonial Stock." The Colonial Board also
considered the other terms of the proposed merger agreement. Management
reviewed the negotiations that had resulted in the termination fee, capped at
$9 million, described below under "THE MERGER--Termination of the Merger
Agreement; Termination Fee." The amount of this fee had been subject to a
number of proposals and counterproposals, with Liberty Financial originally
demanding a "topping fee" of 25% of the excess in value of any higher
proposal by a third party accepted by Colonial over the value of the Liberty
Financial proposal, in addition to a termination fee. Later, Liberty
Financial had insisted upon a termination fee of $13 million. Colonial had
succeeded in reducing the termination fee required by Liberty Financial to $9
million. Liberty Financial required that the principal stockholders of
Colonial agree in their individual capacities as stockholders to vote their
shares of Colonial Common Stock in favor of the Merger and to refrain from
voting in favor of a business combination with a third party, as described
below under "THE MERGER-- Interests of Certain Persons in the Merger--Voting
Agreement." This voting requirement would, however, terminate upon any
termination of the Merger Agreement.
At the October 12 meeting, representatives of management made presentations
to the Colonial Board regarding the proposed Merger and Liberty Financial's
strategic plans for the combined entity and in particular for Colonial.
Colonial management emphasized the opportunities for growth that would result
from the much greater capital resources of the combined entity, as well as
the benefits in diversification from the non-mutual fund products provided by
Liberty Financial.
At the October 12 meeting, the Colonial Board also heard presentations by
Merrill Lynch and by Berkshire Capital of their separate analyses of the
financial terms of the Merger, and representatives of Merrill Lynch and of
Berkshire Capital delivered their respective opinions to the Colonial Board
that, as of such date, the consideration to be received by the Colonial
stockholders pursuant to the Merger, taken as a whole, was fair to such
stockholders from a financial point of view. After further deliberations, the
Colonial Board unanimously approved the execution and delivery of the Merger
Agreement as being in the best interests of Colonial and its stockholders.
The Merger Agreement was executed and delivered at 8:00 a.m. on October 13,
1994. For a description of the factors considered by the Colonial Board in
reaching its decision, see"--Reasons For The Merger; Recommendation of
Colonial Board" below.
In February, 1995, the Parent, Liberty Financial, Merger Subsidiary and
Colonial determined to make certain technical changes in the corporate
structure of the Merger and amended and restated the Merger Agreement
accordingly (the "Merger Agreement Amendments"). The changes effected by the
Merger Agreement Amendments did not substantively affect the rights or
interests of Colonial's stockholders.
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Reasons for the Merger; Recommendation of Colonial Board
In reaching its decision to adopt and approve the Merger Agreement on October
12, 1994, the Colonial Board consulted with Colonial's management and
financial and legal advisers and considered many factors, including, but not
limited to, the following:
1. The presentations made by each of Merrill Lynch and Berkshire Capital and
their respective opinions that the proposed consideration to be received by
the Colonial stockholders pursuant to the Merger, taken as a whole, is fair
to the Colonial stockholders from a financial point of view (see "-- Opinions
of Colonial Financial Advisers");
2. The Colonial Board's review with its legal and financial advisers of the
provisions of the Merger Agreement, including provisions which would not
prevent Colonial from considering or the Colonial Board from approving an
alternative business combination proposal from a third party, under certain
conditions (see "THE MERGER--No Solicitations; Fiduciary Duties" and "--Right
of the Colonial Board to Withdraw its Recommendation"). The Colonial Board
attached importance to the ability of each Colonial stockholder to elect to
receive cash or LFC Preferred Stock, subject to the aggregate limitations
discussed below under "THE MERGER--Conversion of Colonial Stock," rather than
receiving entirely LFC Common Stock;
3. Historical and prospective financial information regarding Liberty
Financial and presentations by Colonial's representatives as to their due
diligence review of Liberty Financial's business and financial statements;
4. Presentations by Colonial management regarding the proposed Merger and its
advantages to the business of Colonial, including the fact that the combined
company would be a diversified asset management organization with
approximately $43 billion of assets under management (at September 30, 1994
values), the opportunities for growth in the business of Colonial resulting
from the much greater capital resources of the combined organization, the
opportunity to offer new products, available through the existing businesses
of Liberty Financial, to the present customers of Colonial and the
opportunity to improve service to Colonial's customers through a combination
of the strengths of the two organizations and possible economies of scale,
including potential operating efficiencies and other synergies which could
result from combining Liberty Financial and Colonial;
5. The expectation that the Merger will be tax-free for federal income tax
purposes to Colonial and its stockholders, in the latter case to the extent
they receive LFC Common Stock or LFC Preferred Stock (but not cash);
6. Consideration of the prospects for Colonial if it continued as an
independent organization;
7. The effect of the Merger on Colonial's relationships with its mutual funds
(including their shareholders), other clients and employees, and the Colonial
Board's belief that the Colonial mutual fund trustees would view a merger
with Liberty Financial favorably because it would provide Colonial with
additional resources to enhance further its investment management,
distribution and shareholder service capabilities; and
8. The risks that prolonging the merger negotiation process further could
significantly disrupt Colonial's businesses.
The Colonial Board did not assign any specific or relative weight to the
factors discussed above.
THE COLONIAL BOARD HAS UNANIMOUSLY ADOPTED AND APPROVED THE MERGER AGREEMENT
AND DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF COLONIAL AND ITS
STOCKHOLDERS AND RECOMMENDS THAT THE COLONIAL STOCKHOLDERS VOTE FOR THE
ADOPTION AND APPROVAL OF THE MERGER AGREEMENT. Colonial has the right, under
certain circumstances, to withdraw or modify the foregoing recommendation of
the Colonial Board. See "THE MERGER--Right of the Colonial Board to Withdraw
its Recommendation."
Opinions of Colonial Financial Advisers
Merrill Lynch Opinion
General. Colonial retained Merrill Lynch in February, 1994 to render
financial advisory and investment banking services in connection with
exploring strategic opportunities for growth. The Colonial
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Board retained Merrill Lynch based upon its experience and expertise. Merrill
Lynch is a nationally recognized investment banking and advisory firm and, as
part of its investment banking business, is continuously engaged in the
valuation of businesses and securities in connection with mergers and
acquisitions, underwritings, distributions of securities and similar
activities. Merrill Lynch acted exclusively for the Colonial Board in
rendering its fairness opinion and will receive a fee from Colonial for its
services, the largest part of which is contingent upon consummation of the
Merger. See "--Fees Payable to Merrill Lynch."
Merrill Lynch acted as financial adviser to Colonial in connection with, and
participated in certain of the negotiations leading to, the Merger Agreement.
During the course of such negotiations, Merrill Lynch was not asked to
determine, and did not propose, the consideration to be paid in the Merger.
Prior to the negotiations leading to the Merger Agreement, Merrill Lynch had
been in active discussions with Liberty Mutual regarding a potential private
placement by Liberty Mutual of debt securities. During the negotiations
leading to the Merger Agreement, Merrill Lynch came under active
consideration by Liberty Mutual to be the lead underwriter of such proposed
private offering. Merrill Lynch has in the past performed various investment
banking services for Liberty Mutual and Liberty Financial, including acting
as a co-manager in connection with the proposed initial public offering of
Liberty Financial's stock in the first quarter of 1994, for which it received
customary compensation. Merrill Lynch may perform additional investment
services for Liberty Mutual, Liberty Financial and their affiliates in the
future. Dr. Michael von Clemm, a director of Liberty Mutual and Liberty
Financial, is a director of Merrill Lynch Capital Partners, Inc., a
wholly-owned subsidiary of Merrill Lynch, and was an executive officer of
Merrill Lynch prior to his retirement in 1992.
Merrill Lynch rendered its written opinion to the Colonial Board that, as of
the date of the Merger Agreement, the proposed consideration to be received
by the holders of Colonial Common Stock pursuant to the Merger, taken as a
whole, was fair to such stockholders from a financial point of view. The full
text of Merrill Lynch's opinion is attached as Appendix II hereto. The
description of the written opinion set forth herein is qualified in its
entirety by reference to the full text of the opinion attached hereto.
Colonial stockholders are urged to read the opinion in its entirety for a
description of the procedures followed, assumptions made, matters considered,
and qualifications and limitations on the review undertaken, by Merrill Lynch
in connection therewith. Pursuant to instructions from Colonial, Merrill
Lynch contacted a limited number of potential strategic partners for
Colonial. Since the execution of the Merger Agreement, Merrill Lynch has not
received any proposals from third parties relating to a merger or acquisition
transaction with Colonial.
Merrill Lynch's opinion is directed only to the consideration to be paid in
the Merger and does not constitute a recommendation to any Colonial
stockholder as to how such stockholder should vote at the Colonial Meeting.
Materials and Information Considered. In connection with its opinion, Merrill
Lynch:
(1) Reviewed Colonial's Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended December 31, 1993 and Forms 10-Q
and related unaudited financial information for the quarterly periods ending
March 31, 1994 and June 30, 1994;
(2) Reviewed Liberty Financial financial information for the three fiscal
years ended December 31, 1993 and other interim reports through August 31,
1994 furnished by Liberty Financial;
(3) Reviewed certain information, including financial forecasts relating to
the business, earnings, cash flow, assets and prospects of Colonial and
Liberty Financial furnished by Colonial and Liberty Financial;
(4) Conducted discussions with members of senior management of Colonial and
Liberty Financial concerning their respective businesses and prospects;
(5) Reviewed the historical market prices and trading activity for Colonial's
Class A Common Stock and compared them with those of certain publicly traded
companies deemed by Merrill Lynch to be reasonably similar to Colonial;
(6) Compared the results of operations of Colonial and Liberty Financial with
those of certain companies deemed by Merrill Lynch to be reasonably similar
to Colonial and Liberty Financial;
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(7) Compared the proposed financial terms of the transactions contemplated by
the Merger Agreement with the financial terms of certain other mergers and
acquisitions deemed by Merrill Lynch to be relevant;
(8) Reviewed the Merger Agreement; and
(9) Reviewed such other financial studies and analyses and performed such
other investigations and took into account such other matters as deemed
necessary by Merrill Lynch, including its assessment of general economic and
market conditions.
In preparing its opinion, Merrill Lynch relied on the accuracy and
completeness of all information supplied or otherwise made available to it by
Colonial and Liberty Financial. Merrill Lynch did not independently verify
such information or assume any responsibility therefor, nor did Merrill Lynch
undertake an independent appraisal of the assets of Colonial or Liberty
Financial. Merrill Lynch assumed that the financial forecasts furnished by
Colonial and Liberty Financial were reasonably prepared and reflected as of
the dates thereof the best available estimates and judgment of Colonial's or
Liberty Financial's management as to the expected future financial
performance of Colonial or Liberty Financial, as the case may be.
Summary of Analyses. The following is a summary of the analyses that Merrill
Lynch utilized in arriving at its opinion as to the fairness of the
consideration to be paid in the Merger, as discussed with the Colonial Board
on October 12, 1994.
Valuation of Colonial. Merrill Lynch arrived at a range of values for
Colonial by utilizing two principal valuation methodologies: a comparable
transactions analysis and a discounted cash flow analysis. Comparable
transactions analysis provides a valuation range based upon financial
information of selected companies in the same or similar industries as the
company being valued which have been involved in recent merger or acquisition
transactions. Discounted cash flow analysis provides insight into the
intrinsic value of a company based on projected earnings and the subsequent
cash flows generated by the business of the company being valued. No company
or transaction used in these analyses for comparison was identical in all
respects to Colonial or the contemplated Merger. Accordingly, an analysis of
the results of the foregoing involved complex considerations and judgments
concerning differences in financial and operating characteristics of the
companies and other factors that could affect the value of the companies and
transactions to which Colonial and the Merger were compared. Although Merrill
Lynch considered the results of both of these methodologies, Merrill Lynch
gave the greater weight to the comparable transactions analysis.
Comparable Transactions Analysis. This analysis was based on twenty-two
selected acquisitions of asset management companies announced after January,
1992, and reflects imputed values based on mean multiples paid on assets
under management, earnings before interest, taxes, depreciation and
amortization ("EBITDA"), and net income. The transactions included
(buyer/seller): Franklin Resources, Inc./Templeton, Galbraith & Hansberger
Ltd.; United Asset Management/NWQ; Mellon Bank Corporation/The Boston
Company; CDV Acquisition Corporation/The Van Kampen Merritt Companies;
Alliance Capital/Equitable Capital Management; Phoenix Home Life Insurance
Company/National Securities & Research; Reich & Tang, LP/New England
Investment Companies; Alliance Capital/Shields Asset Management; United Asset
Management/Heitman Financial; Chemical Banking Corp./AmeriTrust-Texas Corp.;
Society Corp./Schaenen Wood & Associates; Management/Keystone Group; First
Union Corp./Lieber & Company; Management and TA Associates/AIM Management
Group, Inc.; Duff & Phelps Corp./Beutel, Goodman & Co.; CoreStates
Financial/Rittenhouse Financial Services; Mellon Bank Corporation/Dreyfus
Corporation; Thomson Advisory Group/Four Pacific Mutual Subsidiaries; Kansas
City Southern/Berger Associates; PNC Bank Corp./BlackRock Financial
Management; The Van Kampen Merritt Companies/American Capital Management &
Research and Swiss Bank Corp./Brinson Partners. Analysis of these selected
transactions produced mean implied multiples based on net income and EBITDA
of 12.9 times and 6.2 times, respectively, and a mean price to assets under
management percentage of 1.7%. These implied
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multiples resulted in a range of values for Colonial of between $144.2
million and $259.9 million (or from $18.18 to $32.78 per fully diluted
share). The mean valuation measures compared with implied multiples of price
to net income and EBITDA of 13.7 times and 9.4 times, respectively, and a
price to assets under management percentage of 2.7% for the Merger.
Discounted Cash Flow Analysis. Using a discounted cash flow analysis,
Merrill Lynch estimated the present value of the future cash flows that
Colonial could produce over a projected six-year period from 1995 to 2000 if
Colonial were to operate on a stand-alone basis (i.e., without giving effect
to any operating or other efficiencies pursuant to the Merger). Merrill Lynch
relied upon the earnings projections provided by management of Colonial to
perform the discounted cash flow analysis. Merrill Lynch derived certain
potential equity market value reference ranges for Colonial Common Stock
based upon the sum of the present value (using discount rates ranging from
11% to 15%) of the future cash flows derived from the six-year earnings of
Colonial and the discounted value of the final year's EBITDA less
distribution and deferred sales charge revenues multiplied by numbers
representing price-EBITDA multiples ranging from 5 times to 7 times. This
analysis produced potential aggregate equity values ranging from $186.7
million to $324.9 million (or from $23.55 to $40.98 per fully diluted share).
Valuation of Liberty Financial. Merrill Lynch arrived at a range of values
for Liberty Financial by utilizing two principal valuation methodologies: a
discounted terminal value analysis and a break- up valuation analysis. The
break-up valuation provides a valuation range for Liberty Financial based on
the stand-alone imputed values for separate operating divisions of Liberty
Financial based on selected companies which Merrill Lynch deemed to be
comparable to such divisions. No company used in the breakup valuation
analysis as a comparison was identical in all respects to Liberty Financial,
any separate operating division of Liberty Financial or the combined Liberty
Financial/ Colonial entity. Accordingly, an analysis of the results of the
foregoing involves considerations and judgments that could affect the value
of the companies to which Liberty Financial was compared. Merrill Lynch also
compared the valuations of Liberty Financial as implied in Liberty
Financial's 1994 uncompleted initial public offering.
Discounted Terminal Value Analysis. Using a discounted terminal value
analysis, Merrill Lynch estimated the present value of Liberty Financial's
1999 estimated earnings multiplied by numbers which represent a range of
price-earnings multiples of 9 times to 13 times. The earnings used in the
analysis were provided by the management of Liberty Financial and reflect the
earnings that Liberty Financial could produce if Liberty Financial were to
operate on a stand- alone basis (i.e., without giving effect to any operating
or other efficiencies pursuant to the Merger). In its analysis, Merrill Lynch
used discount rates ranging from 11% to 15%. This analysis produced potential
aggregate equity values for Liberty Financial ranging from $623.8 million to
$1,075.5 million.
Break-up Valuation. Merrill Lynch compared certain financial information
for the insurance and asset management businesses of Liberty Financial with
the following group of companies that Merrill Lynch believed to be
appropriate for comparison: for the insurance division, Equitable of Iowa,
First Colony, SunAmerica and Western National, and for the asset management
division, Duff & Phelps, Eaton Vance Corp., Franklin Resources, Inc., The
John Nuveen Company, The Pioneer Group, Inc., T. Rowe Price Associates, and
United Asset Management. Merrill Lynch used this information to perform three
break-up valuations of Liberty Financial. The first valuation analysis
reflects the sum of the total stockholder's equity of the insurance business
and the net income of the asset management business multiplied by a number
which represents a price-earnings multiple of 12.3 times. The second
valuation analysis reflects the sum of the total stockholder's equity of the
insurance business and the assets under management of the asset management
business multiplied by a number which represents a price-assets under
management percentage of 1.7%. The third valuation analysis reflects the sum
of the net income for the insurance business multiplied by a number which
represents a price earnings multiple of 8.8 times and the net income of the
asset management business multiplied by a number which represents a
price-earnings multiple of 12.3 times. These
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valuation analyses produced values for Liberty Financial ranging from $749.2
million to $990.4 million.
Implied Valuation in Uncompleted Initial Public Offering. As an
additional valuation exercise, Merrill Lynch compared the value of Liberty
Financial as implied in the proposed initial public offering that Liberty
Financial initiated in late 1993 against the value of Liberty Financial as
implied in the Merger. At the midpoint of the filing range of Liberty
Financial's initial public offering, the implied market value of Liberty
Financial was $874.3 million. This value represented a price to next fiscal
year earnings multiple of 10.9 times and a price-book value multiple of 1.15
times. The valuation of Liberty Financial as implied in the proposed initial
public offering compares to a value implied in the Merger of $779.1 million,
which represents a price-next fiscal year earnings multiple of 9.8 times and
a price-book value multiple of 1.17 times. The value of Liberty Financial as
implied in the Merger is based on fully diluted shares to be held by Liberty
Mutual after the Merger and the estimated market value of the LFC Common
Stock of the combined Liberty Financial/Colonial entity. See "--Valuation of
Merger Consideration" for a description of the methodology used to estimate
the market value of the LFC Common Stock.
Valuation of the Combined Companies. Merrill Lynch arrived at a range of
values for the combined Liberty Financial/Colonial entity by applying the
subsidiaries, provided that such
shares are not held in a fiduciary capacity or held in the ordinary course of
business by subsidiaries of Colonial or Liberty Financial that are insurance
companies or broker-dealers), unless an election for such share is made as
described below, shall be converted into the right to receive one share of
LFC Common Stock. Each holder of shares of Common Stock may elect to receive,
instead of LFC Common Stock, for all or part of the Common Stock held by such
holder either, but not both, of (i) $40.00 in cash for each share of Common
Stock held by such holder, or (ii) 0.77 shares of LFC Preferred Stock for
each share of Common Stock held by such holder ($38.50 face amount per share
of Common Stock). Any holder of Common Stock who holds the Common Stock in
two or more different names may make different elections with respect to the
Common Stock held in each name. Holders who elect to receive LFC Preferred
Stock may also elect, but shall not be required, to become a party to a
Stockholders Agreement. See "--Stockholders Agreement." The foregoing amounts
of LFC Common Stock, cash and LFC Preferred Stock to be received by Colonial
stockholders may be reduced under certain circumstances. See "--Adjustment of
Merger Consideration."
If the number of shares of Common Stock subject to elections to receive cash
or LFC Preferred Stock would result in the payment of aggregate cash in
excess of $100 million or in the issuance of more than 1,040,000 shares of
LFC Preferred Stock, then the amount of cash payable or LFC Preferred Stock
issuable to each holder making such election will be reduced ratably, without
further action by the holder, based on the number of shares of Common Stock
elected to be so treated by each stockholder and on a whole Common Stock
share basis, until the aggregate cash consideration being paid no longer
exceeds $100 million and/or the aggregate number of shares of LFC Preferred
Stock no longer exceeds 1,040,000, respectively. Holders electing to receive
cash or LFC Preferred Stock will not be given the opportunity to change their
elections in the event that the number of shares of Common Stock subject to
elections to receive cash or LFC Preferred Stock would exceed the maximum
aggregate limits described above. Each share of Common Stock not receiving
the consideration for which an election was made as a result of the reduction
described in the first sentence of this paragraph will be converted into a
right to receive one share of LFC Common Stock. If all holders of Common
Stock properly elect to receive cash for each share of Common Stock held by
such holders, based on the number of shares of Common Stock outstanding as of
the Record Date, each Colonial stockholder would effectively receive
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for each share of Common Stock $13.57 in cash and 0.66 shares of LFC Common
Stock pursuant to the Merger.
The shares of Common Stock held by holders who perfect appraisal rights will
not be so converted. See "Appraisal Rights."
An affiliate of Liberty Mutual will lend to Liberty Financial the total
amount of cash required to be paid to Colonial stockholders pursuant to the
Merger. Such loan will bear interest at an annual rate not exceeding 8.5% and
mature on the tenth anniversary of the Effective Time. See "Certain
Information Regarding Liberty Financial--Relationships with Liberty Mutual."
Adjustment of Merger Consideration
The number of shares of LFC Common Stock issuable in exchange for each share
of Common Stock, the amount of cash payable for each share of Common Stock
and the number of shares of LFC Preferred Stock issuable in exchange for each
share of Common Stock (collectively, the "Consideration") are each subject to
adjustment by an identical proportion if the Specified Assets Under
Management (as defined below) on the date two days prior to the closing date
of the Merger (the "Adjustment Date") do not exceed 85% of the Specified
Assets Under Management on October 12, 1994, after factoring out market
fluctuations of the values of portfolio assets (positive or negative) between
such dates. In such event, each of the three elements of the Consideration
and the maximum aggregate amount of cash payable and LFC Preferred Stock
issuable will be reduced by subtracting therefrom the amounts obtained by
multiplying the applicable exchange ratio or dollar amount by a fraction, (i)
the numerator of which equals the lesser of (A) 17.5 or (B) the difference
between (x) 92.5 and (y) the number representing the ratio, expressed as a
percentage, of such Specified Assets Under Management as of the Adjustment
Date (after factoring out market fluctuations) to such Specified Assets Under
Management on October 12, 1994 (the "Adjustment Percentage") and (ii) the
denominator of which is 92.5. If the Adjustment Percentage is less than 75%,
then there will be no further reduction in the Consideration, but the Merger
Agreement will be terminable at the election of Liberty Financial. As of
January 27, 1995, the Adjustment Percentage (determined in such manner) was
96.75%.
For example, assuming that Specified Assets Under Management of Colonial on
October 12, 1994 were $14 billion, if Specified Assets Under Management at
the Adjustment Date are $11.2 billion (after factoring out market
fluctuations), or 80% of the Specified Assets Under Management on October 12,
1994, then the exchange ratio for each of the LFC Common Stock and the LFC
Preferred Stock and the cash payable for each share of Common Stock would be
adjusted by subtracting therefrom the amounts obtained by multiplying the
applicable exchange ratio and the dollar amount by .135. Thus, in this
example, and assuming that the elections to receive cash and the LFC
Preferred Stock are not oversubscribed, each share of Common Stock would be
exchangeable for the right to receive .865 shares of LFC Common Stock, .666
shares of LFC Preferred Stock or $34.60 in cash and the maximum aggregate
amount of cash payable in the Merger would be $86.5 million and the maximum
aggregate number of shares of LFC Preferred Stock issuable in the Merger
would be 899,600 shares.
"Specified Assets Under Management" means, as of each time the amount thereof
is to be determined, the sum of (i) the aggregate of the net assets of the
registered open-end investment companies to which Colonial or any of its
subsidiaries serves as an investment adviser or sub-adviser, calculated in
accordance with the Investment Company Act and the Rules and Regulations of
the SEC promulgated thereunder, plus (ii) the aggregate of the net assets of
other investment management clients for which Colonial or any of its
subsidiaries serves as investment adviser, determined in substantially the
same manner, plus (iii) without duplication, the aggregate of the net assets
of the registered open-end investment companies to which Colonial or any of
its subsidiaries serves as an investment adviser or sub-adviser and which are
underlying funding vehicles of the variable annuity or variable life
insurance products offered by Keyport and certain of its affiliates
(collectively, "Liberty Variable Funds"), determined in substantially the
same manner, without giving effect to any action taken by Liberty Financial
or any of its affiliates which results in those assets no longer being
included in Specified Assets Under Management. The effects on Specified
Assets Under Management occasioned by changes (positive or negative) in the
market value of portfolio assets constituting Specified Assets Under
Management
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between the close of business on October 12, 1994 and the close of business
on the Adjustment Date shall be entirely factored out of Specified Assets
Under Management as of the close of business on the Adjustment Date, as shall
be set forth in a certificate, prepared in a manner consistent with past
practices of Colonial and practices prevailing generally in the mutual fund
industry, to be delivered by Colonial to Liberty Financial not later than the
close of business on the date following the Adjustment Date (which
certificate shall be subject to review by, and the concurrence of, Liberty
Financial, such concurrence not to be unreasonably withheld). Notwithstanding
the foregoing, Specified Assets Under Management shall not include (i) assets
which are controlled by Liberty Financial or any of its affiliates (other
than net assets in the Liberty Variable Funds), and (ii) the assets of
Colonial's sole institutional advisory client.
Election Forms
Accompanying this Prospectus/Proxy Statement is a letter of transmittal and
election form (collectively, the "Election Form") pursuant to which each
holder of Common Stock may elect to receive cash or LFC Preferred Stock in
lieu of LFC Common Stock and other related materials. AN ELECTION BY A HOLDER
OF COLONIAL SHARES TO RECEIVE CASH OR LFC PREFERRED STOCK SHALL HAVE BEEN
DULY MADE ONLY IF THE PAYING AGENT SHALL HAVE RECEIVED BY 5:00 P.M., NEW YORK
CITY TIME, ON THE DAY WHICH IS TWO BUSINESS DAYS PRIOR TO THE COLONIAL MEETING
(FRIDAY, MARCH 17, 1995) (THE "ELECTION DEADLINE"), A PROPERLY COMPLETED AND
DULY EXECUTED ELECTION FORM ACCOMPANIED BY EITHER (I) THE CERTIFICATE OR
CERTIFICATES OF COMMON STOCK COVERED BY SUCH ELECTION FORM DULY ENDORSED OR
OTHERWISE ACCEPTABLE FOR TRANSFER OR (II) AN APPROPRIATE GUARANTY OF DELIVERY
OF SUCH CERTIFICATE OR CERTIFICATES (PROVIDED THAT SUCH CERTIFICATES ARE IN
FACT DELIVERED WITHIN FIVE (5) NASDAQ TRADING DAYS OF THE DATE OF DELIVERY OF
THE GUARANTY), LIBERTY FINANCIAL SHALL HAVE THE RIGHT TO MAKE REASONABLE
DETERMINATIONS AND TO ESTABLISH REASONABLE PROCEDURES IN GUIDING THE PAYING
AGENT IN ITS DETERMINATION AS TO THE VALIDITY OF ELECTION FORMS AND OF ANY
REVISION, REVOCATION OR WITHDRAWAL THEREOF. ANY STOCKHOLDER WHO HAS MADE AN
ELECTION MAY CHANGE OR REVOKE THAT ELECTION AT ANY TIME PRIOR TO THE ELECTION
DEADLINE BY SUBMITTING A REVISED ELECTION FORM OR A NOTICE OF REVOCATION, AS
THE CASE MAY BE, TO THE PAYING AGENT PRIOR TO SUCH DEADLINE. ANY STOCKHOLDER
WHO FAILS TO DELIVER BY THE ELECTION DEADLINE A PROPERLY COMPLETED AND DULY
EXECUTED ELECTION FORM AND STOCK CERTIFICATES OR GUARANTY AS PROVIDED ABOVE
SHALL NOT BE ENTITLED TO RECEIVE CASH OR LFC PREFERRED STOCK IN THE MERGER
AND SHALL RECEIVE ONLY LFC COMMON STOCK.
Treatment of Fractional Shares
No fractional shares of LFC Common Stock will be issued in the Merger.
Holders of Common Stock who would otherwise have been entitled to receive a
fraction of a share of LFC Common Stock (after taking into account all
certificates delivered by such holder) will receive in lieu thereof, cash
(without interest) in an amount equal to such fractional part of a share of
LFC Common Stock multiplied by $40.00 (subject to reduction in certain
circumstances as provided above). Fractional shares of LFC Preferred Stock
may be issued.
Dissenting Shares; Appraisal Rights
No conversion of Common Stock into a right to receive LFC Common Stock, cash
or LFC Preferred Stock will be made with respect to any shares of Common
Stock as to which a stockholder of Colonial has properly elected to exercise
any rights to appraisal in accordance with the Massachusetts General Laws
("Dissenting Shares"). Under the Massachusetts General Laws, including in
particular the MBCL, any Colonial stockholder (i) who files with Colonial an
objection to the Merger in writing before the approval of the Merger by the
stockholders of Colonial and who states in such objection that such
stockholder intends to demand payment for his or her shares if the Merger is
concluded and (ii) whose shares are not voted in favor of the Merger, shall
be entitled to demand payment for his or her shares of Common Stock and an
appraisal of the value thereof, in accordance with the provisions of Sections
85 through 98 of the MBCL. See "Appraisal Rights." If, after the Effective
Time, a holder of Dissenting Shares fails to perfect or loses any such right
of appraisal, each Dissenting Share of such stockholder shall be treated as a
share that had been converted as of the Effective Time into the right to
receive LFC
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Common Stock, even if the stockholder shall have made a timely election to
receive cash or LFC Preferred Stock.
Terms of Liberty Financial Series A Convertible Preferred Stock
In connection with the Merger, Liberty Financial will issue up to 1,040,000
shares of the LFC Preferred Stock. See "Comparison of Stockholders' Rights
and Description of LFC Capital Stock" for a description of the preferences,
voting powers, qualifications and special or relative rights and privileges
of the LFC Preferred Stock.
Stockholders Agreement
Each holder of Common Stock who elects to receive LFC Preferred Stock shall
also be entitled (but shall not be obligated) to become a party to the
Stockholders Agreement among Liberty Financial, Liberty Mutual and those
other Colonial stockholders making such election. An election to become a
party to the Stockholders Agreement may be made by properly completing the
appropriate provisions of the Election Form and delivering the same to the
Paying Agent as provided above.
The Stockholders Agreement provides that the holder of shares of LFC
Preferred Stock who becomes a party to the Stockholders Agreement (a
"Holder") may not voluntarily or involuntarily Transfer (as hereinafter
defined) the Holder's LFC Preferred Stock without the prior written consent
of Liberty Financial prior to the fifth anniversary of the closing date of
the Merger, except to a Permitted Transferee (as hereinafter defined).
"Permitted Transferee" means (i) if the Holder is an individual, a trust or
similar entity for the benefit, primarily, of the Holder or the Holder's
Immediate Family, (ii) a person or entity to whom a Transfer is made by
operation of law or legal process, including, without limitation, a decree of
divorce, order in a proceeding under Title 11 of the United States Code (or
any successor statute), the laws of descent and distribution or otherwise by
reason of the Holder's death or legal incompetency, (iii) if the Holder is a
corporation, a successor corporation in the event of a reorganization of such
corporate Holder, (iv) a corporation or trust qualified under section
501(c)(3) of the Code, or (v) a bona fide pledgee. "Transfer" means any
voluntary or involuntary sale, transfer, disposition, pledge or assignment,
by gift or otherwise, provided, however, that the term shall not include
ordinary proxies or powers of attorney with respect to voting of shares.
"Immediate Family" means, with respect to an individual, such individual's
spouse, children, adopted children and parents.
A precondition to each Transfer of LFC Preferred Stock to a Permitted
Transferee shall be that the Permitted Transferee shall have duly executed
and delivered to LFC an agreement in a form reasonably satisfactory to
Liberty Financial by which such Permitted Transferee shall become a party to
the Stockholders Agreement and such LFC Preferred Stock shall be made subject
to the Stockholders Agreement, provided, however, that a person or entity to
whom a Transfer is made by operation of law or legal process as described
above shall have the option of not becoming a party to the Stockholders
Agreement, exercisable by written notice to Liberty Financial in connection
with the registration of such Transfer to such Permitted Transferee, in which
case such Permitted Transferee and such LFC Preferred Stock shall cease to be
subject to the restrictions, or entitled to the benefits, of the Stockholders
Agreement. The Stockholders Agreement also provides that at any time during
the first 60 days after the fifth anniversary of the closing date of the
Merger, any Holder may elect to sell to Liberty Mutual, and Liberty Mutual
shall be obligated to purchase, all, but no less than all, of the LFC
Preferred Stock then owned by such Holder (the "Put Shares") at a price of
$50.00 per Put Share (adjusted for any stock splits, dividends or similar
recapitalization events affecting the Put Shares), plus accrued but unpaid
dividends through the date of purchase in respect of the Put Shares.
The restrictions on Transfer and the provisions requiring the purchase of the
Put Shares by Liberty Mutual contained in the Stockholders Agreement do not
apply to any shares of LFC Common Stock acquired upon conversion of LFC
Preferred Stock and nothing contained in the Stockholders Agreement restricts
such conversion.
See "Comparison of Stockholders' Rights and Description of LFC Capital Stock"
for a more detailed description of the Stockholders Agreement.
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Procedures for Exchange of Certificates
Manner of Exchange
As soon as practicable after the Effective Time, each holder of an
outstanding certificate which prior thereto represented shares of Common
Stock shall, upon surrender to the Paying Agent of such certificate or
certificate (if not previously surrendered), be entitled to receive a
certificate or certificates representing the appropriate number of shares of
LFC Common Stock to which such holder is entitled and cash in lieu of any
fractional shares of LFC Common Stock. To the extent the holder has validly
elected to receive cash or LFC Preferred Stock, the holder will receive
(subject to reduction in certain circumstances as provided in this
Prospectus/Proxy Statement), respectively, (i) the amount of cash which the
aggregate number of shares of Common Stock previously represented by such
certificate(s) surrendered shall have been converted into the right to
receive or (ii) a certificate or certificates representing the appropriate
number of shares of LFC Preferred Stock which the aggregate number of shares
of Common Stock previously represented by such certificate(s) shall have been
converted into the right to receive. No interest will accrue on any cash
payable as consideration for Common Stock or in lieu of fractional shares of
LFC Common Stock.
Common Stock certificates or guarantees of delivery should be forwarded to
the Paying Agent with the accompanying Election Form and should not be
returned with the accompanying proxy.
The Paying Agent shall accept certificates previously representing Common
Stock upon compliance with such reasonable terms and conditions as the Paying
Agent may impose to effect an orderly exchange thereof in accordance with
normal exchange practices. If any portion of the Consideration to be paid in
the Merger is to be delivered to any person other than the person in whose
name the certificate representing shares of Common Stock surrendered in
exchange therefor is registered, it shall be a condition to such exchange
that the certificate so surrendered shall be properly endorsed or otherwise
in a proper form for transfer and that the person requesting such exchange
shall pay to the Paying Agent any transfer or other taxes required by reason
of the payment of such consideration to a person other than the registered
holder of the certificate surrendered, or shall establish to the satisfaction
of the Paying Agent that such tax has been paid or is not applicable. After
the Effective Time, there shall be no further transfer on the records of
Colonial or its transfer agent of certificates representing shares of Common
Stock and if such certificates are presented to Colonial for transfer, they
shall be cancelled against delivery of the Consideration as provided above.
As soon as practicable after the Effective Time, the Paying Agent will mail
transmittal instructions and a form of letter of transmittal to each person
who was a Colonial stockholder immediately prior to the Effective Time who
did not properly complete and return an Election Form prior to the Election
Deadline. The transmittal instructions will describe the procedures for
surrendering the certificates that prior to the Merger represented Common
Stock in exchange for the Colonial certificates representing LFC Common
Stock. Delivery shall be effected, and risk of loss and title to the Liberty
Financial certificates shall pass, only upon actual delivery of the Colonial
certificates to the Paying Agent. Upon surrender of the Colonial certificates
for cancellation to the Paying Agent, together with a duly executed letter of
transmittal and such other documents as the Paying Agent may reasonably
require, such Colonial certificates will be cancelled and the holder of such
Colonial certificates will receive a certificate representing that number of
whole shares of LFC Common Stock to which the former Colonial stockholder is
entitled pursuant to the provisions of the Merger Agreement, in addition to
payment in cash for any fractional share of LFC Common Stock.
Rights of Holders of Common Stock Prior to Surrender
After the Effective Time, no dividends or distributions with a record date
after the Effective Time with respect to LFC Common Stock or LFC Preferred
Stock, as the case may be, shall be paid to the holder of any unsurrendered
certificate representing Common Stock until the surrender for exchange of
such certificate has been made. Following surrender for exchange of any such
certificate, the holder of such certificate will receive, without interest,
(i) at the time of surrender, the dividends and other distributions
theretofore paid with respect to such shares of LFC Common Stock or LFC
Preferred Stock, as the case may be, since the Effective Time and (ii) at the
appropriate payment date, the amount of dividends or
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other distributions with a record date after the Effective Time but prior to
such surrender and with a payment date subsequent to such surrender, payable
with respect to such shares of either LFC Common Stock or LFC Preferred
Stock. Under the terms of the Merger Agreement, Colonial as it exists after
the Effective Time (the "Surviving Corporation") will pay any dividends on
Common Stock with a record date prior to the Effective Time and which remain
unpaid at the Effective Time.
Lost, Stolen or Destroyed Certificates
Any Colonial stockholder whose certificate for any of his or her shares of
Common Stock has been lost, stolen or destroyed should immediately call State
Street Bank and Trust Company, Colonial's Transfer Agent, at 1 (800) 426-5523
for information regarding the procedures to be followed for replacing the
certificate. Until a replacement certificate is obtained, the Colonial
stockholder will be unable to properly surrender the certificate to the
Paying Agent.
Conversion of Liberty Financial Stock
Pursuant to the Merger Agreement and immediately prior to the Effective Time,
Liberty Financial will (i) amend and restate its Articles of Organization to
change the authorized capital stock of Liberty Financial to 100,000,000
shares of LFC Common Stock, and 10,000,000 shares of preferred stock, $.01
par value and (ii) effect the Parent Contribution pursuant to which Parent
will contribute all of its assets (other than the Excluded Assets, as defined
below) to Liberty Financial in exchange for an aggregate of 22,812,200
additional shares of LFC Common Stock and the assumption by Liberty Financial
of all of Parent's liabilities (including, without limitation, all unknown,
contingent or otherwise inchoate liabilities) in existence immediately prior
to the Parent Contribution ("Assumed Liabilities"). "Excluded Assets" consist
of (i) Parent's existing equity interest in Liberty Financial and (ii) a $30
million promissory note of SteinRoe Services, Inc., a wholly-owned subsidiary
of Parent, bearing interest, payable, semi-annually, at 8% per annum and due
(without scheduled mandatory prepayments) on March 31, 2000 (the "SSI Note").
As part of the Parent Contribution, Liberty Financial will assume the Assumed
Liabilities, including all obligations under benefit plans and the assumption
of all outstanding stock options to acquire Parent Common Stock. Thereafter,
but also prior to the Effective Time, Liberty Financial will file and cause
to become effective with the Massachusetts Secretary of State a certificate
of designation providing the preferences, voting powers, qualifications,
special and relative rights and privileges and other terms of the LFC
Preferred Stock. See "--Terms of Liberty Financial Series A Convertible
Preferred Stock."
The Merger Agreement also provides for an adjustment (the "Effective Time
Adjustment") of all outstanding stock options for Liberty Financial capital
stock granted under Liberty Financial's 1990 Stock Option Plan (the "LFC
Stock Options") as of the Effective Time. After giving effect to the
Effective Time Adjustment, the LFC Stock Options outstanding on the date of
this Prospectus/Proxy Statement will consist of options to purchase an
aggregate of 1,402,211 shares of LFC Common Stock at a weighted- average
exercise price per share of $18.01. In addition, Liberty Financial reserved
the right under the Merger Agreement to make additional adjustments (the
"Additional Adjustments") to the number of shares issuable upon exercise of
each such LFC Stock Option during the 30-day period following the Effective
Time in a manner determined by the Compensation Committee of Liberty
Financial's Board of Directors. The Compensation Committee has determined to
make such Additional Adjustments based, in part, on average trading prices
for the LFC Common Stock for a specified period following the Effective Time.
Such Effective Time and Additional Adjustments are being made to keep the
optionholder in the same economic position as before the Merger. After these
adjustments, the difference between the aggregate exercise price of the
options and the aggregate value of the shares issuable thereunder after the
Merger (as measured by such average trading prices) will be the same as the
difference between the aggregate original exercise price of such options and
the aggregate value of the shares issuable before the Merger (as measured by
the formula value determined under Liberty Financial's 1990 Stock Option
Plan).To the extent the Additional Adjustments result in an increase in the
number of shares subject to the LFC Stock Options (as adjusted by the
Effective Time Adjustment), Parent will contribute to Liberty Financial's
capital a number of shares of LFC Common Stock equal to the incremental
amount of LFC Common Stock equivalents of such LFC Stock Options resulting
from the Additional Adjustments, determined in accordance with GAAP employing
the treasury stock method of accounting for such options.
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As indicated above and as provided in the Merger Agreement, immediately prior
to the Effective Time, Parent will contribute all of its assets (other than
the Excluded Assets) to Liberty Financial in exchange for 22,812,200
additional shares of LFC Common Stock and the assumption by Liberty Financial
of the Assumed Liabilities. The indebtedness evidenced by the SSI Note was
taken into account in the negotiations which resulted in the agreement
reflected in the Merger Agreement regarding the relative ownership interests
in Liberty Financial of Parent, on the one hand, and the holders of Common
Stock, on the other hand, immediately after the Effective Time.
Conduct of Business Pending Merger
Colonial
The Merger Agreement contains certain restrictions on the conduct of the
business of Colonial and its subsidiaries pending consummation of the Merger.
In particular, Colonial has agreed that it and each of its subsidiaries will
act and carry on their respective businesses in the ordinary course of
business and, to the extent consistent therewith, use reasonable efforts to
preserve intact their current business organizations and assets, keep
available the services of their current key officers and employees and
preserve the goodwill of those engaged in material business relationships
with them.
The Merger Agreement also prohibits Colonial from engaging in certain
activities prior to the Effective Time without the prior written consent of
Liberty Financial. Specifically, without such consent, Colonial may not, and
may not permit its subsidiaries to:
(a) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any of
Colonial's outstanding capital stock (other than Colonial's ordinary
quarterly cash dividend in the amount of $.15 per share of Common Stock, in
accordance with usual record and payment dates and in accordance with
Colonial's usual dividend practice; provided, however, that Colonial may
declare, and the Surviving Corporation will pay, a cash dividend at an annual
rate of $.60 per share for the period from Colonial's final regular quarterly
dividend payment date prior to the date of the closing of the Merger (the
"Closing Date") through the Closing Date, payable to holders of record of the
Common Stock as of immediately prior to the Effective Time), (y) split,
combine or reclassify any of its outstanding capital stock or issue or
authorize the issuance of any other securities in respect of, in lieu of or
in substitution for shares of its outstanding capital stock, or (z) purchase,
redeem or otherwise acquire any shares of outstanding capital stock or any
rights, warrants or options to acquire any such shares except, in the case of
clause (z), for the acquisition of shares of Common Stock (i) in accordance
with the Amended and Restated Stock Purchase Agreement dated November 19,
1982 among Colonial and certain individuals party thereto, as amended and in
effect on October 12, 1994 (the "Company Stock Purchase Agreement"), and (ii)
from holders of unexercised outstanding stock options to purchase shares of
Common Stock ("Company Stock Options") in full or partial payment of the
exercise price payable by such holder upon exercise of Company Stock Options
outstanding on October 12, 1994;
(b) issue, sell, grant, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or securities convertible into, or
any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities, except for the issuance of shares of
Common Stock (i) in accordance with the Company Stock Purchase Agreement or
(ii) upon exercise of Company Stock Options outstanding on October 12, 1994
(and without limiting the generality of the foregoing, Colonial may not issue
any stock options or similar securities or interests from and after October
12, 1994);
(c) amend its articles of organization, by-laws or other comparable charter
or organizational documents;
(d) acquire any business or any corporation, partnership, joint venture,
association or other business organization or division thereof, except as
disclosed previously to Liberty Financial;
(e) sell, mortgage or otherwise encumber or subject to any pledges, claims,
liens, charges, encumbrances and security interests of any kind or nature
whatsoever (collectively, "Liens") or otherwise dispose of any of its
properties or assets that are material to Colonial and its subsidiaries taken
as a whole, except in the ordinary course of business or as previously
disclosed to Liberty Financial;
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(f) except as previously disclosed to Liberty Financial, (i) incur any
indebtedness for borrowed money or guaranty any such indebtedness of another
person, other than pursuant to Colonial's Credit Agreement dated as of May 5,
1993, as amended and restated as of December 17, 1993, as amended through the
date of this Prospectus/Proxy Statement, with certain lenders named therein
and The First National Bank of Boston, as Agent, in an aggregate principal
amount not to exceed $120,000,000 at any time outstanding, and pursuant to
Colonial's Promissory Note dated May 1, 1994 in favor of The First National
Bank of Boston, in an aggregate principal not to exceed $10,000,000 at any
time outstanding or (ii) make any loans or advances to any other person,
other than to any direct or indirect wholly-owned subsidiary of Colonial and
other than routine advances to employees;
(g) except as previously disclosed to Liberty Financial, make any tax
election (other than elections required by law and made in the ordinary
course of business not giving rise to additional material tax liabilities) or
settle or compromise any tax liability that could reasonably be expected to
be material to Colonial and its subsidiaries taken as a whole;
(h) except as previously disclosed to Liberty Financial, pay, discharge,
settle or satisfy any claims, liabilities or obligations (absolute, accrued,
asserted or unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction, in the ordinary course of business consistent with
past practice or in accordance with their terms (or in terms more favorable
to Colonial), of liabilities reflected or reserved against in, or
contemplated by, the most recent consolidated financial statements (or the
notes thereto) of Colonial included in the Filed SEC Documents (as such term
is defined in the Merger Agreement) or incurred since the date of such
financial statements in the ordinary course of business consistent with past
practice;
(i) except in the ordinary course of business, modify, amend or terminate any
material agreement, permit, concession, franchise, license or similar
instrument to which Colonial or any subsidiary is a party or waive, release
or assign any material claims or rights thereunder; or
(j) authorize any of, or commit or agree to take any of, the foregoing
actions.
Liberty Financial
The Merger Agreement contains certain restrictions on the conduct of the
business of Parent, Liberty Financial and its subsidiaries pending
consummation of the Merger. In particular, Parent has agreed that it and each
of its subsidiaries will carry on their respective businesses in the usual,
regular and ordinary course in substantially the same manner as conducted
prior to the date of the Merger Agreement and, to the extent consistent
therewith, use all reasonable efforts to preserve intact their business
organizations, keep available the services of their officers and employees
and preserve their relationships with customers, suppliers, licensors,
licensees, distributors and others having business dealings with them to the
end that their good will and on-going businesses shall be unimpaired at the
Effective Time.
The Merger Agreement also prohibits Parent and Liberty Financial from
engaging in certain activities prior to the Effective Time. Specifically,
except for transactions previously disclosed to Colonial, neither Parent nor
Liberty Financial may:
(a) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property), in respect of, any
outstanding capital stock of Parent or Liberty Financial (except that Parent
may distribute the SSI Note to Liberty Mutual Equity Corporation, its
principal stockholder) or (y) split, combine or reclassify any of its
outstanding capital stock or issue or authorize the issuance of any other
securities in respect of, in lieu of or in substitution for shares of
Parent's or Liberty Financial's outstanding capital stock (other than
effecting the Parent Contribution as contemplated in the Merger Agreement
(see "--Conversion of Liberty Financial Stock" and "Certain Information
Regarding Liberty Financial--Relationships with Liberty Mutual"));
(b) issue, sell, grant, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities, except for effecting the Parent
Contribution and any adjustments to stock options of Parent (including the
assumption thereof by Liberty Financial pursuant to the Parent Contribution)
contemplated by the Merger Agreement;
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(c) acquire any business or any corporation, partnership, joint venture,
association or other business organization or division thereof, in each case
if any such action could reasonably be expected to require amendment of this
Prospectus/Proxy Statement; or
(d) authorize any of, or commit or agree to take any of, the foregoing
actions.
No Solicitations; Fiduciary Duties
Colonial has agreed in the Merger Agreement that, except as described below,
neither Colonial nor any of its subsidiaries shall permit any officer,
director, employee, or any investment banker, attorney or other advisor or
representative of Colonial or any of its subsidiaries to, directly or
indirectly, (i) solicit, initiate or encourage the submission of any proposal
with respect to a merger, consolidation, share exchange or similar
transaction involving Colonial or any subsidiary of Colonial, or any purchase
of all or any significant portion of the assets of Colonial or any subsidiary
of Colonial, or any equity interest in Colonial or any subsidiary of Colonial
other than the transactions contemplated by the Merger Agreement (an
"Acquisition Proposal") or (ii) participate in any discussions or
negotiations regarding, or furnish to any person any information with respect
to, or take any other action to facilitate any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal.
Colonial has also agreed pursuant to the Merger Agreement that the Colonial
Board shall not (i) withdraw or modify, or propose to withdraw or modify, in
a manner adverse to Liberty Financial or Merger Subsidiary, the approval or
recommendation by the Colonial Board of the Merger Agreement or the Merger,
(ii) approve or recommend, or propose to approve or recommend, any
Acquisition Proposal or (iii) enter into any agreement with respect to any
Acquisition Proposal, unless Colonial receives an Acquisition Proposal and
the Colonial Board determines in good faith, following consultation with
outside counsel, that in order to comply with its fiduciary duties to
stockholders under applicable law it is necessary for the Colonial Board to
withdraw or modify its approval or recommendation of the Merger Agreement or
the Merger, approve or recommend such Acquisition Proposal, enter into an
agreement with respect to such Acquisition Proposal or terminate the Merger
Agreement. In the event that the Colonial Board makes such a determination,
Colonial, any of its subsidiaries or any officer, director or employee of, or
any investment banker, attorney or other advisor or representative of,
Colonial or any of its subsidiaries, may participate in negotiations
regarding such Acquisition Proposal. Colonial will, upon demand by Liberty
Financial, pay a termination fee to Liberty Financial in such an event. See "
- -- Termination of the Merger Agreement; Fee."
Colonial has further agreed to notify Liberty Financial of the receipt of any
Acquisition Proposal or any inquiry which could lead to an Acquisition
Proposal and to inform Liberty Financial of the status of any such
laws. In particular, the discussion set forth
below may not apply to special classes of taxpayers, including, without
limitation, foreign persons, tax-exempt entities, and holders who acquired
their Common Stock pursuant to the exercise of an employee stock option or
otherwise as compensation. No rulings have been or will be requested from the
Internal Revenue Service (the "IRS") with respect to any of the matters
discussed herein. The discussion is based upon federal income tax laws as in
effect on the date hereof, and there can be no assurance that future
legislation, regulations, administrative rulings, or court decisions will not
adversely affect the accuracy or validity of the statements contained herein.
In General
Bingham, Dana & Gould, counsel for Colonial, and Mayer, Brown & Platt,
special tax counsel to Liberty Financial, are of the opinion that (i) the
Parent Contribution together with the transfer of stock of Colonial by its
stockholders pursuant to the Merger constitute an integrated exchange of
property for stock described in Section 351 of the Code as to which no gain
or loss will be recognized to the stockholders of Colonial except, in the
case of holders of Common Stock (including, without limitation, holders of
Dissenting Shares), with respect to cash received by such holders in
accordance with the Merger Agreement, and (ii) no gain or income will be
recognized by Liberty Financial, Colonial or Merger Subsidiary as a result of
the Merger or the Parent Contribution. These opinions and the discussion
below are based on certain facts and representations received from Colonial,
Parent, Liberty Financial, and Merger Subsidiary. Except as provided below,
the following discussion assumes, in accordance with the opinions described
above, that the transfer of stock pursuant to the Merger will be treated as a
transaction to which Section 351 applies. If the cash component of the Merger
is not fully subscribed, the Merger could also be treated as a tax-free
reorganization within the meaning of Section 368 of the Code. The
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tax consequences of the Merger qualifying as a tax-free reorganization within
the meaning of Section 368 are set forth below under the caption "--Tax
Consequences to Holders of Common Stock if the Merger Qualifies as a Tax-Free
Reorganization."
Tax Treatment of Holders of Common Stock
Exchanges of Common Stock pursuant to the Merger will have the federal income
tax consequences described below. This discussion assumes that the Common
Stock exchanged by each holder in the Merger is held as a capital asset.
Exchange of Common Stock Solely for LFC Common Stock
A holder of Common Stock who exchanges all of his Common Stock solely for LFC
Common Stock in the Merger will not recognize gain or loss on the exchange.
The aggregate tax basis of the LFC Common Stock received will be equal to the
aggregate tax basis of the Common Stock exchanged therefor, and the holding
period of the LFC Common Stock received will include the holding period of
the Common Stock exchanged. See also the discussion under the caption "--Cash
Received in Lieu of Fractional Shares of LFC Common Stock."
Exchange of Common Stock Solely for Cash
A holder of Common Stock who exchanges all of his Common Stock solely for
cash in the Merger, including pursuant to the exercise of appraisal rights,
if any, will recognize capital gain or loss equal to the difference between
the amount of cash received and the adjusted tax basis of the Common Stock
surrendered.
Exchange of Common Stock for a Combination of Cash and LFC Common Stock
A holder of Common Stock who exchanges his Common Stock for cash and LFC
Common Stock in the Merger will not recognize any loss. Such a holder will
realize gain measured by the excess, if any, of (i) the sum of the amount of
cash and the fair market value of the LFC Common Stock received in the Merger
over (ii) the holder's adjusted tax basis in the Common Stock. However, any
such gain will be recognized (and thus subject to tax) only to the extent of
the cash received. The recognized gain will constitute long- or short- term
capital gain, depending on whether the holder held the Common Stock for more
than one year. The holder's adjusted tax basis in the LFC Common Stock
received generally will be the same as the adjusted tax basis of the Common
Stock surrendered, decreased by the amount of cash received and increased by
the amount of gain recognized. The holding period of the LFC Common Stock
received will include the period during which the Common Stock surrendered
was held.
Exchange of Common Stock for LFC Preferred Stock or for a Combination of LFC
Common Stock and LFC Preferred Stock
A holder of Common Stock who exchanges his Common Stock for LFC Preferred
Stock or for a combination of LFC Common Stock and LFC Preferred Stock in the
Merger will not recognize any gain or loss on the exchange. The aggregate tax
basis of the LFC Preferred Stock and the LFC Common Stock (if any) received
will be equal to the aggregate tax basis of the Common Stock exchanged
therefor (allocated among the LFC Preferred Stock and any LFC Common Stock in
proportion to their respective fair market values), and the holding period of
the LFC Preferred Stock and any LFC Common Stock received will include the
holding period of the Common Stock exchanged. See also the discussion below
under the caption "--Cash Received in Lieu of Fractional Shares of LFC Common
Stock."
If the redemption price of the LFC Preferred Stock (potentially including any
dividend arrearages) exceeds its issue price, all or a portion of the excess
may be taxable as a dividend; any such dividend may be included in income
over the life of the LFC Preferred Stock. For this purpose, the life of the
LFC Preferred Stock will be no more than ten years, and, in the case of
holders who become parties to the Stockholders Agreement, will be no more
than five years.
Corporate holders of LFC Preferred Stock should be aware that it is possible,
but not certain, that if they become parties to the Stockholders Agreement
their holding period for purposes of the dividends received deduction for
corporations could be suspended. Under those circumstances, such holders may
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not be eligible for the dividends received deduction for corporations with
respect to dividends on the LFC Preferred Stock.
Cash Received in Lieu of Fractional Shares of LFC Common Stock
No fractional shares of LFC Common Stock will be issued in the Merger. A
holder who receives cash in lieu of a fractional share of LFC Common Stock
will be treated as having received the fractional share of LFC Common Stock
and having sold it to Liberty Financial. The holder generally will recognize
capital gain or loss equal to the difference between the amount of cash
received in the deemed sale to Liberty Financial of the fractional share of
LFC Common Stock and the adjusted tax basis allocated to the fractional
share, and the holder's basis in LFC Common Stock received will be decreased
by the amount of basis so allocated to the fractional share.
Tax Consequences to Holders of Common Stock if the Merger Qualifies as a
Tax-Free Reorganization
If the cash component of the Merger is not fully subscribed, the Merger could
also be treated as a tax-free reorganization within the meaning of Section
368 of the Code if certain other conditions are met. If the Merger so
qualifies, the tax consequences to a holder of Common Stock will be
essentially the same as the tax consequences described above except that (i)
any gain recognized by a holder of Common Stock as a result of the Merger
could be taxed as a dividend (albeit such treatment is unlikely) and (ii) the
LFC Preferred Stock received by some holders in the Merger could conceivably
be "Section 306 stock." Holders of Section 306 stock may incur certain
adverse tax consequences with respect to certain sales or redemptions of the
stock, including ordinary income treatment with respect to all or a portion
of the amount realized on the sale or redemption.
Backup Withholding
In order to avoid "backup withholding" of federal income tax on payments of
cash to a holder who exchanges all or a portion of his Common Stock for cash
in the Merger or pursuant to appraisal rights, the holder must, unless an
exception applies under applicable law and regulations, provide the payor of
the cash with such holder's correct taxpayer identification number ("TIN") on
a Form W-9 and certify under penalties of perjury that the number is correct
and that the holder is not subject to backup withholding. A Form W-9 is
included as part of the materials accompanying the Election Form. If the
correct TIN and certifications are not provided, a $50 penalty may be imposed
on a holder by the IRS and any cash payments received by the holder in
exchange for Common Stock in the Merger (or pursuant to appraisal rights) may
be subject to "backup withholding" at a rate of 31%.
Tax Treatment of Liberty Financial, Colonial and Merger Subsidiary
No gain or loss will be recognized by Liberty Financial, Colonial, or Merger
Subsidiary as a result of the Merger or the Parent Contribution.
APPRAISAL RIGHTS
If the Merger becomes effective, a stockholder of Colonial who does not vote
in favor of the Merger and who follows the procedures prescribed under
Massachusetts law may require the Surviving Corporation to pay the fair
value, determined as provided under the MBCL, for the shares held by such
stockholder. The following is a summary of certain features of the relevant
sections of the MBCL, the provisions of which are set forth in full in
Appendix IV annexed hereto, and such summary is subject to and qualified in
its entirety by reference to such law. In order to exercise such statutory
appraisal rights, strict adherence to the statutory provisions is required,
and each stockholder who may desire to exercise such rights should carefully
review and adhere to such provisions.
A stockholder of Colonial who desires to pursue the appraisal rights
available to such stockholder must adhere to the following procedures: (1)
file a written objection to the Merger with Colonial before the taking of the
stockholders' vote on the Merger Agreement, stating the intention of such
stockholder to demand payment for shares owned by such stockholder if the
Merger Agreement is approved and
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the Merger is consummated; (2) refrain from voting in favor of the Merger
Agreement; and (3) within twenty days of the date of mailing of a notice by
the Surviving Corporation to objecting stockholders that the Merger has
become effective, make written demand (the "Demand") to the Surviving
Corporation for payment for said stockholder's shares. Such written objection
and the Demand should be delivered to The Colonial Group, Inc., One Financial
Center, Boston, Massachusetts 02111, Attention: General Counsel, and it is
recommended that such objection and demand be sent by registered or certified
mail, return receipt requested.
A stockholder who files the required written objection with Colonial prior to
the stockholder vote need not vote against the Merger, but a vote in favor of
the Merger will constitute a waiver of such stockholder's statutory appraisal
rights. (If a stockholder returns a proxy which is signed but on which no
preference is specified as to the proposal on the Merger and thereafter does
not revoke such proxy, it will be voted for the Merger, and the stockholder
will have failed to satisfy this condition.) A vote against the Merger does
not, alone, constitute a written objection. Pursuant to the applicable
statutory provisions, notice that the Merger has become effective will be
sent to the objecting stockholders of Colonial within ten days after the date
on which the Merger becomes effective. Objecting stockholders must then
deliver a Demand to the Surviving Corporation, in accordance with the
procedures described above.
The value of the Common Stock will be determined initially by the Surviving
Corporation and the dissenting stockholder. If, during the period of thirty
days after the expiration of the period during which the Demand may be made,
the Surviving Corporation and the stockholder fail to agree on an appraisal
value, either of them may file a bill in equity in the Superior Court of
Suffolk County, Massachusetts, asking that the Court determine the matter in
issue. The bill in equity must be filed within four months after the date of
expiration of the foregoing thirty-day period. If the bill in equity is
timely filed, the court or an appointed special master will hold a hearing.
After the hearing, the court shall enter a decree determining the fair value
of the Common Stock and shall order the Surviving Corporation to make payment
of such value, with interest, from the date of the vote approving the Merger,
if any, to the stockholders entitled to said payment, upon transfer by them
to the Surviving Corporation of the certificate or certificates representing
the Common Stock held by said stockholders.
For appraisal proceeding purposes, value is determined as of the day before
the approval of the Merger by stockholders, excluding any element of value
arising from the expectation or accomplishment of the Merger.
The enforcement by a stockholder of his or her request to receive payment for
shares of Common Stock as provided under the applicable statutory provisions
shall be an exclusive remedy except that such remedy shall not exclude the
right of a stockholder to bring or maintain an appropriate proceeding to
obtain relief on the ground that said corporate action will be or is illegal
or fraudulent as to said stockholder. However, in Coggins v. New England
Patriots Football Club, Inc., 397 Mass. 525 (1986), the Massachusetts Supreme
Judicial Court held that dissenting stockholders are not limited to the
statutory remedy of judicial appraisal where violations of fiduciary duty
exist.
A final judgment by the court or a special master determining the fair value
of the Common Stock would be binding on and enforceable by stockholders who
have perfected their statutory appraisal rights and the Surviving
Corporation, even if such fair value were determined to be less than the
amount provided for in the Merger Agreement. A stockholder who perfects his
rights as a dissenting stockholder will not, after the Effective Date, be
entitled to notices of meetings, to vote, or to receive dividends.
The law pertaining to the statutory appraisal remedy also contains provisions
regarding costs, dividends on dissenting shares, rights under dissenting
shares prior to purchase, discontinuance of dissenters' rights, and certain
miscellaneous matters.
Each share held by stockholders who seek to exercise appraisal rights and,
after the Effective Time, fail to perfect or lose any such right to
appraisal, shall be treated as a share that had been converted as of the
Effective Time into the right to receive LFC Common Stock as provided in the
Merger Agreement, even if a holder shall have made a timely election to
receive cash or LFC Preferred Stock prior to the vote on the Merger
Agreement. Such stockholders will not, therefore, have the right to receive
cash or LFC Preferred Stock under the Merger Agreement.
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<PAGE>
CERTAIN INFORMATION REGARDING
LIBERTY FINANCIAL
General
Liberty Financial is a diversified and integrated asset management
organization providing insurance and investment products to individuals and
institutions through multiple distribution channels. Liberty Financial has
combined product development, asset management and customer service through
Keyport, a specialist in single premium fixed and variable annuities, and
Stein Roe, a diversified investment advisory firm. Liberty Financial also has
distributed products through the Bank Marketing Group, a specialist in the
design and implementation of bank marketing programs for insurance and
investment products. As of September 30, 1994, Liberty Financial managed
approximately $28.9 billion of assets (approximately $22.9 billion as of
December 31, 1994).
Liberty Financial's strategy is to increase its assets under management
through ongoing product innovation, customer service, multiple distribution
channels, and focused marketing efforts. Historically, Liberty Financial's
largest source of revenues has been the net investment income derived from
the investments which support Keyport's fixed annuity business (principally
SPDAs) and its closed-block of single premium whole life insurance ("SPWLs").
Liberty Financial also derives fee income from asset management products and
services, including private managed accounts, mutual funds and variable
annuities. The sale of products through banks is an important element of
Liberty Financial's distribution strategy. During 1993 and the nine months
ended September 30, 1994, such distribution channels accounted for 38.1% and
39.7%, respectively, of Liberty Financial's total proprietary annuity and
mutual fund product sales and 77.7% and 70.0%, respectively, of Keyport's
annuity sales. Liberty Financial seeks to diversify further its sources of
income by increasing its fee-based assets under management. Income before
income taxes (as a percentage of Liberty Financial's total pretax income)
derived from fee-based assets and services was 10.7% in 1991, 21.1% in 1993
and 19.7% for the nine months ended September 30, 1994. See
"Business--Industry Segment Information." The Merger is in furtherance of
this strategy.
The appeal of certain insurance and investment products varies according to
an individual's age, income, risk tolerance and financial goals. Liberty
Financial offers a diversified product line designed to serve these needs at
various stages of an individual's life and earnings cycle. For example,
Keyport's variable annuities appeal to individuals during their net savings
years, while its fixed annuities appeal to older, more conservative customers
who seek a more stable source of income in their retirement. Stein Roe offers
a variety of mutual funds designed to appeal to a range of financial
objectives and risk tolerances. Stein Roe also provides private account
management for wealthy individuals and institutions. Liberty Financial
believes that it has established a mix of products that will appeal to
customers under a variety of economic and market conditions.
Corporate Structure and History
Parent was organized as a Delaware corporation in 1989 to become the holding
company for the direct and indirect financial services subsidiaries of
Liberty Mutual and was reincorporated in Massachusetts in 1991. The capital
stock of these subsidiaries was contributed to Parent as of January 1, 1990,
the date as of which Parent commenced operations. The subsidiaries included
Keyport, Stein Roe and Liberty Securities Corporation ("LSC"), a registered
broker-dealer that operates the Bank Marketing Group.
The Merger Agreement was originally executed by and among Parent, a
subsidiary of Parent and Colonial. In connection with the parties'
determination to make certain technical changes in the corporate structure of
the Merger, Parent formed Liberty Financial as a wholly-owned subsidiary of
Parent, and Liberty Financial formed Merger Subsidiary as a wholly-owned
subsidiary of Liberty Financial. On February 8, an amendment and restatement
of the Merger Agreement was executed pursuant to which, among other things,
each of Liberty Financial and Merger Subsidiary became a party to the Merger
Agreement and succeeded to certain of the rights and obligations of Parent
and such other subsidiary. Under the terms of the Merger Agreement,
immediately prior to the Effective Time, Parent will contribute
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<PAGE>
all of its assets (other than the Excluded Assets) to Liberty Financial in
exchange for 22,812,200 additional shares of LFC Common Stock and the
assumption by Liberty Financial of the Assumed Liabilities. Also immediately
prior to the Effective Time, Parent will change its name to "LFC Holdings,
Inc." and Liberty Financial will change its name to "Liberty Financial
Companies, Inc." Unless otherwise indicated, all references to Liberty
Financial in this Prospectus/Proxy Statement give effect to the Parent
Contribution and include Liberty Financial, its predecessors and its
subsidiaries, and all references to the Consolidated Financial Statements of
Liberty Financial shall be deemed references to the consolidated financial
statements of the Parent and its subsidiaries.
Liberty Financial's businesses have been built internally and through
acquisitions. These acquisitions included Keyport (acquired in 1988), Stein
Roe (80% acquired in 1986, with the remaining equity interests acquired
through 1990) and The PAMCO Group, Inc., a bank distribution marketer
acquired in 1988 and combined with the Bank Marketing Group in 1991. All
pre-1990 financial data and all pre-1990 descriptions of business activities
contained in this Prospectus/Proxy Statement reflect the historical
information of the constituent subsidiaries as if Liberty Financial had been
in existence on the dates on which Liberty Mutual acquired its interests in
such companies and as if Liberty Mutual had contributed such interests to
Liberty Financial at such times.
Liberty Financial is an indirect subsidiary of Liberty Mutual. As of the date
of this Prospectus/Proxy Statement the sole stockholder of Liberty Financial
is Parent, whose principal stockholder is Liberty Mutual Equity Corporation
("LMEC"). Following completion of the Merger, based on shares outstanding on
February 8, 1995, assuming that all holders of Colonial Common Stock receive
only shares of LFC Common Stock in the Merger, Liberty Mutual, through LMEC
and Parent, will own approximately 75.4% of the outstanding LFC Common Stock
(approximately 83.0% of the voting power of the LFC Stock if the maximum
amount of cash is paid and the maximum number of shares of LFC Preferred
Stock is issued in the Merger). Unless otherwise indicated, references in
this Prospectus/Proxy Statement to Liberty Mutual's ownership of Liberty
Financial shall be deemed to be references to its indirect ownership through
LMEC and Parent. See "RISK FACTORS--Control by Liberty Mutual; Potential
Conflicts of Interest" and "Relationships with Liberty Mutual."
Liberty Financial's principal executive offices are located at 600 Atlantic
Avenue, Boston, Massachusetts 02210-2214, and its telephone number is (617)
722-6000. Unless otherwise indicated, all cross references contained under
this caption of "CERTAIN INFORMATION REGARDING LIBERTY FINANCIAL" refer to
the applicable sub-section hereof.
Dividend Policy
Pursuant to the Merger Agreement, Liberty Financial has agreed to cause the
Surviving Corporation to pay, as soon as practicable following the Closing
Date, Colonial's regular cash dividend at an annualized rate of $.60 per
share for the period from Colonial's most recent ex-dividend date through the
Closing Date. Such dividend will be payable to holders of the Colonial Common
Stock immediately prior to the Effective Time of the Merger.
The holders of shares of LFC Preferred Stock will be entitled to receive
cumulative cash dividends on the shares of LFC Preferred Stock at the rate of
$2.875 per annum per share, payable in equal quarterly installments on March
31, June 30, September 30 and December 31, in each year, commencing on the
first such date following the 30th business day following the Closing Date.
The Board of Directors of Liberty Financial will declare such quarterly
dividends in each case from and to the extent Liberty Financial has funds
legally available therefor. The terms of the LFC Preferred Stock will prevent
the payment of any dividends on the LFC Common Stock unless full cumulative
dividends on the outstanding LFC Preferred Stock have been paid or declared
in full. See "Comparison of Stockholders' Rights and Description of LFC
Capital Stock--General Provisions Regarding LFC Common Stock and LFC
Preferred Stock; Description of Series A Convertible Preferred Stock" for a
more detailed description of the dividend rights of holders of the LFC
Preferred Stock.
Liberty Financial currently intends to establish an initial policy of
declaring and paying quarterly cash dividends of $0.15 per share of LFC
Common Stock beginning in the second quarter of 1995 (with the
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<PAGE>
result being that Colonial stockholders will continue to receive the annual
dividends currently paid to them by Colonial). The declaration and payment of
any dividends will be dependent upon Liberty Financial's results of
operations, financial condition, cash requirements, capital requirements of
subsidiaries, regulatory considerations and other relevant factors, and in
all events will be subject to the discretion of the Board of Directors and to
any preferential dividend rights of then outstanding LFC Preferred Stock. In
addition, the terms of any future indebtedness that Liberty Financial may
incur could also impose limits on Liberty Financial's ability to pay
dividends. Accordingly, there is no requirement, and no assurances can be
given, that dividends will be paid. Liberty Financial has not paid dividends
on its Common Stock during the last two fiscal years or during the nine
months ended September 30, 1994.
Liberty Financial's Board of Directors intends to establish an optional
dividend reinvestment plan (the "Dividend Plan") for holders of LFC Common
Stock following the Merger. Prior to the time at which Liberty Financial is
eligible to register under the Securities Act the offer and sale of shares
pursuant to the Dividend Plan on a Form S-3 Registration Statement (at least
one year after the Closing Date), participation in the Dividend Plan will be
conditioned upon ownership of at least 2,500,000 shares of LFC Common Stock
and the execution by the participant of an agreement containing
representations and warranties which are customary in connection with the
private sale of securities. This condition will effectively restrict
participation in the Dividend Plan to Liberty Mutual prior to such time as a
Form S-3 Registration Statement covering the Dividend Plan shares is
effective. Liberty Mutual has indicated that its present intention is to
participate in the Dividend Plan during 1995. Such participation, if
commenced, may be terminated at any time. Based upon Liberty Financial's
current expectations as to its liquidity and cash needs, Liberty Financial's
ability to pay dividends on the LFC Common Stock is dependent upon Liberty
Mutual electing to participate in the Dividend Plan. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Liquidity and Capital Resources."
As a holding company, Liberty Financial's ability to pay dividends will
depend largely upon the ability of its subsidiaries to make distributions to
it. In this regard, payments by Keyport to Liberty Financial are restricted
by the insurance laws of the State of Rhode Island, Keyport's state of
domicile. See "Risk Factors--Holding Company Structure; Dividend
Restrictions." Keyport has not paid any dividends since its acquisition by
Liberty Mutual in December, 1988. As of September 30, 1994, the amount of
dividends that Keyport could pay under such restrictions without the approval
of the Commissioner of Insurance of the State of Rhode Island was $51.7
million. Stein Roe is also subject to certain regulatory standards which may
restrict its ability to pay dividends. As of December 31, 1994, Stein Roe
exceeded the most restrictive of these standards by approximately $1.4
million. Stein Roe makes regular interest payments to Liberty Financial in
the amount of $10.8 million annually for an intra-company note with a
principal balance of $127.6 million as of September 30, 1994. After the
Effective Time, unrestricted cash balances and cash flows (if any) of
Colonial will also be available to Liberty Financial to make its regular
dividend payments.The terms of Colonial's existing senior credit facility
place certain limitations on the ability of Colonial to pay dividends.
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<PAGE>
Selected Financial Data
The selected statement of operations data, per share data and balance sheet
data presented below for each of the years ended December 31, 1991, 1992 and
1993 and as of December 31, 1992 and 1993 have been derived from Liberty
Financial's Consolidated Financial Statements which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, and which appear
elsewhere in this Prospectus/Proxy Statement , together with its report
thereon, and such financial data are qualified by reference to such financial
statements. The selected statement of operations data, per share data and
balance sheet data presented below for the year ended December 31, 1990 and
as of December 31, 1990 and 1991 are derived from Liberty Financial's audited
consolidated financial statements which are not included in this
Prospectus/Proxy Statement. The selected statement of operations data, per
share data and balance sheet data presented below for the year ended and as
of December 31, 1989, have been derived from Liberty Financial's unaudited
combined financial statements not included in this Prospectus/Proxy
Statement. The selected statement of operations data, per share data and
balance sheet data for the nine months ended September 30, 1993 and 1994 and
as of September 30, 1994 have been derived from Liberty Financial's unaudited
consolidated financial statements included elsewhere in this Prospectus/Proxy
Statement. Such unaudited combined or consolidated financial statements
include all adjustments, consisting only of normal recurring adjustments,
which Liberty Financial considers necessary for a fair presentation of the
results of Liberty Financial for such unaudited periods. The results for the
nine-month period ended September 30, 1994 are not necessarily indicative of
the results to be expected for the entire year. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
Historical selected financial data has not been presented for New LFC, Inc.,
as it was formed on January 26, 1995. Immediately prior to the Effective
Time, Parent will contribute all of its assets (other than the Excluded
Assets) to Liberty Financial in exchange for 22,812,200 additional shares of
LFC Common Stock and the assumption by Liberty Financial of the Assumed
Liabilities. The transfer of such assets and liabilities will be recorded at
historical cost and will be accounted for as if it were a pooling-
of-interests. As of the Effective Time, the historical consolidated financial
statements of Parent and its subsidiaries will effectively become those of
Liberty Financial and its subsidiaries.
The data set forth below should be read in conjunction with Liberty
Financial's Consolidated Financial Statements, including the notes thereto,
and "Management's Discussion and Analysis of Results of Operations and
Financial Condition" included elsewhere in this Prospectus/Proxy Statement.
The per share data set forth below have not been adjusted for the Parent
Contribution which is to be effected immediately prior to the Effective Time
of the Merger.
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Liberty Financial Companies, Inc.--Selected Historical Financial Data
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1989 1990 1991 1992 1993 1993 1994
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data(1) (in thousands, except per share data)
Revenues:
Net investment
income $542,444 $627,297 $692,920 $710,013 $675,309 $511,671 $512,994
Investment
management
revenues and
other fees(2) 62,474 72,322 81,770 94,072 105,962 77,969 77,563
Securities,
commissions and
other
revenues(3) 42,143 39,846 64,338 66,981 88,569 64,337 72,904
Realized
investment
gains (losses) (16,636) (4,962) 8,621 3,444 10,553 11,621 2,910
Total revenues 630,425 734,503 847,649 874,510 880,393 665,598 666,371
Expenses:
Interest credited
to
policyholders 431,126 503,900 568,844 569,563 501,073 381,358 352,237
Operating
expenses(4) 126,738 136,761 162,415 181,036 215,555 155,284 165,821
Option plan
compensation
expense(5) -- -- 189 36 22,071 1,495 6,686
Amortization of
value of
insurance in
force and
deferred policy
acquisition
costs 36,678 42,854 47,146 49,800 62,528 46,699 53,213
Amortization of
intangible
assets(6) 22,381 24,338 25,580 42,265 15,018 13,462 4,363
Guaranty fund
expense(7) 235 147 3,224 35,000 3,714 2,700 5,400
Interest
expense(8) 12,660 412 174 -- -- --- 2,700
Total expenses 629,818 708,412 807,572 877,700 819,959 600,998 590,420
Income (loss)
before income
taxes 607 26,091 40,077 (3,190) 60,434 64,600 75,951
Provision for
income taxes(9) 11,449 11,985 19,172 9,343 29,154 23,252 26,982
Net income (loss) $(10,842) $ 14,106 $ 20,905 $(12,533) $ 31,280 $ 41,348 $ 48,969
Per Share Data(10)
Net income
(loss)(11) $ (1.20) $ 1.57 $ 2.32 $ (1.39) $ 3.33 $ 4.59 $ 5.24
Book value(12) 31.94 50.22 68.84 68.08 70.98 72.53 71.92
</TABLE>
<TABLE>
<CAPTION>
September
Year Ended December 31, 30,
1989 1990 1991 1992 1993 1994
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data(1)
Total Investments $
$5,550,920 $6,444,204 $6,929,814 $8,151,591 $ 8,411,668 8,804,029
Intangible
assets(13) 105,057 117,964 92,451 50,186 35,168 30,805
Total assets 6,657,667 7,778,058 8,954,411 9,798,335 10,324,994 10,858,277
Long-term debt(8) 148,043 -- -- -- -- --
Stockholder's
equity(8) 287,468 452,019 619,566 612,689 638,828 647,359
</TABLE>
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Liberty Financial Companies, Inc. --Selected Historical
Financial Data (continued)
(1) Liberty Financial commenced operations in its present form as of January
1, 1990 when Liberty Mutual contributed to Liberty Financial its ownership
interest in its financial services subsidiaries. See "General." Accordingly,
the 1989 financial data have been combined to reflect the historical
financial information for such subsidiaries as if Liberty Financial had been
in existence and Liberty Mutual had contributed to Liberty Financial its
interests in such subsidiaries on the dates on which Liberty Mutual initially
acquired ownership thereof. The combined financial data for 1989 are
unaudited.
(2) Investment management revenues and other fees for the nine months ended
September 30, 1994 include $1.1 million related to certain client
relationships that were terminated during the period. See "Management's
Discussion and Analysis of Results of Operations and Financial Condition."
(3) Security commissions for the nine months ended September 30, 1994
include $21.3 million (including one bank client's commissions of $17.3
million) related to certain bank relationships that were terminated during
the period. In addition, other revenues include $4.1 million of payments
received in connection with one of the terminated programs. Other revenues
are comprised of premium income and policyholder assessments and other
revenues which, collectively, include surrender charges, mortality charges,
policy fees earned, contract fees assessed and premiums on life-contingent
supplementary contracts and immediate annuities. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
(4) Operating expenses are comprised of operating expenses, policy benefits
and claims and commission expense.
(5) See "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Option Plan Compensation Expense" for a discussion of
option plan compensation expense.
(6) In 1992, Liberty Financial changed its estimate of the carrying value of
certain intangible assets related to Stein Roe which resulted in additional
amortization expense of $21.0 million in 1992. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Amortization
Charge."
(7) In 1992, Keyport accrued $28.2 million for anticipated guaranty fund
assessments in connection with the failure of certain insurance companies.
See "Risk Factors--Guaranty Fund Assessments" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition."
(8) In 1990, the decrease in long-term debt and interest expense, and the
increase in stockholder's equity, reflect the contribution to the capital of
Liberty Financial by Liberty Mutual of previously outstanding indebtedness of
approximately $145.0 million. The increase in stockholder's equity in 1991
reflects an additional capital contribution from Liberty Mutual of $142.5
million. See "Management's Discussion and Analysis of Results of Operations
and Financial Condition--Liquidity and Capital Resources."
(9) For a discussion relating to Liberty Financial's income taxes, see
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Provision for Income Taxes" and Note 7 of Notes to Liberty
Financial's Consolidated Financial Statements.
(10) The per share data have not been adjusted for the Parent Contribution
that is to be effected prior to the Effective Time of the Merger.
(11) Based on the weighted average number of shares of LFC Common Stock and
common stock equivalents outstanding during each of the periods.
(12) Book value per share is computed by dividing total stockholder's equity
(including intangible assets) by the 9,000,000 shares of LFC Common Stock
outstanding at the end of the respective periods, except September 30, 1994,
when 9,001,000 shares were outstanding.
(13) Intangible assets represent intangible assets acquired through business
combinations accounted for as a purchase.
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<PAGE>
Management's Discussion and Analysis of
Results of Operations and Financial Condition
Overview
A substantial portion of Liberty Financial's operating earnings (80.3% for
the nine months ended September 30, 1994 and 78.9% for the year ended
December 31, 1993) relates to the net investment income derived from the
investments which support Keyport's fixed annuity business and its closed
block of single premium whole life ("SPWL") insurance. See
"Business--Industry Segment Information." Liberty Financial seeks to grow its
assets under management and further diversify its sources of income by
increasing its fee-based assets under management. Income before income taxes
(as a percentage of Liberty Financial's total pretax income) derived from
fee-based assets and services was 10.7% in 1991, 21.1% in 1993 and 19.7% for
the nine months ended September 30, 1994. See "Business--Industry Segment
Information" for information with respect to the contribution of Liberty
Financial's asset management operations for the past three fiscal years and
the nine months ended September 30, 1994. Under GAAP, premiums received on
SPDAs (the majority of Keyport's fixed annuity sales) are considered
investment contracts and are not recognized as revenue at the time of sale,
but as premium deposits. Such premiums received are reflected on Liberty
Financial's consolidated balance sheet as an increase in assets, equal to the
premiums received, and as a corresponding increase in policy liabilities.
Policy acquisition costs, principally commissions, related to the sales of
SPDAs are not recognized as expenses but are capitalized as deferred policy
acquisition costs ("DAC"). As a result of this deferral of costs and the
non-recognition of revenue for premiums received, no profit or loss is
realized on these policies at the time of sale.
Over the life of an annuity, net investment income, realized investment gains
(losses) and policyholder assessments are recognized as revenues (expenses),
and interest credited to policyholders and amortization of DAC are recognized
as expenses. DAC is amortized in relation to the present value of estimated
gross profits, including realized investment gains (losses), on the
applicable annuity contracts and is adjusted for actual experience, in the
then current period, by recomputing or "unlocking" such amortization
retrospectively to the date the amortization schedule of such costs was
originally determined or most recently redetermined. For example, to the
extent gross profits are accelerated through the realization of investment
gains, a portion of the related amortization of DAC will also be accelerated.
Net investment income and interest credited to policyholders are Liberty
Financial's largest revenue and expense items, respectively. The amount by
which net investment income exceeds interest credited to policyholders is the
"investment spread." The investment spread percentage is the excess of the
weighted average investment yield over the weighted average interest rate
credited. Net investment income is determined primarily by interest rates,
the maturities of Keyport's portfolio, market conditions and the overall
investment policy of Keyport. Interest credited to policyholders is
determined primarily by the interest rate environment, market conditions and
competitive conditions. Liberty Financial's profitability is substantially
dependent on its ability to manage effectively Keyport's investment spread.
Keyport seeks to manage investment spread through, among other things, its
setting of renewal rates and by investment portfolio actions, including
utilizing interest rate swaps and caps designed to address the interest rate
sensitivity of asset cash flows in relation to liability cash flows. See
"--Liquidity and Capital Resources" and "Business--Keyport--General Account
Investments."
As reflected in the table below, net investment income, interest credited to
policyholders and investment spread increased in 1992 compared to 1991. For
the year ended December 31, 1993, net investment income and interest credited
decreased compared to 1992, while the investment spread percentage increased.
For the nine months ended September 30, 1994, net investment income increased
and interest credited decreased compared to the nine months ended September
30, 1993, while the investment spread percentage increased.
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<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1991 1992 1993 1993 1994
($ in millions) (unaudited)
<S> <C> <C> <C> <C> <C>
Net investment income $692.9 $710.0 $675.3 $511.7 $513.0
Interest credited to policyholders 568.9 569.6 501.1 381.4 352.2
Investment spread $124.0 $140.4 $174.2 $130.3 $160.8
Investment spread percentage 1.61% 1.61% 1.91% 1.89% 2.26%
</TABLE>
Liberty Financial's investment spread and the investment spread percentage
for the periods shown above were influenced by the following factors:
1. A decline in interest rates during the period covered by this discussion
through February 1994 resulted in an increase in investment spread due to
Keyport's ability during this period to reduce its interest crediting rates
more quickly than the decline in its weighted average portfolio yield. The
beneficial impact of this interest rate decline was realized through
September 30, 1994.
2. Between December 31, 1990 and September 30, 1994, the percentage of high
yield, below investment grade bonds held in the investment portfolio was
reduced from 12.4% to 6.8%. This reduction resulted in lower portfolio yields
as the proceeds of such sales or repayments were reinvested in higher-
quality, lower-yielding investments.
3. Keyport no longer offers SPWLs. The ratio of SPWL policy liabilities in
force to total policy liabilities in force was approximately 25.6%, 23.6% and
23.4% as of December 31, 1991, 1992 and 1993, respectively, and 22.0% as of
September 30, 1994. Because SPWL policies are generally managed for wider
investment spreads than SPDAs to reflect their life insurance risk, the
overall investment spread percentage of Keyport has been reduced.
4. In an effort to reduce its exposure to rising interest rates, Keyport has
sold, from time to time, a portion of its longer-term portfolio securities.
The proceeds were reinvested in shorter term or floating rate investments
which produced lower yields. As a consequence, the effective duration of
Keyport's asset portfolio was 3.6 years at December 31, 1990, 2.8 years at
December 31, 1993 and 3.1 years at September 30, 1994. The weighted average
portfolio yield was 9.59% in 1991, 7.46% in 1993 and 7.71% for the
nine-months ended September 30, 1994, while the weighted average crediting
rate on policy liabilities was 7.98%, 6.01% and 5.45%, respectively.
5. The initial crediting rate on Keyport's principal annuity product was 7.9%
in the beginning of 1991, 5.0% at December 31, 1993 and 6.5% as of September
30, 1994. Renewal rates on existing policies have also been reduced to
reflect lower market interest rates prevailing during most of the period. The
effects of a lower interest rate environment on Keyport are reduced
investment yield and lowered interest- crediting rates on policyholder
liabilities.
6. The higher investment spread realized during the nine-months ended
September 30, 1994 compared to the nine-month period in 1993, and during the
year ended December 31, 1993 compared to the year ended December 31, 1992,
was primarily due to Keyport's ability to reduce crediting rates on new and
renewing policyholder liabilities more quickly than the decline in the
realized weighted average portfolio yield. Keyport's ability to reduce
crediting rates was due, in part, to falling interest rates during 1993.
Liberty Financial believes, however, that Keyport's interest crediting rates
and customer service are important factors in attracting and retaining
business, and that its interest crediting rates are competitive.
Liberty Financial believes that the higher investment spread percentage
realized during the nine months ended September 30, 1994 compared to the nine
months ended September 30, 1993, and the prior periods presented, continued
during the fourth quarter of 1994. However, as a result of the increasing
interest rate environment beginning in February 1994, Keyport anticipates a
slight decrease in the investment spread percentage for the full year,
compared to 2.26% for the nine months ended September 30, 1994. For 1995,
assuming a constant interest rate environment, Keyport anticipates an
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<PAGE>
overall investment yield comparable to 1994 and a moderately higher weighted
average crediting rate. As a consequence, it is expected that the investment
spread percentage will decrease in 1995.
Liberty Financial's net income has, in certain cases, fluctuated
significantly from quarter to quarter. Such fluctuations have been due, among
other things, to amortization of acquired intangibles, activities associated
with Keyport's management of its investment spread, the level of surrenders
of annuity policies, guaranty fund assessments and the impact of the
performance of the capital markets on Keyport's general account investments
and Liberty Financial's fee-generating assets under management. The level of
net cash inflows or outflows from period to period at Stein Roe also affects
these results. Liberty Financial's future results of operations may also
fluctuate significantly from quarter to quarter. See "--Fourth Quarter 1994
Results" and Note 12 of Notes to Liberty Financial's Consolidated Financial
Statements.
Amortization Charge
In connection with the purchase of Stein Roe, Liberty Financial recorded
certain intangible assets, such as customer lists and goodwill, the value of
which was based on anticipated future gross profits attributable to such
assets. In 1992, Liberty Financial changed its estimate of the levels of
anticipated future gross margins relating to these intangible assets, and
accordingly amortization expense was increased by approximately $21.0
million. This charge was determined primarily by comparing the present value
of the expected gross profits attributable to the intangible assets to the
carrying value of the assets. See Notes 2 and 6 of Notes to Liberty
Financial's Consolidated Financial Statements.
Option Plan Compensation Expense
Liberty Financial recognizes periodic compensation expense under Liberty
Financial's 1990 Stock Option Plan. Under the 1990 Stock Option Plan, options
are granted at a price not less than the fair market value of the LFC Common
Stock as of the then most recent valuation date, and compensation expense is
based upon the annual change in the fair market value of the LFC Common
Stock. The fair market value is determined annually as of December 31 in
accordance with the formula contained in the 1990 Stock Option Plan.
Compensation expense was $189,000 and $36,000 in 1991 and 1992, respectively.
Effective December 31, 1993, the Board of Directors revised the method of
calculating such formula value from an earnings-based formula to one based
upon 104% of the book value per share of the LFC Common Stock, as adjusted
for the effects of previously-recognized option plan compensation expense.
This change was made as a result of discussions in December 1993 between
Liberty Financial and its financial advisors regarding the indicated fair
market value of LFC Common Stock. Option plan expense for 1993 was $22.1
million using this revised formula. Had the original formula value been used
in measuring 1993 option plan compensation expense, such expense would have
been approximately $3.3 million. For the nine months ended September 30,
1994, option plan compensation expense, using a current estimate of fair
market value of LFC Common Stock, was $6.7 million. Compensation expense has
been recognized under the 1990 Stock Option Plan because Plan participants
have the right to receive a cash payment equal to the appreciation in value
of the Common Stock from the initial grant to the date the participants
exercise the right. At the Effective Time, participants will no longer be
entitled to this cash-out right and, accordingly, Liberty Financial will no
longer recognize compensation expense under the 1990 Stock Option Plan.
Restructuring Charges
In the fourth quarter of 1994, Liberty Financial will recognize restructuring
charges of approximately $900,000 in connection with the Merger. In addition,
Liberty Financial will recognize a charge of approximately $2.0 million in
the fourth quarter relating to a decision to offer for sale substantially all
the properties managed by Liberty Financial's real estate asset and property
management company in order to take advantage of the recent strengthening of
property values.
The restructuring charge of approximately $900,000 incurred in connection
with the Merger relates to the transfer to Colonial of the administration and
shareholder servicing functions for the load mutual funds sponsored by
Liberty Financial. These funds will be merged into certain Company Funds or
newly created Colonial funds. See "Business--Stein Roe--Mutual Funds
Division." Accordingly, subsequent to the Merger, these functions will be
transferred to Colonial to realize cost savings and to take advantage of the
experience and advanced capabilities of Colonial's administration and
shareholder servicing
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functions. The restructuring charge consists of the severance costs of the 37
affected employees and other direct expenses to be incurred in connection
with the fund mergers. Future cost savings expected to be realized total $5.6
million and will consist primarily of employee compensation and benefits due
to the reduction of employees. Liberty Financial does not anticipate a
decrease in management or administration fees resulting from this action.
The restructuring charge of approximately $2.0 million in the real estate
asset and property management business relates to a decision made during the
fourth quarter of 1994 to take advantage of the recent strengthening of
property values and to offer for sale substantially all of the properties
managed by Liberty Financial's real estate asset and property management
company. See "Business--Other Asset Management Businesses." This charge
reflects anticipated severance costs associated with staff reductions of the
51 affected employees. The effect of these property sales upon completion
will be to reduce materially property management fees earned and the
associated compensation and benefits expense attributable to the terminated
employees. The sales of these properties and the related reduction in asset
and property management fees do not represent a disposal of a segment of a
business, such activities being reflected as a component of Liberty
Financial's asset management industry segment. The reduction of annual
property management fees is expected to be approximately $6.7 million, or
less than 1% of Liberty Financial's total revenues. The reduction of annual
operating expenses is expected to be approximately $5.9 million.
In addition, Liberty Financial intends to recognize a charge to income in the
first quarter of 1995 of approximately $3.0 million in connection with the
restructuring of its asset management business at Stein Roe and approximately
$300,000 in connection with the restructuring of its Bank Marketing Group.
The restructuring charge at Stein Roe relates to a comprehensive
efficiency-improvement study that was begun in the fall of 1994 and completed
in 1995, and reflects anticipated severance costs of $2.6 million, project
costs of $125,000, and other direct expenses of $260,000 to be incurred in
implementing the recommendations contained in this study. See
"Business--Stein Roe." This study was performed to develop a program for
building a more efficient organization with enhanced customer service and
improved profitability. The program for implementing these recommendations
will involve a comprehensive reorganization of Stein Roe's research and
investment management activities and its administrative operations and
procedures. This charge pertains solely to identified direct and incremental
costs associated with the program, which will commence in the first quarter
of 1995. The most significant portion of future expense reductions, which are
expected to total approximately $10.0 million annually upon full
implementation of the program, will consist of employee compensation and
benefits due to a reduction of employees. As is the case with any
reorganization of this nature, there is a risk that it could lead to
additional resignations of key employees and losses of client relationships.
See "Risk Factors--Reliance on Key Personnel." Although no assurances can be
given, Liberty Financial does not anticipate a material decrease in net
revenues as a result of this program.
The restructuring charge of approximately $300,000 in the Bank Marketing
Group to be recognized in the first quarter of 1995 primarily reflects
anticipated severance costs of 13 administrative employees who are being
terminated in the first quarter of 1995. This action results from the excess
capacity resulting from the program terminations that occurred during 1994.
See "Business--Bank Distribution Channel--Bank Marketing Group." It is
expected that there will be a decrease in employee compensation and benefits
expenses in the Bank Marketing Group of approximately $770,000 in 1995 as a
result of this action.
1994 Results
Liberty Financial expects to record income before income taxes of
approximately $83.3 million and net income of approximately $50.8 million for
the year ended December 31, 1994. Accordingly, income before income taxes for
the three months ended December 31, 1994 was approximately $7.3 million, and
net income for the three months ended December 31, 1994 was approximately
$1.9 million. Included in the fourth quarter results are the restructuring
charges discussed above of approximately $2.9 million relating to the Merger
and the real estate and property management business. In addition, results
for the fourth quarter include realized investment losses at Keyport in the
pretax amount of $14.2 million. These losses reflect, in part, sales
transactions effected to improve portfolio quality and include writedowns of
certain securities in the amount of $6.5 million which experienced declines
in value determined to be other than temporary.
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Results of Operations
Nine Months Ended September 30, 1994 Compared to Nine Months Ended September
30, 1993
Revenues
Net investment income was $513.0 million during the nine months ended
September 30, 1994 compared to $511.7 million for the nine months ended
September 30, 1993, an increase of $1.3 million or 0.3%. This increase in net
investment income was primarily due to a higher level of portfolio assets
during the period. The impact of this higher level of assets on net
investment income was approximately $20.8 million. This favorable impact was
offset in part by a decline in Keyport's overall portfolio yield during 1994.
The impact of this lower yield was approximately $19.5 million. For the nine
months ended September 30, 1994, the overall yield on investments (the ratio
of net investment income to average monthly total investments) was 7.71%
compared to 8.03% for the nine months ended September 30, 1993.
Investment management revenues and other fees were $77.6 million for the nine
months ended September 30, 1994 compared to $78.0 million for the nine months
ended September 30, 1993, a decrease of $400,000 or approximately 0.5%. This
revenue decrease reflects a decrease in fee-based assets under management of
approximately $2.5 billion to $19.6 billion at September 30, 1994 from $22.1
billion at September 30, 1993. This decrease in fee-based assets was
primarily attributable to net outflows of assets under management of
approximately $1.7 billion and a decrease of $800 million in the market value
of the assets managed. Outflows of $2.2 billion (representing annualized
investment revenues of $6.1 million) occurred in the investment counsel and
institutional asset management businesses at Stein Roe and were offset, in
part, by net subscriptions in the SteinRoe mutual funds and in Liberty
Financial's variable annuity products of approximately $461 million. The
outflows in Stein Roe's institutional asset management businesses were, in
part, attributable to the loss of client relationships associated with the
departure of four portfolio managers and the withdrawal of $600.0 million of
a client's assets in the fourth quarter of 1993 (the investment management
revenues relating to these clients' assets were $1.1 million and $534,000,
respectively). Favorably impacting the amount of investment management
revenues for the nine months ended September 30, 1994 was the mix of assets
managed. During the fourth quarter of 1994, institutional and investment
counsel clients withdrew assets of approximately $2.7 billion as of September
30, 1994. Of this amount, approximately $1.2 billion of assets was
attributable to client relationships that moved with a portfolio manager who
resigned prior to September 30, 1994, and an additional $1.3 billion of
assets were attributable to client relationships that moved with three other
portfolio managers who resigned following September 30, 1994. In connection
with this latter withdrawal of assets, these four portfolio managers have
agreed to make certain payments to Stein Roe based on a specified formula.
Amounts owed to Stein Roe under this formula through December 31, 1994 were
approximately $5.6 million. Such amount is subject to adjustment in certain
circumstances. The $2.7 billion of asset withdrawal in the fourth quarter is
anticipated to result in an annualized revenue reduction of approximately
$6.3 million. Liberty Financial believes that the resignations of such six
portfolio managers are due to the expiration as of December 31, 1993 of the
non-competition covenants described below under "Business--Stein Roe."
Included in investment management revenues and other fees are shareholder
servicing fees, transfer agency fees and administrative service fees earned
in Liberty Financial's mutual fund businesses. Such fees totaled
approximately $6.8 million during 1994 compared to $6.9 million in 1993, a
decrease related to the decrease in the average number of shareholder
accounts under service fee arrangements at Stein Roe.
Premium income and policyholder assessments were $26.2 million for the nine
months ended September 30, 1994 compared to $23.6 million for the nine months
ended September 30, 1993, an increase of $2.6 million or 11.1%. This increase
was primarily due to increased separate account fees earned on higher levels
of variable annuity and variable life policyholder account balances. Premium
income and policyholder assessments also include surrender charges on fixed
and variable annuities and life insurance contracts. Surrender charges are
assessed on policyholder withdrawals of accumulated values at declining
rates, typically during the first five to seven years of the policy's life
and cease to apply after a specified period. Surrender charge income on
withdrawals totaled $6.2 million in the 1994 period compared to $5.4 million
in the 1993 period.
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Securities commissions were $41.5 million for the nine months ended September
30, 1994 compared to $39.1 million for the nine months ended September 30,
1993, an increase of $2.3 million, or 6.2%. Of this increase, $2.0 million
relates to asset-based service fees on Liberty Financial's load mutual funds,
which were instituted during the fourth quarter of 1993. Commissions earned
on the sale of investment and insurance products by the Bank Marketing Group
were $39.5 million for the nine months ended September 30, 1994 compared to
$39.1 million during the nine months ended September 30, 1993, an increase of
$0.4 million or 1.1%. This increase was due to increased sales of higher
commission annuity products compared to mutual funds. However, the 1994
period experienced a decline in total product sales of 9.0% from $927.5
million during the nine months ended September 30, 1993 to $843.9 million
during the nine months ended September 30, 1994. Liberty Financial believes
this overall sales decrease is attributable, in part, to the higher interest
rate environment which diminished investor interest in the fixed income
mutual fund products sponsored by Liberty Financial. Total product sales
include sales related to a program with Chemical Bank N.A. (the "Chemical
Program"), an arrangement which terminated on July 31, 1994. Product sales
attributable to this program during the nine months ended September 30, 1993
and 1994, were $126.6 million and $358.2 million, respectively. Excluding
these sales relating to the Chemical Program, total product sales for the
nine month periods would have been $800.9 million and $485.7 million,
respectively, or a decrease of 39.4%.
Other revenues were $5.2 million for the nine months ended September 30, 1994
compared to $1.6 million for the nine months ended September 30, 1993. This
increase was due primarily to $4.1 million received from Chemical Bank in
connection with the termination of the Chemical Program. See "Business--Bank
Distribution Channel--Program Structures."
Realized investment gains were $2.9 million for the nine months ended
September 30, 1994 compared to realized investment gains of $11.6 million for
the nine months ended September 30, 1993. The realized gains in the 1994
period were primarily due to calls on portfolio bonds. The realized gains in
1993 were primarily attributable to the higher level of calls on portfolio
bonds during the period and, to a lesser extent, sales of fixed maturities
classified as "held to maturity" which were sold because of deteriorating
credit quality. Realized investment gains include gross gains and losses and,
for periods prior to 1994, provisions for possible investment losses. The
provision was $11.7 million for the nine months ended September 30, 1993.
Expenses
Interest credited to policyholders was $352.2 million for the nine months
ended September 30, 1994 and $381.4 million for the nine months ended
September 30, 1993, a decrease of $29.2 million or 7.7%. This decrease was
primarily due to a reduction in the weighted average crediting rate on
policyholder liabilities to 5.45% during 1994 from 6.14% in the 1993 period.
This reduction had an impact of $42.2 million. Total interest credited also
reflected growth in policyholder liabilities which had the effect of
increasing interest credited by $13.0 million during the period. This
decrease in interest credited and the increase in net investment income
discussed above resulted in an increase in investment spread of approximately
$30.5 million and an increase in the investment spread percentage in the 1994
period to 2.26% from 1.89% in 1993.
Operating expenses were $116.6 million for the nine months ended September
30, 1994 compared to $105.0 million for the nine months ended September 30,
1993, an increase of $11.6 million, or 11.0%. These expenses primarily
represented compensation and other general and administrative expenses, and
increased primarily due to higher personnel costs, higher levels of
professional fees and general cost increases. In addition, operating expenses
in 1994 include interest expense of $2.7 million relating to the $75.0
million note payable to an affiliate of Liberty Mutual. See "--Liquidity and
Capital Resources."
Guaranty fund expense was $5.4 million for the nine months ended September
30, 1994 compared to $2.7 million in the 1993 period, an increase of $2.7
million. This increase relates to a provision for a possible future
assessment regarding an insurance company which became insolvent during the
period.
Option plan compensation expense was $6.7 million for the nine months ended
September 30, 1994 compared to $1.5 million for the nine months ended
September 30, 1993. This increase was due to the change in the method used to
determine the fair market value of the LFC Common Stock described above
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under "--Option Plan Compensation Expense" and in Note 9 of Notes to Liberty
Financial's Consolidated Financial Statements and to the additional vesting
which occurred during the period.
Policy benefits and claims were $13.9 million for the nine months ended
September 30, 1994 compared to $15.2 million for the nine months ended
September 30, 1993, a decrease of $1.3 million or 8.9%. This decrease was
primarily due to the decrease in policy reserves associated with the issuance
of limited pay contracts, such as immediate annuities with life
contingencies.
Commission expense relates to the sale of investment and insurance products.
For the nine months ended September 30, 1994, commission expense totaled
$38.0 million compared to $35.0 million for the nine months ended September
30, 1993, an increase of $3.0 million, or 8.5%. Of this increase $1.1 million
relates to the asset-based service fees instituted in the fourth quarter of
1993. The remainder of this increase is primarily attributable to a revised
commission structure introduced during the first quarter of 1994 and
increased commissions on sales through the Chemical Program, which paid a
higher rate as compared to the Bank Marketing Group's other programs.
Amortization of value of insurance in force was $12.7 million for the nine
months ended September 30, 1994 compared to $17.2 million for the nine months
ended September 30, 1993, a decrease of $4.5 million or 26.3%. This decrease
was attributable primarily to the scheduled amortization of specific blocks
of business which were no longer subject to surrender charges beginning in
the fourth quarter of 1992. See "--Liquidity and Capital Resources." The
value of insurance in force was recorded in connection with the acquisition
of Keyport in 1988 and is amortized in relation to the estimated gross
profits to be realized over the life of the related policies.
Amortization of deferred policy acquisition costs were $40.5 million for the
nine months ended September 30, 1994, compared to $29.5 million for the nine
months ended September 30, 1993, an increase of $11.0 million. This increase
in amortization is related to the higher levels of investment spread in 1994
and the growth of business in force during 1994 and 1993. As a result of the
acceleration of profits associated with existing contracts, the amortization
of DAC was adjusted to reflect actual investment experience.
Amortization of intangible assets was $4.4 million for the nine months ended
September 30, 1994, compared to $13.4 million in the 1993 period, a decrease
of $9.0 million. This decrease was primarily attributable to certain
intangibles becoming fully amortized during 1993 and 1994. Intangible assets
were recorded primarily in connection with the acquisition of Stein Roe and,
to a lesser extent, Keyport.
Net income
Net income was $49.0 million for the nine months ended September 30, 1994
compared to net income of $41.3 million for the nine months ended September
30, 1993. The higher net income during the 1994 period primarily reflected
the higher levels of investment spread (offset in part by increased
amortization of deferred policy acquisition costs) and decreased amortization
of value of insurance in force and intangible assets, offset in part by
increased operating expenses, option plan compensation expense and guaranty
fund expense, and decreased realized investment gains.
Year Ended December 31, 1993 Compared to Year Ended December 31, 1992
Revenues
Net investment income was $675.3 million in 1993 compared to $710.0 million
in 1992, a decrease of $34.7 million, or 4.9%. This decrease in net
investment income was primarily due to a decline in Keyport's overall
portfolio yield associated with the lower interest rate environment
prevailing during 1993. The impact of this lower yield was approximately
$61.7 million. This unfavorable impact was offset in part by a higher level
of portfolio assets, which had a favorable impact on net investment income of
approximately $27.0 million. In 1993, the overall yield on investments was
7.92% compared to 8.69% in 1992.
Investment management revenues and other fees were $106.0 million in 1993
compared to $94.1 million in 1992, an increase of $11.9 million, or 12.6%.
This revenue increase was primarily attributable to an increase in mutual
fund assets, which in general earn higher investment management fees relative
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to Liberty Financial's other fee-based assets, and which accounted for
approximately 37.0% of total fee- based assets compared to 31.0% as of
December 31, 1992. Total fee-based assets declined by $400.0 million, or
1.6%, to $21.5 billion at December 31, 1993 from $21.9 billion at December
31, 1992. The decrease in fee-based assets reflected net cash outflows of
$1.3 billion, offset in part by an increase of approximately $840.0 million
in the market value of the assets managed. The net cash outflows of $1.3
billion were attributable to withdrawals by the institutional and investment
counsel clients at Stein Roe of $2.2 billion, offset in part by mutual fund
net subscriptions of $900.0 million.
Shareholder servicing fees, transfer agency fees and administrative service
fees totaled approximately $9.7 million in 1993 compared to $8.2 million in
1992, an increase of 18.3%. This increase was primarily attributable to
growth in assets under management and to an increase in the average number of
shareholder accounts under service fee arrangements.
Premium income and policyholder assessments were $31.3 million in 1993
compared to $21.5 million in 1992, an increase of $9.8 million or 45.7%. This
increase was due to higher sales of limited pay contracts, such as immediate
annuities with life contingencies, which are recognized as revenues at the
time of sale in accordance with GAAP. Surrender charge income on withdrawals
totaled $7.3 million in 1993 compared to $7.5 million in 1992.
Securities commissions earned on the sales of investment and insurance
products were $55.0 million in 1993 compared to $42.4 million in 1992, an
increase of $12.6 million, of which $12.0 million relates to the Chemical
Program, which was entered into in May, 1993. This increase was primarily
related to a 29.5% increase in total product sales through the Bank Marketing
Group to $1.3 billion in 1993 from $1.0 billion in 1992, an increase of
$299.1 million, of which $288.1 million related to the Chemical Program. See
"Business--Bank Marketing Group."
Realized investment gains were $10.6 million in 1993 compared to $3.4 million
in 1992. The realized gains in 1993 were primarily attributable to the higher
level of calls on portfolio bonds and, to a lesser extent, sales of fixed
maturities classified as "held to maturity" which were sold because of
deteriorating credit quality. In addition, in 1993, realized gains included
sales of equity securities, principally redemptions of the "seed money"
invested in mutual funds sponsored by Liberty Financial. Partially offsetting
these gains were losses on interest rate swaps and caps. These swaps were
unwound because the underlying assets and liabilities no longer existed, and
the caps were sold because of the decline in interest rates since their
acquisition. The realized gains in 1992 were primarily due to sales of
high-yield bonds, interest-only securities and interest rate caps. Realized
investment gains include gross gains and losses as well as provisions for
possible investment losses. Such provisions totaled $10.4 million and $9.1
million in 1992 and 1993, respectively. See Note 3 of Notes to Liberty
Financial's Consolidated Financial Statements.
Expenses
Interest credited to policyholders was $501.1 million in 1993 compared to
$569.6 million in 1992, a decrease of $68.5 million, or 12.0%. This decrease
was primarily due to a decline in the weighted average crediting rate on
policyholder liabilities to 6.01% from 7.08% in 1992, which had an impact of
$85.6 million. The effect of the decline in the weighted average crediting
rate was partially offset by growth in policyholder liabilities which had the
effect of increasing the amount of interest credited by $17.1 million in
1993. The decrease in interest credited exceeded the decrease in net
investment income discussed above, thereby increasing investment spread by
$33.8 million, from $140.4 million in 1992 to $174.2 million in 1993, and
increasing the investment spread percentage in 1993 to 1.91% from 1.61% in
1992.
Operating expenses were $147.1 million in 1993 compared to $132.2 million in
1992, an increase of $14.9 million, or 11.2%. These expenses primarily
represented compensation and other general and administrative expenses, and
increased primarily due to higher personnel costs, higher levels of
professional fees and general cost increases. Of the total increase, $2.7
million was related to the expenses associated with the Chemical Program.
Guaranty fund expense decreased by $31.3 million to $3.7 million in 1993
compared to $35.0 million in 1992. The $35.0 million included a $28.2 million
provision for future assessments recorded in 1992
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with respect to known insurance company insolvencies. The amount actually
assessed to Liberty Financial for the year ended December 31, 1992 was
approximately $6.2 million. However, based on information provided by NOLHGA,
which information became available to Liberty Financial during the third
quarter of 1992, Liberty Financial recorded a $28.2 million charge as its
estimate of the ultimate liability associated with respect to known insurance
company insolvencies. See "--Insurance Company Guaranty Fund Assessments" and
"Business--Regulation--Insurance Activities."
Option plan compensation expense was $22.1 million in 1993 compared to
$36,000 in 1992. The increase in 1993 was primarily due to the change in the
method used to determine the fair market value of the LFC Common Stock under
the 1990 Stock Option Plan discussed above.
Policy benefits and claims were $19.7 million in 1993 compared to $11.8
million in 1992, an increase of $7.9 million, or 67.2%. This increase was
primarily due to the increase in policy reserves associated with the sale of
limited pay contracts.
Commission expense totaled $48.8 million in 1993 compared to $37.0 million in
1992. This increase of $11.8 million, or 31.8%, correlated with the increase
in commission income and was attributable to the increased volume of total
product sales during the period.
Amortization of value of insurance in force was $22.3 million in 1993
compared to $32.4 million in 1992, a decrease of $10.1 million, or 31.2%.
This decrease was attributable primarily to the scheduled amortization of
specific blocks of business which were no longer subject to surrender charges
beginning in the fourth quarter of 1992. See"--Liquidity and Capital
Resources."
Amortization of deferred policy acquisition costs was $40.2 million in 1993
compared to $17.4 million in 1992, an increase of $22.8 million. This
increase in amortization was related to the growth of policies in force
during each of 1992 and 1993, the higher than initially estimated levels of
investment spread in 1993 and higher realized investment gains in 1993
compared to 1992. As a result of the acceleration of profits associated with
existing contracts, the amortization of DAC was adjusted to reflect actual
investment experience.
Amortization of intangible assets was $15.0 million in 1993 compared to $42.3
million in 1992, a decrease of 64.5%. This decrease of $27.3 million was
primarily attributable to the charge of $21.0 million recorded in 1992
relating to a change in estimate of the carrying value of certain intangible
assets at Stein Roe. This charge decreased the carrying value of these
intangible assets subject to future amortization. See "--Amortization
Charge."
Net income (loss)
Net income was $31.3 million in 1993 compared to a net loss of $12.5 million
in 1992. The net income in 1993 reflected the higher levels of investment
spread and realized investment gains and the decreased levels of amortization
of value of insurance in force and intangible assets, partially offset by the
higher amortization of deferred policy acquisition costs and the increased
recognition of option plan compensation expense which is not deductible for
tax purposes. The net loss in 1992 included an after- tax charge of $18.6
million for the accrual of expected future insurance guaranty fund
assessments relating to then known insurance company insolvencies.
Year Ended December 31, 1992 Compared to Year Ended December 31, 1991
Revenues
Net investment income was $710.0 million in 1992 compared to $692.9 million
in 1991, an increase of $17.1 million, or 2.5%. This increase was primarily
due to the higher level of Keyport's portfolio assets during 1992, which had
a favorable impact on net investment income of approximately $79.4 million.
The increase was partially offset by reduced yields on portfolio investments
due to decreases in market interest rates, which had an unfavorable impact on
net investment income of approximately $62.3 million. In 1992, the overall
yield on investments was 8.69% compared to 9.59% in 1991.
Investment management revenues and other fees were $94.1 million in 1992
compared to $81.8 million in 1991, an increase of $12.3 million, or 15.0%.
This increase was primarily attributable to an increase of $2.0 billion in
fee-based assets under management to $21.9 billion at December 31, 1992
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compared to $19.9 billion at December 31, 1991. This increase in fee-based
assets was primarily attributable to net inflows of new assets managed of
$1.5 billion and to increased market values of assets managed of
approximately $500.0 million. The net inflow of $1.5 billion was split
approximately evenly between Liberty Financial's mutual funds and the
institutional and investment counsel businesses at Stein Roe. Approximately
60% of the mutual fund net subscriptions occurred in the load funds. Also
contributing to the increase in investment management fees in 1992 was the
mix of assets managed. As of December 31, 1992, higher-fee mutual fund assets
represented 31.0% of total fee-based assets compared to 30.0% as of December
31, 1991.
Shareholder servicing fees, transfer agency fees and administrative service
fees totaled approximately $8.2 million in 1992 compared to $7.4 million in
1991, an increase of 10.8%. This increase was primarily attributable to
growth in assets under management and to an increase in the average number of
shareholder accounts under service fee arrangements.
Premium income and policyholder assessments were $21.5 million in 1992
compared to $27.5 million in 1991, a decrease of $6.0 million, or 21.9%.
Approximately $5.0 million of the decrease related to reduced surrender
charge income compared to 1991 when the level of surrenders subject to
surrender charges was higher. Liberty Financial believes the level of
surrenders in 1991 reflected policyholder concern, in part, attributable to
unfavorable publicity related to insurance company insolvencies during that
year. Although total policyholder withdrawals in 1992 were $678.3 million
compared to $491.2 million in 1991, these 1992 withdrawals primarily
reflected policies for which the surrender charge period no longer applied
beginning in the fourth quarter of 1992. See "--Liquidity and Capital
Resources."
Securities commissions earned on the sales of investment and insurance
products were $42.4 million in 1992 compared to $35.4 million in 1991, an
increase of $7.0 million, or 19.8%. This increase was directly related to a
23.6% increase in product sales to $1.0 billion in 1992 from $809.0 million
in 1991.
Realized investment gains were $3.4 million in 1992 compared to $8.6 million
in 1991. These amounts included gross realized gains and losses as well as
provisions for possible investment losses. Gross realized gains in 1992 were
$42.2 million and were offset, in part, by gross realized losses of $25.9
million and provisions for possible investment losses of $10.4 million. The
gross realized gains in 1992 were primarily attributable to calls on
portfolio bonds and sales of bonds to adjust portfolio quality and duration.
The gross realized losses in 1992 related to sales of high-yield bonds,
interest-only securities and interest rate caps. The 1991 period included
gross realized gains of $57.0 million and gross realized losses of $11.4
million. The 1991 realized gains and losses were primarily due to a
restructuring of the portfolio as part of an effort to improve overall credit
quality and increase liquidity. Provisions for possible investment losses
were $37.6 million in 1991 and related to fixed maturities which defaulted
during that period.
Expenses
Interest credited to policyholders was $569.6 million in 1992 compared to
$568.9 million in 1991, an increase of approximately $700,000. The increase
in interest credited in 1992 resulted from higher levels of policyholder
liabilities during the year on which more interest was credited, almost
wholly offset by reduced crediting rates resulting from lower market interest
rates. The average crediting rate on policyholder liabilities was 7.08% in
1992 and 7.98% in 1991. Combined with the increase in net investment income
of $17.1 million discussed above, investment spread increased in 1992 by
approximately $16.4 million. The average investment spread percentage was
1.61% in each of 1992 and 1991.
Operating expenses increased by $14.3 million, or 12.1%, to $132.3 million in
1992 compared to $118.0 million in 1991. This increase primarily reflected
increased personnel costs associated with the growth in Liberty Financial's
businesses, costs of approximately $2.5 million incurred at Stein Roe in
connection with reorganizing its businesses, and general inflationary cost
increases.
Guaranty fund expense increased to $35.0 million in 1992 from $3.2 million in
1991. This increase of $31.8 million was primarily attributable to the
charge, accrued in the third quarter of 1992, of $28.2
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million for future state guaranty fund assessments with respect to known
insurance company insolvencies. See "--Insurance Company Guaranty Fund
Assessments" and "Business--Regulation-- Insurance Activities."
Commission expense totaled $37.0 million in 1992 compared to $32.7 million in
1991. This increase of $4.3 million correlated with the increase in
commission income and was attributable to the increased volume of total
product sales during the year.
Amortization of deferred policy acquisition costs was $17.4 million in 1992
compared to $13.8 million in 1991, an increase of $3.6 million, or 26.1%.
This increase was attributable to the full year amortization in 1992 of
certain of such costs deferred in 1991, and reflects the increase in policy
acquisition costs incurred in 1992 and amortized in part in 1992. In 1992,
total policy acquisition costs incurred were $74.5 million, a 21.0% increase
over the $61.7 million incurred in 1991. This increase was primarily due to
an increase in the amount of higher-commission business sold through banks
and other institutions ($48.7 million of acquisition costs deferred were sold
through this channel in 1992 compared to $33.1 million in 1991), and to an
increase in business in force.
Amortization of intangible assets was $42.3 million in 1992 compared to $25.6
million in 1991. The 1992 amount reflected a change in estimate of the
carrying value of certain intangible assets related to Stein Roe which
resulted in additional amortization expense of $21.0 million.
See"--Amortization Charge."
Net income (loss)
The net loss in 1992 was $12.5 million compared to net income in 1991 of
$20.9 million. The net loss in 1992 included an after-tax charge of $18.6
million for the accrual of a charge pertaining to expected future insurance
guaranty fund assessments. The net loss in 1992 also included a provision for
income taxes of $9.3 million on a consolidated pretax loss of $3.2 million.
The provision for income taxes relates primarily to Keyport, which was
required to file a separate federal income tax return through 1993 and thus
was not consolidated with Liberty Financial's asset management businesses.
See "--Provision for Income Taxes." A significant portion of the provision
for income taxes was recorded in the fourth quarter of 1992 and was primarily
attributable to realized investment gains and higher investment spread at
Keyport.
Provision for Income Taxes
Liberty Financial (except for Keyport, which was required to file a separate
federal income tax return through 1993) has been included in the consolidated
federal income tax return filed by Liberty Mutual. In accordance with the
Code, Liberty Mutual expects to continue to include Liberty Financial in
Liberty Mutual's consolidated federal income tax return as long as Liberty
Mutual continues to own at least 80% of the outstanding stock of Liberty
Financial (determined by both vote and value). Pursuant to a Tax Sharing
Agreement to be entered into between Liberty Mutual and Liberty Financial,
Liberty Financial will pay to Liberty Mutual an amount generally equal to the
taxes that Liberty Financial would be required to pay if Liberty Financial
were to file a separate consolidated federal income tax return (as if Liberty
Financial were the common parent of an affiliated group filing its own
separate consolidated return). For periods prior to 1994, when Keyport became
eligible for inclusion in Liberty Mutual's consolidated federal income tax
return, Keyport determined separately its individual liability for federal
income taxes. Accordingly, the provision for federal income taxes included in
Liberty Financial's consolidated statements of operations has been computed
by combining the separate tax provisions for Keyport and for Liberty
Financial and all of its other subsidiaries, and not by computing a
consolidated tax provision as if Liberty Financial had filed its own
consolidated return including Keyport. See "Relationships with Liberty
Mutual--Tax Sharing Agreement" and Note 7 of Notes to Liberty Financial's
Consolidated Financial Statements.
Insurance Company Guaranty Fund Assessments
Under insurance guaranty fund laws existing in each state, insurers licensed
to do business in the state can be assessed for certain obligations of
insolvent insurance companies to policyholders and claimants. The amounts
actually assessed to and paid by Keyport to guaranty fund associations under
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<PAGE>
such laws for the years ended December 31, 1991, 1992, 1993 and for the nine
months ended September 30, 1994, were approximately $2.1 million, $6.2
million, $7.3 million and $2.7 million, respectively.
Assessments are typically not made for several years after an institution
fails and depend upon the final outcome of liquidation or rehabilitation
proceedings. Therefore, Liberty Financial cannot accurately determine their
precise amount or timing at this time or whether, with respect to known
insolvencies, Liberty Financial's existing reserve will be sufficient to
cover the actual assessments. In 1992, based, among other things, on
information then provided by NOLHGA, Liberty Financial recorded a charge to
income of approximately $28.2 million as its estimate of these future
assessments for known insolvencies. Based on information provided by NOLHGA
through January, 1994 with respect to aggregate assessments related to known
insolvencies, the range of future assessments with respect to known
insolvencies is estimated by Keyport to be between $19.0 million and $28.0
million, taking into account the NOLHGA information as well as Keyport's own
estimate of its potential share of such aggregate assessments. At September
30, 1994, Keyport's reserve for such assessments was $27.2 million. This
reserve does not include any provision for future assessments related to
unknown failures or to known failures for which Keyport is not able to
estimate its exposure. Liberty Financial is not aware of any significant
insurance company insolvencies for which an estimate of Keyport's guaranty
fund assessments has not been made. No assurances can be given that the
reserve will be adequate to cover future assessments. Keyport reviews at
least quarterly information regarding known failures of insurers and will
revise its estimate of future guaranty fund assessments accordingly. In 1991,
1992, 1993 and during the nine months ended September 30, 1994, Keyport
recorded guaranty fund expense of approximately $3.2 million, $35.0 million
(which amount includes the $28.2 million charge referred to above), $3.7
million and $5.4 million, respectively. See "Risk Factors--Guaranty Fund
Assessments" and "Business--Regulation--Insurance Activities."
Liquidity and Capital Resources
Liberty Financial's sources of cash are its operating and financing
activities. Operating activities generate cash primarily from investment
income and asset management fees, while financing activities generate cash
primarily as a result of deposits to policyholder accounts. Liberty Financial
uses cash in its investing and financing activities, which consist primarily
of Keyport's buying and selling of portfolio investments. The table below
summarizes Liberty Financial's cash flows for the periods indicated.
<TABLE>
<CAPTION>
Nine Months
Ended
Year Ended December 31, September 30,
1991 1992 1993 1994
(in millions) (unaudited)
<S> <C> <C> <C>
Cash and cash equivalents at beginning of year $ 488 $ 1,108 $ 660 $ 542
Net cash provided by operating activities 600 630 541 386
Net cash used in investing activities (384) (1,278) (295) (575)
Net cash provided by (used in) financing activities 404 200 (364) 119
Net increase (decrease) in cash and cash equivalents 620 (448) (118) (70)
Cash and cash equivalents at end of period $1,108 $ 660 $ 542 $ 472
</TABLE>
Liberty Financial seeks to maintain sufficient liquidity in order to meet
Keyport's policyholder obligations and to pay Liberty Financial's other
operating expenses when they come due. Cash received by Keyport for annuity
premiums, from the maturity and sale of investments and from net investment
income have historically been sufficient to meet Keyport's requirements.
Keyport monitors cash and cash equivalents in an effort to maintain
sufficient liquidity for these purposes. In addition, as of September 30,
1994, Keyport also managed $542.1 million of its fixed maturities
investments, which were classified as a short duration portfolio. This
portfolio's effective duration is 0.13 years and has similar liquidity
characteristics as the cash equivalents while providing enhanced yield.
Consistent with the nature of its obligations, Keyport has invested a
substantial amount of its general account assets in readily marketable
securities. As of September 30, 1994, 76.4% of Keyport's total investments,
including short- term investments, are considered readily marketable. See
"Business--Keyport--General Account Investments."
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<PAGE>
Liberty Financial classifies Keyport's general account investments as "held
to maturity" and "available for sale." See Notes 2 and 3 of Notes to Liberty
Financial's Consolidated Financial Statements. Keyport manages its available
for sale portfolio, in part, based on the effective duration of its portfolio
investments and the anticipated effective duration of its policyholder
liabilities. Investments are sold from time to time to pay policyholder
benefits and surrenders, to adjust portfolio quality and duration, to improve
the return on portfolio investments and to respond to a change in the credit
risk of an issuer. Investments in short-term securities are made in order to
fulfill liquidity needs that may arise, among other things, in connection
with policy surrenders and operating expenses. To the extent unanticipated
surrenders cause Keyport to sell a material amount of securities prior to
their maturity, such surrenders could have a material adverse effect on
Liberty Financial's operations and liquidity. See "Risk Factors--Surrenders"
and "Business--Keyport--General Account Investments."
Keyport has sought to reduce its exposure to interest rate risk in the event
of an increasing rate environment by purchasing portfolio investments with
shorter maturities, by purchasing interest rate caps, by entering into
interest rate swaps and by selling portfolio investments with longer
maturities. As a result, as of September 30, 1994, the effective duration of
Keyport's portfolio was 3.1 years compared to 3.6 years at December 31, 1990.
As of September 30, 1994, Keyport owned interest rate caps with a notional
balance of $200 million and interest rate swaps with a notional balance of
$1,275 million. With respect to the swaps, there are four distinct classes.
First, Keyport pays a floating rate based on six month LIBOR and receives a
floating rate based on the ten year swap rate on a notional balance of $300
million. Second, Keyport receives a fixed rate of interest and pays variable
rates based on five and ten year "constant maturity treasury" or swap rates,
on a notional balance of $775 million. Third, Keyport executed a $50 million
notional current coupon mortgage swap under which Keyport pays the total
return of a seven year swap to receive the total return of a current coupon
FNMA mortgage. Fourth, in May, 1993, Keyport entered into a $150 million
notional swap that terminates in 1995. The swap is designed to hedge the
increase in the seven year swap spread over U.S. Treasury rates. The
agreement guarantees the value of a seven year swap in which Keyport would
pay 0.26% over the 7.5% U.S. Treasury Note maturing November 15, 2001.
Currently, the counterparties with whom Keyport has entered into swaps and
caps are rated "A+" or above by S&P. See Note 4 of Notes to Liberty
Financial's Consolidated Financial Statements.
Interest rate swaps are used to hedge interest rate risk on certain
investments and to reduce fluctuations in investment spread. The net
differential to be paid or received on interest rate swaps, which are
classified as a hedge for financial reporting purposes, is recorded monthly
as interest rates change. From time to time, swap positions may be unwound.
If the unwound swap has been effective in hedging interest rate risk and the
assets or liabilities hedged continue to be held, realized gains or losses
relating to such positions are amortized over the remaining life of the swap.
Conversely, if the unwound swap has not been effective in hedging interest
rate risk, or assets and liabilities which were hedged no longer exist, the
swap position is marked to market, and the realized gains or losses are
immediately recognized in income. Sales of swaps that result in gains
increase current earnings, liquidity and capital resources but may reduce
future investment yield if the sales proceeds are reinvested during a
declining interest rate environment. Interest rate swaps and caps involve, to
varying degrees, elements of credit and market risk which are not reflected
in Liberty Financial's consolidated financial statements. Such instruments
are primarily entered into for hedging (instead of investment or speculative)
purposes in connection with the management of Keyport's general account
portfolio, and from time to time Keyport incurs gains or losses on such
instruments. Such gains or losses for the nine months ended September 30,
1994 were not material. In 1993, losses of $16.2 million and $6.1 million
were recognized on interest rate swaps and interest rate caps, respectively.
In 1992, a loss on interest rate caps of $4.4 million was recognized, and a
gain on interest rate swaps of $16.2 million was realized and is being
amortized over the remaining lives of the applicable swap agreements.
As of September 30, 1994, net unrealized losses in Keyport's general account
investment portfolio of fixed income securities totaled $164.4 million. See
Note 3 of Notes to Liberty Financial's Consolidated Financial Statements.
These unrealized losses reflect a total portfolio yield which is lower than
current market rates for similar securities. The impact on investment yields,
current and future earnings and liquidity and capital resources associated
with sales of portfolio investments is influenced by future
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market conditions and the interest rate environment. In general, in an
increasing interest rate environment, sales of fixed income securities with
net unrealized losses decrease current earnings, liquidity and capital
resources, but may increase future investment yield resulting from the
reinvestment of the proceeds in higher-yielding securities. During the fourth
quarter of 1994, Keyport had net realized losses on investments of $14.2
million. Additional material sales of securities at a loss and material
shifts in the average maturity of such securities are not currently
contemplated by Keyport. However, sales or shifts in the average maturity of
such securities are undertaken from time to time in response to changing
market conditions.
Unrealized gains in Keyport's general account investment portfolio generally
result from decreases in interest rates. Unrealized losses generally result
from increases in interest rates or deteriorating credit quality of the
issuer. Keyport's realized losses in the periods covered by this discussion
were principally due to credit quality factors and related primarily to fixed
maturities rather than equities. Keyport's realized gains generally arose
from calls associated with interest rate decreases, repositioning of the
portfolio investments or from tax planning strategies to offset losses. See
"Business--Keyport--General Account Investments."
As discussed above, Keyport seeks to maintain sufficient liquidity in order
to meet its policyholder obligations, including payments for SPDA policy
withdrawals. To the extent that unanticipated surrenders cause Keyport to
sell a material amount of securities prior to their maturity for liquidity
purposes, such surrenders could have a material adverse effect on Liberty
Financial.
In 1991, for reasons which Liberty Financial believes are partly attributable
to unfavorable publicity associated with insurance company insolvencies
during that year, withdrawals increased by approximately $114.0 million to
$298.8 million. In response, Keyport increased its liquidity by maintaining
higher levels of cash and short-term investments. SPDA policyholder
withdrawals were $298.8 million, $512.1 million, $1,124.0 million and $649.0
million for the years ended December 31, 1991, 1992 and 1993, and the
nine-months ended September 30, 1994, respectively. Substantially all of the
1992 increase was experienced during the fourth quarter. The higher
withdrawals beginning with the fourth quarter of 1992 related primarily to
the expiration of the surrender charges of a portion of a $2.6 billion block
of annuities sold from 1987 through 1989 which contained a relatively high
and stable surrender charge schedule which expired after the fifth year (the
"1987 Block"). The 1987 Block represented approximately 79.4% of the total
SPDAs sold by Keyport during that period. Of this block of business, the
surrender charge period with respect to $2.1 billion of annuities expired
during the two years ended September 30, 1994. Surrenders of the 1987 Block
represented approximately 52.4% of the surrenders during such two year
period. The remaining portion of the 1987 Block had approximately $72.7
million of policyholder accumulated values as of September 30, 1994. For the
years ended December 31, 1992 and 1993, and for the nine months ended
September 30, 1994, Keyport's overall surrender ratio was 8.6%, 17.7% and
13.2%, respectively. Excluding the 1987 Block, the surrender ratio would have
been 6.4% in 1992, 5.7% in 1993 and 6.8% for the nine months ended September
30, 1994.
In 1992, Keyport introduced a new program in an effort to retain the 1987
Block. This program offers existing policyholders competitive renewal
crediting rates in conjunction with new surrender charge schedules. Through
September 30, 1994, Keyport has retained business representing approximately
42% of the 1987 Block policies for which the surrender charge expired
following September 30, 1992. Since 1989, Keyport has sold limited amounts
($38.6 million in 1993 and $92.4 million for the nine months ended September
30, 1994) of new policies with surrender charge schedules comparable to those
contained in the 1987 Block and renewed, through September 30, 1994, an
aggregate of $964.8 million of 1987 Block policies with surrender terms
comparable to those contained in the original policies.
As of September 30, 1994, approximately $5.8 billion (86.5%) of SPDA
policyholder liabilities were subject to surrender charges. As of that date,
the schedule of policyholder liabilities then in force which will cease to be
subject to surrender charges is as follows: 1994--$100 million; 1995--$543
million; 1996--$621 million; 1997--$822 million; 1998--$1,021 million;
1999--$1,041 million; and thereafter-- $1,681 million. Although Liberty
Financial believes that Keyport will have adequate liquidity to meet
anticipated surrender levels, a material increase in actual surrenders could
have a material adverse effect on Liberty Financial's operations and
liquidity.
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Keyport invests in certain below investment grade securities to enhance
overall portfolio yield. Investments in below investment grade securities
have greater risks than investments in investment grade securities. The risk
of loss upon default by the borrower is significantly higher with respect to
below investment grade securities because, among other things, such
securities generally are unsecured and are often subordinated to other
creditors of the issuer. In addition, issuers of below investment grade
securities tend to have a higher level of debt and are more sensitive to
adverse economic conditions, such as recession or increasing interest rates,
than investment grade issuers. In order to improve the quality of its
portfolio, in 1991 Keyport sold a portion of its investment in these
securities. This improvement in overall portfolio quality increased
liquidity, but resulted in lower levels of investment income since the sales
proceeds were reinvested in lower-yielding securities. As of September 30,
1994, approximately 7.0% ($645.2 million) of Keyport's investments was
invested in high-yield below investment grade securities compared to 12.4%
($751.2 million) as of December 31, 1990.
On December 29, 1993, an affiliate of Liberty Mutual made a loan in the
principal amount of $75.0 million to Liberty Financial. Liberty Financial
applied the full amount of this loan on such date to make a capital
contribution to Keyport to strengthen Keyport's capital base. In January,
1995, SteinRoe Services, Inc., a wholly-owned subsidiary of Parent ("SSI"),
issued to Parent the $30.0 million principal amount SSI Note. The SSI Note is
an Excluded Asset, and as such, the SSI Note will not be contributed to
Liberty Financial in the Parent Contribution. In addition, immediately prior
to the Effective Time, an affiliate of Liberty Mutual will loan up to $100.0
million to Liberty Financial (the proceeds of the loan will be used to pay
the cash portion of the Consideration in the Merger). Finally, as described
below under "Business--Other Asset Management Businesses," Liberty Financial
has entered into an agreement to acquire an investment management company for
cash. In connection with this acquisition, an affiliate of Liberty Mutual
will loan $24.0 million to Liberty Financial. See "Relationships with Liberty
Mutual-- Certain Other Transactions" for a description of all such
indebtedness.
In 1990, Liberty Mutual contributed to the capital of Liberty Financial
approximately $145.0 million of previously outstanding indebtedness of
Liberty Financial to Liberty Mutual. In addition, Liberty Mutual contributed
$142.5 million, and $1.8 million in cash to Liberty Financial during 1991 and
1992, respectively. Of the $142.5 million received by Liberty Financial in
1991, $100.0 million was contributed to the capital of Keyport, and $40.0
million was used to extinguish certain indebtedness incurred in 1990 to
finance the acquisition of the remaining ownership interests in Stein Roe.
See "General--Corporate Structure and History." The contribution to the
capital of Keyport in 1991 was used to finance Keyport's acquisition of
mortgage notes in the aggregate principal amount of $100.0 million issued by
certain indirect subsidiaries of Liberty Mutual. See "Relationship with
Liberty Mutual--Certain Other Transactions."
Although Liberty Mutual's past capital contributions and loans to Liberty
Financial have been a material source of funds for Liberty Financial's growth
and operations, Liberty Financial believes that, as a public corporation, it
will have greater access to the capital markets and other potential sources
of financing. Liberty Financial believes that such external sources of funds
will be adequate for any currently anticipated cash needs which cannot be met
through anticipated cash flow from operating activities, although no
assurances to that effect can be given. Consequently, Liberty Financial
believes that the fact that Liberty Mutual has no obligation to make future
capital contributions or loans or otherwise provide credit support to Liberty
Financial will not have a material adverse effect on Liberty Financial's
financial condition or liquidity.
Liberty Financial is a holding company whose principal assets consist of its
equity interests in Keyport, Stein Roe and its other subsidiaries. Regulatory
authorities restrict dividend payments from Keyport to Liberty Financial in
excess of the lesser of (i) 10% of statutory surplus as of the preceding
December 31 or (ii) the net gain from operations for the preceding fiscal
year and have established minimum net capital standards for LSC (6.67% of its
aggregate indebtedness). Liberty Financial considers these requirements in
managing its cash flows and liquidity needs. At September 30, 1994, Keyport
could not declare dividends in excess of $51.7 million without the approval
of the Commissioner of Insurance of the State of Rhode Island. Stein Roe is
also subject to certain regulatory standards which may restrict its ability
to pay dividends. As of December 31, 1994, Stein Roe exceeded the most
restrictive of these standards by approximately $0.4 million. Keyport has not
paid any dividends since its acquisition
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by Liberty Mutual in 1988. See "Risk Factors--Holding Company Structure;
Dividend Restrictions" and "--Dividend Policy."
Based upon the historical cash flow of Liberty Financial, Liberty Financial's
current financial condition and Liberty Financial's expectation that there
will not be a material adverse change in the results of operations of Liberty
Financial and its subsidiaries (including Colonial after the Merger) during
the next twelve months, Liberty Financial believes that cash flow provided by
operating activities over this period will provide sufficient liquidity for
Liberty Financial to meet its working capital, capital investment and other
operational cash needs, its debt service obligations, its obligations to pay
dividends on the Series A Convertible Preferred Stock, and (assuming Liberty
Mutual elects to participate in 1995 in the Dividend Plan described above
under "Dividend Policy") its intentions to pay dividends on the LFC Common
Stock. Liberty Financial's cash flow may be influenced by, among other
things, general economic conditions, realized investment gains and losses,
the interest rate environment, level of assets under management, market
changes, regulatory changes and tax law changes. A material adverse change in
one or more of such factors could have a material adverse impact on Liberty
Financial's financial condition and liquidity.
Effects of Inflation
Inflation has not had a significant impact on the operations of Liberty
Financial to date. Liberty Financial's assets consist primarily of cash and
investments which are monetary in nature. However, to the extent inflation
results in rising interest rates with the attendant adverse effects on the
securities markets and on the value of fixed maturity investments held in
Keyport's general account, inflation may adversely affect Liberty Financial's
financial position and results of operations. Inflation also may result in
increased operating expenses (primarily personnel-related costs) that may not
be readily recoverable in the prices of the services charged by Liberty
Financial.
Recent Accounting Pronouncement
SFAS No. 119. In October 1994, the Financial Accounting Standards Board
("FASB") issued SFAS No. 119, "Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments." SFAS No. 119 requires
specific disclosures about derivative financial instruments such as forward,
swap and option contracts. It requires distinguishing between financial
instruments held or issued for trading purposes and financial instruments
held or issued for purposes other than trading. There are separate disclosure
requirements for each classification. SFAS No. 119 is effective for fiscal
years ending after December 15, 1994. Liberty Financial intends to adopt SFAS
No. 119 as of December 31, 1994. Liberty Financial has held certain
derivative financial instruments during the period covered by this
discussion; financial statement disclosures with respect to such instruments
are set forth in Notes 2 and 3 to Liberty Financial's Consolidated Financial
Statements.
Federal Income Taxes
In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted.
This law increased Liberty Financial's maximum marginal federal income tax
rate from 34% to 35% retroactive to January 1, 1993. The effect of this
change in the tax rates on Liberty Financial's consolidated financial
statements was not material. Liberty Financial's future marginal tax rate
also will increase as a result of this legislation. Liberty Financial does
not believe that such law will have a material adverse effect on its business
or financial condition.
Currently, under the Code, income taxes payable by policyholders on current
investment earnings is deferred during the accumulation period of certain
annuity products, such as those offered by Keyport. This favorable federal
income tax treatment may enhance the competitiveness of certain of Liberty
Financial's products as compared with other retirement savings products that
do not offer such benefits. If the Code were to be amended to eliminate or
reduce the tax deferred status of annuity products, including the products
offered by Keyport, market demand for such products could be materially
adversely affected. See "Risk Factors--Tax Legislation."
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Business
Industry Segment Information
Through its operating subsidiaries, Liberty Financial conducts its business
in two industry segments: insurance operations and asset management. The
following table sets forth certain industry segment information for the
periods indicated. The data set forth below should be read in conjunction
with Liberty Financial's Consolidated Financial Statements, including the
notes thereto, "Selected Financial Data" and "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1991 1992 1993 1993 1994
(unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data: (in thousands)
Revenues:
Insurance operations $747,164 $752,028 $743,093 $562,347 $578,923
Asset management:
Unaffiliated 94,585 114,878 130,157 97,931 83,150
Intersegment 18,361 22,480 22,986 16,104 14,277
Total asset management 112,946 137,358 153,143 114,035 97,427
Other operations and corporate 840 2,063 1,501 1,097 134
Intercompany eliminations (13,301) (16,939) (17,344) (11,881) (10,113)
Total revenues $847,649 $874,510 $880,393 $665,598 $666,371
Income (loss) before income taxes:
Insurance operations:
Income before amortization of
intangible assets and guaranty fund
provision(1) $ 64,891 $ 60,402 $ 84,839 $ 68,604 $ 78,582
Amortization of intangible assets (4,820) (2,130) (1,406) (1,033) (970)
Guaranty fund provision(2) (28,217)
Subtotal--Insurance operations 60,071 30,055 83,433 67,571 77,612
Asset Management:
Income before amortization of
intangible assets 7,777 14,281 22,636 18,077 19,275
Amortization of intangible assets(3) (20,524) (39,899) (13,376) (12,252) (3,216)
Subtotal--asset management (12,747) (25,618) 9,260 5,825 16,059
Other operations and corporate:
Income before amortization of
intangible assets(4) (7,011) (7,391) (32,023) (8,619) (17,543)
Amortization of intangible assets (236) (236) (236) (177) (177)
Subtotal--other operations (7,247) (7,627) (32,259) (8,796) (17,720)
Total income (loss) before taxes $ 40,077 $ (3,190) $ 60,434 $ 64,600 $ 75,951
</TABLE>
(1) The increase in income before amortization of intangible assets and
guaranty fund provision in 1993 compared to 1992 was primarily attributable
to the increase in investment spread and realized investment gains, offset in
part by the increase in 1993 in amortization of deferred policy acquisition
costs.
(2) See "Business--Regulation--Insurance Activities" and "Management's
Discussion and Analysis of Results of Operations and Financial Condition" for
a description of the guaranty fund provision.
(3) The increase in amortization of intangible assets in 1992 compared to
1991 was attributable to a change in estimate of their useful lives. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition--Amortization Charge."
(4) Includes, in 1993, a provision for Option Plan Compensation Expense in
the amount of $22.1 million. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Option Plan Compensation
Expense."
101
<PAGE>
<TABLE>
<CAPTION>
December 31, September 30,
1991 1992 1993 1994
(unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data: (in thousands)
Identifiable Assets:
Insurance operations $8,839,110 $9,708,145 $10,227,327 $10,764,827
Asset management $ 111,841 76,812 86,295 72,638
Other operations and corporate 14,119 21,985 19,850 26,587
Intercompany elimination (10,659) (8,607) (8,478) (5,775)
Total $8,954,411 $9,798,335 $10,324,994 $10,858,277
</TABLE>
Keyport
Keyport is an insurance company which offers a diversified line of fixed and
variable annuity products designed to serve the growing retirement savings
market. Annuities are long-term savings vehicles that are particularly
attractive to customers seeking tax deferred savings products to supplement
retirement income. Keyport seeks to (i) maintain its presence in the fixed
annuity market while expanding its sales of variable annuities, (ii) achieve
a broader market presence through the use of diversified distribution
channels and (iii) maintain a conservative approach to investment and
liability management.
Liberty Financial believes that Keyport has certain competitive advantages
due to its established market presence, reputation for service to
distributors and policyholders, financial rating of "A+" (Superior) by A.M.
Best, "AA-" by S&P and "A1" by Moody's, and the ability to access Liberty
Financial's other operating units in response to the market's demands for
product innovation. Liberty Financial also believes that the Merger will
allow Keyport to broaden its market presence through Colonial's distribution
channels.
Products
Fixed Annuities. Keyport's principal product is a line of SPDAs. SPDAs are
savings vehicles in which the policyholder or annuitant makes a single
premium payment to Keyport at the time of issuance, and Keyport obligates
itself to credit interest to the policyholder's account in an amount based
upon a stated annual interest crediting rate which is adjusted from year to
year, subject to a guaranteed minimum rate. Under current law, interest
credited is not subject to federal or state income tax during the
accumulation period. At the pay-out date, the policyholder is entitled to
receive the principal value plus accumulated credited interest, and may elect
to take the proceeds of the annuity in the form of a single lump-sum or a
series of payments. The income component of such distributions is taxable at
the recipient's then applicable tax rate. Keyport offers SPDAs with varying
levels of benefits, credited rates, commission structures and surrender
provisions. Fixed annuities are particularly attractive to customers over the
age of 50 who are planning for retirement and seeking more secure,
tax-deferred savings products.
As of September 30, 1994, Keyport's general account investments of
approximately $9.2 billion supported approximately $6.9 billion of SPDA
liabilities and a closed block of approximately $2.2 billion of SPWL
liabilities. These general account investments provide Liberty Financial with
a substantial base of assets currently generating spread income. Keyport
issued $814.9 million, $851.6 million, $852.4 million and $868.1 million of
fixed annuities in 1991, 1992, 1993, and the nine months ended September 30,
1994, respectively.
A significant portion of Liberty Financial's current profits relates to
Keyport's management of the spread between its obligations to SPDA
policyholders and its earnings on general account assets acquired with SPDA
premium deposits. The setting of initial and renewal interest-crediting rates
is a major element of this process. Managing these rates also is critical to
keeping Keyport's SPDAs competitive in the marketplace, both for selling new
policies and for retaining existing policies (especially policies which then
may be surrendered without penalty). As often as once a week, Keyport reviews
its crediting rates to be offered with respect to its new and renewing
policies. In determining interest crediting rates
102
<PAGE>
on new policies, Keyport considers its competitive position, prevailing
market rates and the anticipated profitability of the policies. In
establishing renewal crediting rates ("renewal rates"), Keyport also
considers the then current rate and the renewal term. At September 30, 1994,
all of Keyport's fixed annuity products had minimum guaranteed crediting
rates ranging from 3.5% to 4.0% for the life of the contract. At September
30, 1994, the interest crediting rates with respect to 96.7% (approximately
$6.5 billion) of policyholder account balances were to be reset within the
succeeding twelve months. This ability to adjust interest crediting rates
assists Keyport in its efforts to manage investment spread in a variety of
interest rate environments.
The following table sets forth certain information regarding the range of
interest rates credited to Keyport's SPDAs for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1991 1992 1993 1993 1994
<S> <C> <C> <C> <C> <C>
High 9.25% 9.25% 8.90% 8.90% 8.35%
Low 4.75% 4.00% 3.75% 3.75% 3.75%
Weighted average 7.91% 7.27% 6.16% 6.29% 5.62%
</TABLE>
Variable Annuities. A variable annuity involves the deposit of the
policyholder's premium payment in a separate account of the issuing insurance
company, and the policyholder's allocation of this amount among several
available dedicated mutual funds. The value of a variable annuity policy
depends on the performance of these underlying investments, which the
policyholder may reconfigure from time to time. Similarly, during the
variable annuity's payout period, the payments distributed to the annuitant
fluctuate with such performance. Variable annuities provide Liberty Financial
with fee-based revenue in the form of management and administration fees
charged by Keyport to the policyholder's account. Industry sales of variable
annuities have increased in recent years as the "baby-boom" generation has
begun to enter its peak earning years, which typically are a period of net
savings for retirement and other family needs.
Keyport's sales of variable annuities have grown from $75.7 million in 1991
to $149.4 million in 1992, and to $226.1 million in 1993. For the nine months
ended September 30, 1994 lower variable annuity sales of $130.8 million
(compared to $152.0 million for the nine months ended September 30, 1993)
reflected prevailing stock market conditions and relatively high crediting
rates available on fixed annuities. Unlike SPDAs, variable annuities require
significantly less capital support beyond the funding of the acquisition
costs and do not expose Keyport to market risk on the underlying investments.
Liberty Financial believes variable annuities complement Keyport's fixed
annuity business by broadening the appeal of Keyport's products to
individuals who are seeking to save on a tax deferred basis and are willing
to take greater investment risk. Liberty Financial seeks to increase sales of
Keyport's variable annuity products.
Currently, Keyport's variable annuity policyholders may select from among the
mutual funds available in two fund groups, one managed by Stein Roe and the
other managed by Colonial. The Stein Roe group currently consists of seven
funds, including equity, fixed-income, flexible-portfolio and money- market
funds, and had aggregate net assets of approximately $704.0 million at
September 30, 1994. The Colonial group currently is comprised of six funds,
including a U.S. government securities fund, a utilities fund, a growth and
income fund, a domestic equity fund, an international equity fund and a
diversified bond fund. The first three of these funds initially became
available to Keyport's variable annuity customers on July 1, 1993, and the
others were introduced in the summer of 1994. The Colonial group had
aggregate net assets of approximately $155.7 million at September 30, 1994
(of which approximately $61.4 million was seed money deposited by Keyport).
Surrender Charges. Keyport incorporates a number of features into its annuity
products designed to reduce the occurrence and adverse effect of premature
policy terminations. Premature termination of an annuity policy results in
the loss of Keyport's anticipated future earnings related to the annuity
deposit and the accelerated recognition of expenses related to policy
acquisition, principally commissions, which are otherwise amortized over the
life of the policy. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Overview." The primary feature
103
<PAGE>
incorporated by Keyport into its products to minimize premature terminations
is a surrender charge. While the policyholder is permitted at any time to
withdraw all or part of the accumulated value of his policy, such withdrawals
are generally subject to a surrender charge equal to a percentage of the
total accumulated value. Surrender charges apply for the number of years
specified in the policy and typically decline to zero over a period of five
to seven years. All annuities currently issued by Keyport include surrender
charges, and approximately 86.5% of Keyport's fixed annuities in force as of
September 30, 1994 had surrender charges in effect. In certain contracts, the
surrender charge is waived for a period of 45 to 60 days following the
initial determination of a renewal interest rate that falls below a specified
interest crediting rate (the so-called "bailout" rate). As of September 30,
1994, less than 0.1% of Keyport's in-force SPDAs had a bailout feature in
effect. Surrender charges also generally do not apply to withdrawals by
policyowners of up to 10% per year of the then accumulated value of the
annuity. In addition, certain of Keyport's products allow the policyholder to
withdraw accumulated earnings in excess of the initial deposit without a
surrender charge or may provide for charge-free withdrawals in special
circumstances.
Keyport's annualized withdrawal ratio for its SPDAs, calculated by dividing
surrenders and withdrawals by average aggregate account balances, was 8.6%,
17.7% and 13.2% in 1992, 1993, and the nine months ended September 30, 1994,
respectively. Excluding surrenders related to the 1987 Block, the annualized
withdrawal ratio for SPDAs would have been 6.4%, 5.7% and 6.8% for such
periods, respectively. See "Management's Discussion and Analysis of Results
of Operations and Financial Condition--Liquidity and Capital Resources" for a
discussion of the factors which Liberty Financial believes produced the
higher withdrawal ratio associated with the 1987 Block during the fourth
quarter of 1992, 1993 and the first three quarters of 1994. In addition, all
of Keyport's SPDAs are initially subject to "free look" risk. "Free look"
refers to the legal right of a policyholder to return a policy and receive
back the premium deposit, without interest, for a period of up to one year
from the date of issuance. To the extent a policyholder exercises the "free
look" option, Keyport may realize a loss as a result of any investment losses
on the underlying assets during the free look period, as well as the
commissions paid on the sale of the policy to the extent not covered by
reinsurance. Keyport has an annuity reinsurance treaty in force pursuant to
which it cedes the "free look" risk (the difference between the policyholder
liability and the relevant statutory reserve for the respective account) on
all SPDA policies. See "--Reinsurance and Underwriting." In addition,
variable annuities as well as fixed annuities are subject to a 30-day "free
look" under California law.
Closed Block of Life Insurance Policies. Keyport commenced operations in 1957
and sold only traditional life insurance products until 1978, when it began
selling single premium whole life insurance, an investment-oriented,
tax-advantaged product. The 1986 Tax Reform Act eliminated certain of the
attractive investment features of SPWLs. Keyport currently does not offer
life insurance products, but it continues to manage a closed block of
approximately $2.1 billion in SPWL policy liabilities as of September 30,
1994. This business currently provides spread income to Keyport. Keyport
reviews and determines renewal interest-crediting rates on its SPWL polices
in a manner substantially similar to the manner in which it determines
renewal rates on its SPDA policies. See "--Fixed Annuities."
New Product Introductions. Keyport seeks to introduce new annuity products
and refine its existing product line to accommodate new market opportunities
and demands. For example, in 1993 Keyport launched its Preferred Income Plan
variable payout program, which is a variable annuity product designed to
respond to consumer demands for supplemental retirement income with inflation
protection, liquidity to accommodate emergencies and a potential estate
planning benefit. The product provides a variable payout that the annuitant
may curtail at any point and receive the residual account value. Upon the
death of the annuitant, the beneficiary may elect to receive the remaining
account balance in a lump sum or in accordance with the established payment
schedule. In the first or second quarter of 1995, Keyport intends to
introduce a new SPDA product which will offer policyholders a guarantee of
principal, a minimum guaranteed rate, and the opportunity to receive payments
indexed to increases in the S&P 500 Index. This product will be positioned
between Keyport's traditional fixed rate annuities and variable annuities.
104
<PAGE>
Marketing and Distribution
The individual annuity market in the United States is highly fragmented.
According to A.M. Best, the insurer with the largest market share in each
year during the five-year period ended December 31, 1993 (the most recent
period for which A.M. Best rankings currently are available) captured less
than 6.0% of the market. In 1993, according to A.M. Best, writers of
individual annuities collected aggregate premiums of approximately $71.8
billion. Based on total individual annuity premiums for 1993 (according to
A.M. Best), Keyport ranked 16th in the individual annuity industry with a
1.5% market share.
Keyport's sales strategy is to use multiple distribution channels to achieve
broader market presence. In recent years, Keyport has emphasized distribution
through the bank channel (using the Bank Marketing Group and other entities
which concentrate on this channel and direct relationship with banks). During
1993 and the nine months ended September 30, 1994, the bank channel accounted
for 77.7% and 70.0%, respectively, of Keyport's annuity sales. Keyport has a
wholesaling group dedicated to expand further the distribution of its
products through the bank channel. The overall growth of annuity sales
through banks has prompted several other insurance companies to seek to
penetrate this distribution channel, including a number of companies that are
larger and have greater resources and access to capital than Liberty
Financial. Keyport seeks to compete for market share in these channels by
offering innovative products and superior services. The sale of insurance and
investment products through the bank distribution channel is highly
regulated. See "--Regulation." Keyport also sells through broker-dealer firms
and other distributors of insurance products, such as financial planners and
insurance agents. Keyport currently maintains a staff of ten regional vice
presidents and six regional sales managers who collectively provide
nationwide wholesaling support to Keyport's distributors.
The following table presents certain information regarding Keyport's
distribution channels for the periods indicated.
<TABLE>
<CAPTION>
Sales of Fixed Annuities
Nine Months Ended
Year Ended December 31, September 30,
1991 1992 1993 1994
(in millions)
<S> <C> <C> <C> <C>
Bank channel:
Bank Marketing Group $161.4 $147.8 $ 95.6 $145.5
Third party bank marketers 269.1 508.7 618.1 489.9
Other channels:
Broker-dealers 321.6 137.0 106.8 142.9
Other distributors 62.8 58.1 31.9 89.8
</TABLE>
<TABLE>
<CAPTION>
Sales of Variable Annuities
Nine Months Ended
Year Ended December 31, September 30,
1991 1992 1993 1994
(in millions)
<S> <C> <C> <C> <C>
Bank channel:
Bank Marketing Group $42.3 $78.4 $110.2 $55.4
Third party bank marketers 2.3 21.7 14.1 8.1
Other channels:
Broker-dealers 31.1 49.3 101.8 64.8
Other distributors -- -- -- 2.5
</TABLE>
Prior to 1991, the majority of Keyport's third-party distribution of SPDAs
was through broker-dealer firms. However, as a result of the well-publicized
insolvencies of certain insurance companies, the declining interest rate
environment in the early 1990s, and the establishment by certain
broker-dealer firms of proprietary SPDA products, sales of Keyport's SPDAs
through this channel have materially declined. Keyport responded to these
market developments by redirecting a substantial portion of its third-party
SPDA sales through entities which, like the Bank Marketing Group, sell
insurance products
105
<PAGE>
through the bank channel. In 1993 and for the nine months ended September 30,
1994, three third-party bank marketers (James Mitchell & Co., Invest
Financial Corp. and I.F. Agencies Inc.) accounted for 35.9% and 25.8%,
respectively, of Keyport's SPDA sales. Keyport seeks to diversify its
distribution channels by increasing its sales of SPDAs through broker-dealers
and other non-bank channel distributors. For the year ended December 31, 1993
and the nine months ended September 30, 1994, three firms (A.G. Edwards &
Sons, Inc., Dean Witter Reynolds, Inc. and PaineWebber Incorporated)
accounted for 36.0% and 42.0%, respectively, of the third party sales of
Keyport's products which were not made through the bank distribution channel.
Sales of Keyport's products through these firms are made pursuant to written
agreements which are terminable by either party upon 60 days' written notice.
While no assurances can be given, Liberty Financial believes that the Merger
will lead to new SPDA distribution for Keyport as a result of Colonial's
distribution relationships. See "Risk Factors--Reliance on the Bank
Distribution Channels and Certain Distributors."
In the case of variable annuities, three broker-dealer firms accounted for
19.4% and 23.4% of Keyport's variable annuity sales in 1993 and for the nine
months ended September 30, 1994, respectively. As part of its effort to
broaden its distribution channels, Keyport introduced Colonial-managed funds
as an investment option for its variable annuities in July 1993 and created
additional Colonial-managed funds in 1994. In April, 1994 Keyport and
Colonial entered into an agreement providing for the distribution of
Keyport's variable annuities through Colonial's wholesaling force.
Licensing
Keyport is licensed as a life insurance company in all states except New York
and is also licensed in the District of Columbia. Keyport's state license
authority includes life insurance and annuities (both fixed and variable), as
well as variable life insurance, except that Keyport is not licensed to sell
variable life products in the District of Columbia.
Keyport has an arrangement with Liberty Life Assurance Company of Boston
("Liberty Life"), a subsidiary of Liberty Mutual which is authorized to offer
variable annuities in the State of New York. Liberty Life issues variable
annuities in New York which are administered by Keyport and have
substantially the same policy terms and underlying investment options as
Keyport's variable products. All contractual obligations in respect of such
annuities are those of Liberty Life rather than of Keyport. The premiums for
New York sales are deposited in a separate account of Liberty Life. Liberty
Life charges the fees payable under the policies, from which it pays Keyport
an administration fee designed to cover Keyport's expenses and retains the
balance. See "--Regulation--Insurance Activities" and "Relationships with
Liberty Mutual-- Certain Other Transactions."
Customer Service
Liberty Financial believes one of Keyport's competitive advantages in
marketing annuities is a reputation for service to distributors and
policyholders. Liberty Financial believes that Keyport's service reputation
results from a program of training employees in all aspects of customer
relations and with respect to Keyport's products. Policyholders can access
account information through either manned telephone lines or touch-tone
activated response systems, which Keyport believes provides more rapid
processing of customer inquiries. Keyport's data processing systems are
designed to allow its customer service personnel to access electronically all
relevant policyholder data and to resolve the policyholder's inquiry through
one telephone call. Newsletters directed at customers, customer surveys and
other personalized strategies are used to increase customer awareness and
loyalty. Keyport's distributors are serviced through its ten regional vice
presidents and six regional sales managers, who assist with training sales
personnel and provide product information. Keyport offers its distributors a
number of options for the payment of commissions. Virtually all of the
commissions paid in respect of annuities issued by Keyport during 1993 and
the nine months ended September 30, 1994 were paid to the distributor at the
time of sale or within one week.
Liberty Financial believes that effective use of technology provides Keyport
with certain advantages. More than half of Keyport's new business generated
in the bank distribution channel is processed at the time of sale using
Keyport-developed software, and Keyport seeks to expand this capability.
106
<PAGE>
Contract and Policy Liabilities; Reserves
Liberty Financial's consolidated financial statements include reserves in
respect of Keyport's future obligations under outstanding annuity and life
insurance policies, which reserves are calculated in accordance with GAAP.
These GAAP reserves principally include policyholder account balances which
consist of deposits received plus interest credited less accumulated
policyholder assessments and withdrawals. In accordance with regulations
applicable to insurance companies, Keyport also maintains statutory financial
statements and is required to satisfy certain minimum statutory surplus
levels. See "--Regulation." Keyport records as liabilities in its statutory
financial statements actuarially determined reserves in respect of such
future obligations. These reserves are based on statutorily recognized
methods using prescribed mortality tables, as applicable, and assumed
interest rates. Statutory reserves differ from GAAP reserves due to the use
of different assumptions regarding mortality and interest rates and the
absence of lapse assumptions from the statutory reserve calculation. Liberty
Financial believes that Keyport's statutory reserves satisfy applicable
requirements.
The following table sets forth certain information regarding the development
of Keyport's annuity and life insurance business and its reserves calculated
in accordance with GAAP for the periods indicated. Such reserves are
classified in Liberty Financial's consolidated financial statements as policy
liabilities.
<TABLE>
<CAPTION>
As of or for the
As of or for the Year Ended Nine Months Ended
December 31, September 30,
1991 1992 1993 1994
($ in thousands, except policy data)
<S> <C> <C> <C> <C>
Fixed Annuities in Force:
Aggregate amount $5,604,654 $6,325,629 $6,375,415 $6,810,899
Average policy amount $ 38,253 $ 38,025 $ 34,057 $ 33,366
Number of policies 146,514 166,355 187,199 204,126
Aggregate amount subject to
surrender charge $5,131,972 $5,140,599 $5,366,446 $5,834,432
Variable Annuities in Force:
Aggregate amount $ 441,304 $ 560,874 $ 765,134 $ 827,444
Average policy amount $ 31,137 $ 31,485 $ 33,246 $ 32,771
Number of policies 14,173 17,814 23,014 25,249
Life Insurance in Force:
Aggregate amount $2,024,992 $2,046,550 $2,204,813 $2,180,498
Average policy amount $ 61,161 $ 64,674 $ 68,149 $ 70,498
Number of policies 33,109 31,644 32,353 30,930
Premiums:
Fixed annuities $ 814,888 $ 851,562 $ 852,369 $ 868,115
Variable annuities $ 75,703 $ 149,437 $ 226,070 $ 130,784
Life Insurance $ 5,193 $ (185) $ (496) $ (394)
New Contracts and Policies:
Fixed annuities 28,272 45,841 31,139 35,494
Variable annuities 2,766 5,666 7,918 3,528
Life insurance 137 6 -- --
Withdrawals and Terminations:
Fixed annuities:
Death $ 8,006 $ 9,626 $ 10,074 $ 10,197
Maturity $ 17,323 $ 17,593 $ 27,635 $ 20,767
Surrender $ 298,783 $ 512,105 $1,123,964 $ 648,687
Variable Annuities:
Death $ 2,283 $ 2,149 $ 389 $ 329
Maturity $ 1,823 $ 1,031 $ 3,911 $ 9,448
Surrender $ 80,700 $ 59,254 $ 67,666 $ 54,670
107
<PAGE>
Life Insurance:
Death $ 26,645 $ 43,128 $ 34,972 $ 35,058
Surrender $ 128,380 $ 93,495 $ 78,229 $ 66,516
Other $ 101 $ 55 $ 37 $ 13
Policy Liabilities:
Fixed annuities $5,685,373 $6,413,218 $6,470,165 $6,930,409
Variable annuities $ 441,304 $ 560,874 $ 765,134 $ 827,444
Life insurance $2,028,238 $2,053,539 $2,210,843 $2,189,815
Surrender Rates:
Fixed annuities 5.78% 8.58% 17.70% 13.17%
Variable annuities 19.37% 11.83% 10.20% 9.51%
Life insurance 6.39% 4.59% 3.74% 3.88%
Life insurance loans outstanding $ 339,423 $ 375,238 $ 440,338 $ 465,220
</TABLE>
General Account Investments
Keyport's net investment income and interest credited to policyholders are
Liberty Financial's largest revenue and expense items, respectively. To
maintain its profitability, Keyport must maintain a positive spread between
its investment results and the interest credited on its products and its
other expenses. Although to date Keyport's investment spread has been
positive, there can be no assurances that Keyport will continue to realize
investment spreads at levels necessary for Liberty Financial to remain
profitable. See "Risk Factors--Investment Performance and Interest Rate Risk"
and "Management's Discussion and Analysis of Results of Operations and
Financial Condition--Overview."
Keyport manages interest rate risk and monitors investment activities to
conform with its investment policies. Stein Roe manages a substantial amount
of Keyport's general account portfolio (approximately $8.1 billion of a total
of approximately $9.2 billion as of September 30, 1994) within Keyport's
overall investment policies. Stein Roe employs three senior portfolio
managers in its Institutional Asset Management division for this function.
See "--Stein Roe--Institutional Asset Management Division." A portion of
Keyport's general account assets (senior secured bank loans with an aggregate
fair value of approximately $262.6 million, subordinated collateralized
mortgage obligations with an aggregate fair value of approximately $239.0
million and commercial mortgage backed securities with an aggregate fair
value of approximately $20.9 million as of September 30, 1994) are managed by
separate unaffiliated investment advisers who specialize in those respective
types of investments. As of September 30, 1994, Keyport's general account
also included approximately $468.5 million of policyholder loans and
approximately $131.7 million of mortgage loans.
Asset/Liability Management. Keyport's general account investment strategy
takes into account the anticipated cash flow requirements of its SPDA and
SPWL policies. The cash outflows are affected by actual maturities, surrender
experience and interest crediting rates. Simulation models are used to
estimate policy cash flows under a wide range of future interest rate
scenarios. Based on the results of these analyses, investment strategies are
designed to meet policy obligations while maintaining the desired investment
spread between assets and liabilities, and to limit the potential adverse
impact of changing interest rates.
Interest rate risk occurs when interest rate changes cause asset cash flows
(general account investment income, principal payments and calls) to react
differently than general account liability cash flows (policyholder
benefits). Keyport seeks to manage this risk through, among other things, its
setting of renewal rates and by investment portfolio actions designed to
address the interest rate sensitivity of asset cash flows in relation to
liability cash flows. Portfolio actions used to manage interest rate risk
include managing the effective duration of the portfolio securities,
investing in variable rate securities and utilizing interest rate swaps and
caps. Interest rate swaps and caps involve, to varying degrees, elements of
credit and market risk which are not reflected in Liberty Financial's
conslidated financial statements. Keyport's analysis as of September 30,
1994, based on currently anticipated levels of
108
<PAGE>
investment spread and surrender rates, shows that the present value of
Keyport's in force business would decrease if interest rates were to rise
materially.
At September 30, 1994, Keyport's fixed income portfolio (calculated including
cash and short-term investments), represented 93.2% of Keyport's total
general account assets and had an effective duration of approximately 3.1
years.
The following table summarizes certain information with respect to Keyport's
general account investment results for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1991 1992 1993 1994
($ in thousands)
<S> <C> <C> <C> <C>
Average invested assets(1) $7,470,974 $8,403,217 $8,848,115 $9,066,535
Net investment income(2) $ 692,920 $ 710,013 $ 675,309 $ 512,994
Yield(3) 9.59% 8.69% 7.92% 7.71%
Net realized gains $ 8,621 $ 3,444 $ 10,553 $ 2,910
Change in net unrealized
gains (losses) $ 4,192 $ 1,512 $ (5,141) $ (40,472)
</TABLE>
(1) Average of portfolio investments and short-term securities at beginning
and end of period.
(2) Investment income after deduction of investment expenses, but before
applicable income tax.
(3) A compounded average yield calculated by dividing monthly net investment
income by the total of average monthly investments and short-term securities.
For a discussion of net investment spread, see "Management's Discussion of
Results of Operations and Financial Condition--Overview."
The following table sets forth the composition, carrying value and fair value
of Keyport's investment portfolio as of September 30, 1994.
<TABLE>
<CAPTION>
Carrying Value Fair Value (1)
Percent of Percent of
Amount Portfolio Amount Portfolio
($ in thousands)
Fixed maturities:
<S> <C> <C> <C> <C>
Held to maturity:
Investment grade
bonds (2) $1,187,087 12.8% $1,192,845 12.9%
U.S. government and
agency
securities 250,420 2.7 261,157 2.8
Below investment
grade bonds 33,952 0.4 35,188 0.4
Total held to
maturity 1,471,459 15.9 1,489,190 16.1
Available for sale:
Investment grade
bonds 4,591,315 49.7 4,591,315 49.5
U.S. government and
agency
securities 1,503,683 16.3 1,503,683 16.2
Below investment
grade bonds 611,282 6.6 611,282 6.6
Total available
for sale 6,706,280 72.6 6,706,280 72.3
Total fixed
maturities 8,177,739 88.5 8,195,470 88.4
Mortgage loans 131,658 1.4 141,204 1.5
Cash and cash
equivalents 433,295 4.7 433,295 4.7
Equity securities 14,009 0.2 14,009 0.2
Policy loans 468,452 5.1 468,452 5.1
Other 12,171 0.1 12,171 0.1
Total investment
portfolio (3) $9,237,324 100.0% $9,264,601 100.0%
</TABLE>
(1) For purposes of the statistical data presented under this caption
"General Account Investments," fair values of publicly traded securities
are as reported by an independent pricing service. Fair values of
conventional mortgage-backed securities which are not actively traded in
a liquid market are typically determined by obtaining broker-dealer
quotations. Fair values of private placement bonds are typically
determined by obtaining market indications from various broker-dealers.
Keyport attempts to validate these
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valuations by selectively monitoring trades in the secondary private
placement market that involve these holdings.
(2) Securities that are rated 1 or 2 by the Securities Valuation Office (the
"SVO") of the NAIC, or, if not so rated, securities that are rated "BBB-"
or above by S&P, or "Baa3" or above by Moody's (using the lower of the
S&P or Moody's rating) are considered "investment grade" securities.
(3) Includes private placement bonds with a carrying value of approximately
$2.0 billion (21.9% of the portfolio) and an estimated fair value of
approximately $2.0 billion (21.9% of the portfolio).
The following table shows the ratings assigned by S&P or the NAIC, in the
case of securities not rated by S&P, to the securities in Keyport's fixed
maturities portfolio as of September 30, 1994.
<TABLE>
<CAPTION>
Carrying Value Fair Value (1)
Amount Percent of Portfolio Amount Percent of Portfolio
Held to maturity: ($ in thousands)
<S> <C> <C> <C> <C>
Ratings assigned by
S&P(1):
AAA $ 348,158 4.3% $ 355,638 4.3%
AA 110,796 1.4 108,285 1.4
A 152,407 1.9 151,671 1.9
BBB 99,493 1.2 97,643 1.2
Issues not rated by S&P
(NAIC rating) (2):
Rated 1 396,131 4.8 420,972 5.1
Rated 2 330,522 4.0 319,793 3.9
Rated 3 33,952 0.4 35,188 0.4
Rated 4 0 0.0 0 0.0
Rated 5 0 0.0 0 0.0
Total fixed maturities
held to maturity 1,471,459 18.0 1,489,190 18.2
Available for sale:
Ratings assigned by
S&P(1):
AAA 1,962,983 24.0 1,962,983 24.1
AA 569,088 7.0 569,088 6.9
A 1,223,424 15.0 1,223,424 14.9
BBB 1,034,060 12.6 1,034,060 12.6
BB 421,453 5.2 421,453 5.1
B 151,052 1.8 151,052 1.8
D 25,210 0.3 25,210 0.3
Issues not rated by S&P
(NAIC rating)(2):
Rated 1 1,155,682 14.1 1,155,682 14.1
Rated 2 115,439 1.4 115,439 1.4
Rated 3 22,345 0.3 22,345 0.3
Rated 4 4,525 0.1 4,525 0.1
Rated 5 18,852 0.2 18,852 0.2
Rated 6 2,163 0.0 2,165 0.0
Total fixed maturities
available for sale 6,706,280 82.0 6,706,280 81.8
Total fixed maturities $8,177,739 100.0% $8,195,470 100.0%
</TABLE>
(1) S&P rates debt securities from "AAA" (the highest) to "D" (in payment
default). A "+" or a "-" indicates the debt's relative standing within the
category. A rating may be subject to revision or withdrawal at any time by
S&P.
(2) The SVO has six numerical classifications which generally reflect the
ratings of agencies such as S&P (as indicated) and Moody's.
Each month, Keyport reviews investments which have been upgraded or
downgraded by S&P, Moody's or Stein Roe as well as investments which have
been subject to any publicly disclosed credit- related events or have raised
the concerns of Stein Roe or Keyport's other asset managers. For each
investment security where a decline in value is determined to be other than
temporary, Keyport writes down the security to fair value as the adjusted
cost basis. See Note 2 of Notes to Liberty Financial's Consolidated Financial
Statements. At September 30, 1994, approximately .04% of Keyport's total
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general account investment portfolio was delinquent (defined as failure to
make any payment when due with respect to corporate, government or government
agency bonds and as 90 days or more behind schedule on payments with respect
to commercial mortgages).
At September 30, 1994, 7.0% of Keyport's general account assets consisted of
below investment grade securities (as defined above). The fair value of
Keyport's portfolio of below investment grade securities was approximately
$646.7 million at September 30, 1994, or approximately 100.2% of the carrying
value of such securities. Investments in below investment grade securities
have greater risks than investments in investment grade securities. The risk
of loss upon default by the borrower is significantly higher with respect to
below investment grade securities, because such securities are generally
unsecured and are often subordinated to other creditors of the issuer. In
addition, issuers of below investment grade securities tend to have a higher
level of debt and are more sensitive to adverse economic conditions, such as
recession or increasing interest rates, than investment grade issuers.
Keyport believes that, through adequate diversification, additional yields
received from investing in these securities often provide a risk-adjusted
rate of return which is greater than that which could be achieved by
investing in lower-yielding securities with less risk. Keyport attempts to
reduce the overall risk of its below investment grade securities portfolio,
as in all of its investments, through credit analysis, investment policy
guidelines, and diversification by company and industry. In 1991, Keyport
restructured a portion of its general account portfolio, in part, to reduce
its holdings in below investment grade bonds. See "Management's Discussion
and Analysis of Results of Operation and Financial Condition."
Mortgage-Backed Securities. The carrying value and fair value of Keyport's
mortgage-backed securities ("MBS") (including collateralized mortgage
obligations ("CMOs")) as of September 30, 1994, were as follows:
<TABLE>
<CAPTION>
Carrying Value Fair Value
(in thousands)
<S> <C> <C>
Held to maturity:
Agency Backed:
PAC(1) $ 61,845 $ 62,768
Sequential pay and pass through 170,861 180,168
Non-Agency Backed:
PAC(1) 1,142 1,131
Sequential pay and pass through 80,806 77,207
Total mortgage backed securities held to maturity 314,654 321,274
Available for sale:
Agency Backed:
PAC(1) 806,583 806,583
Sequential pay and pass through 378,250 378,250
Other 26,445 26,445
Non-Agency Backed:
PAC(1) 79,003 79,003
Sequential pay and pass through 851,891 851,891
Other 153,878 153,878
Total mortgage backed securities available for sale 2,296,050 2,296,050
Total mortgage backed securities $2,610,704 $2,617,324
</TABLE>
(1) Planned Amortization Class CMOs, described below.
As of September 30, 1994, Keyport owned approximately $2.6 billion of MBS
(28.4% of its total general account investments), 98.3% of which were
investment grade. MBS are debt obligations collateralized by mortgage loans
or mortgage pass-through securities. MBS may be issued by agencies or
instrumentalities of the U.S. government, or by private originators of, or
investors in, mortgage loans, including savings and loan associations,
mortgage banks, commercial banks, investment banks and special purpose
subsidiaries of the foregoing. Keyport's MBS include approximately $2.2
billion of CMOs. In a CMO, a series of bonds or certificates is issued in
multiple classes. Each class of CMOs,
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often referred to as a "tranche," is issued at a specified fixed or floating
coupon rate and has a stated maturity or final distribution date. Payments of
principal and of interest on the underlying mortgage pool, and any
reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multiclass pass-through
securities.
Of Keyport's MBS as of September 30, 1994, approximately $1.4 billion were
government- or government agency-backed securities. Approximately 45% of
Keyport's MBS investments were in non-US agency backed securities as of
September 30, 1994. While the credit risks associated with such securities
are greater than those with the explicit or implicit guaranty of the U.S.
government or an agency or instrumentality thereof, 96.3% of Keyport's
non-agency MBS were investment grade as of September 30, 1994.
Mortgage-backed securities often provide superior yields compared to
investment alternatives of comparable credit quality. However, these
securities are subject, among other things, to prepayment risk, since the
mortgages backing such securities may be prepaid. In addition, non-agency
CMOs tend to prepay faster than agency CMOs. As a result, during periods of
falling interest rates, proceeds from such prepayments generally must be
reinvested at lower prevailing yields. Keyport has reduced its exposure to
this risk through the purchase of a category of CMOs known as Planned
Amortization Class ("PAC") bonds, which are designed to have relatively
stable cash flow characteristics by shifting prepayment risk with respect to
the mortgage pool to investors in other tranches ("support classes"). As of
September 30, 1994, approximately 36.3% of the CMOs in Keyport's general
account were PAC bonds. The predictability of PAC cash flows can be adversely
affected, however, if the actual prepayment experience on the underlying
mortgage loans is at a rate faster or slower than the range assumed in
structuring the tranche or series or if deviations in other assumed variables
occur.
As of September 30, 1994, Keyport owned approximately $113.4 million of
support class CMOs. Support class CMOs are structured with two or more
tranches of securities. Support class bonds receive principal and/or interest
payments from the underlying mortgage pools after scheduled payments for each
payment date have been made to some or all of the related PAC bonds.
Consequently, support class bonds can have relatively unstable cash flows.
When prepayments are greater than expected, support class bonds receive
principal prepayments beyond those required to meet PAC bond schedules. When
prepayments are slower than expected, support class bonds do not receive
principal payments until PAC bond schedules have been met. As of September
30, 1994, Keyport owned approximately $33.3 million of interest only ("IO")
support class CMOs. IO classes receive all of the interest from the
designated CMO tranche. IOs are highly sensitive to changes in prepayment and
interest rates. Under certain interest rate or prepayment rate scenarios,
Keyport may fail to recoup its investment in IO securities, notwithstanding
that such securities may be of the highest credit quality.
Investments in two different mortgage pools (all of which are government
agency-backed) were each in excess of ten percent of Liberty Financial's
stockholder's equity as of September 30, 1994. See Note 3 of Notes to Liberty
Financial's Consolidated Financial Statements.
Other Investments. As of September 30, 1994, Keyport owned approximately
$131.7 million of mortgage loans (1.4% of its total general account
investments), including $87.0 million of mortgage notes issued by indirect
subsidiaries of Liberty Mutual (the "Affiliated Obligors"). Two other
affiliates of Liberty Mutual (the "Contributing Affiliates") have executed a
mortgage maintenance agreement with Keyport pursuant to which the
Contributing Affiliates agreed to provide the Affiliated Obligors with such
funds as from time to time shall be necessary in order to meet any shortfall
in cash available to the Affiliated Obligors to make interest payments due to
Keyport under the mortgage notes and any deficiency balance owed to Keyport
after any sale or foreclosure of the underlying property securing a mortgage
loan. In addition, Liberty Mutual has agreed to advance to the Contributing
Affiliates such amounts as shall from time to time be owed by them under the
mortgage maintenance agreement. See "Management's Discussion and Analysis of
Results of Operations and Financial Condition--Liquidity and Capital
Resources" and "Relationships With Liberty Mutual--Certain Other
Transactions." The remaining mortgage loans consist of two pools of
residential first mortgages acquired in 1985 and 1993, respectively. As of
September 30, 1994, there were no loans in foreclosure, but at that date,
approximately $12,541 of interest payments on a total of 16 loans in the
aggregate outstanding principal amount of $313,010 were overdue by more
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than three months. Keyport does not utilize a loss allowance since its total
foreclosures in each of 1991, 1992, 1993 and for the nine months ended
September 30, 1994 were less than $100,000, which Keyport does not consider
to be material.
As of September 30, 1994, Keyport owned approximately $262.6 million of
participation interests in senior secured bank loans. These senior secured
loans were primarily originated by money center banks and typically are
senior to subordinated debt and equity, and are secured by all or a portion
of the assets of the corporate borrowers. None of the loans was in payment
default as of September 30, 1994.
Keyport's general account investments as of September 30, 1994 included
approximately $1.3 billion of asset-backed securities. All of these
asset-backed securities are collateralized by pools of loans such as credit
card receivables and automobile loans and have a weighted average rating of
"AA" by S&P. At September 30, 1994, 8.3% (approximately $110.3 million) of
the outstanding principal amount of the asset-backed securities were
supported by guaranty insurance or letters of credit. No payment defaults had
occurred under any of these securities through September 30, 1994.
As of September 30, 1994, Keyport's general account included approximately
$2.0 billion of private placement securities, all of which were fixed income
securities. Of these amounts, approximately $354.2 million are currently
eligible for sale in accordance with Rule 144A under the Securities Act. See
"Risk Factors--Illiquid and Restricted Securities" for a discussion of
certain liquidity risks associated with private placement securities. As of
September 30, 1994, 94.3% of Keyport's private placement securities were
investment grade.
The scheduled maturities of Keyport's fixed maturity securities as of
September 30, 1994 were as follows:
<TABLE>
<CAPTION>
Carrying Value Fair Value
Amount Percent Amount Percent
($ in thousands)
<S> <C> <C> <C> <C>
Held to maturity:
Due in one year or less $ 25,000 0.3 % $ 25,500 0.3%
Due after one year through five years 218,526 2.7 219,244 2.7
Due after five year through ten years 489,859 6.0 498,680 6.1
Due after ten years 196,879 2.4 201,344 2.5
Mortgage and assets backed
securities 541,195 6.6 544,422 6.6
Total held to maturity 1,471,459 18.0 1,489,190 18.2
Available for sale:
Due in one year or less 228,736 2.8 228,736 2.8
Due after one year through five years 1,235,560 15.1 1,235,560 15.1
Due after five year through ten years 1,441,646 17.6 1,441,646 17.6
Due after ten years 398,666 4.9 398,666 4.9
Mortgage and asset backed securities 3,401,672 41.6 3,401,672 41.4
Total available for sale 6,706,280 82.0 6,706,280 81.8
Total fixed maturities $8,177,739 100.0% $8,195,470 100.0%
</TABLE>
As of September 30, 1994, Keyport owned approximately $523.6 million of
securities issued by financial services companies and $329.8 million of
securities issued by electrical services utilities. These securities had a
weighted average rating of "A" and "BBB" by S&P, respectively. Four
electrical services utilities issues with an aggregate carrying value of
approximately $25.2 million (approximately $47.5 million at par) were in
payment default as of that date.
Financial Ratings
A.M. Best is an independent insurance rating agency which assigns fifteen
letter ratings to insurance companies. A.M. Best's ratings currently range
from "A++" (Superior) to "F" (In Liquidation) and some
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<PAGE>
insurance companies are not rated. Based on information provided to A.M.
Best, A.M. Best performs a quantitative and qualitative evaluation for each
company it rates. The quantitative evaluation compares a company's
performance to industry standards established by A.M. Best in three areas:
profitability, leverage, and liquidity. The qualitative evaluation examines
eight factors for each company: spread of risk, quality and appropriateness
of the reinsurance program, quality and diversification of assets, adequacy
of policy or loss reserves, adequacy of surplus, capital structure,
management's experience and objectives, and policyholders' confidence. A.M.
Best also may review other qualitative factors.
Publications of A.M. Best indicate that "A+" and "A++" ratings are assigned
to those companies which, in A.M. Best's opinion, have achieved superior
overall performance when compared to the standards established by A.M. Best
and generally have demonstrated a strong ability to meet their contract and
policyholder obligations over a long period of time. Keyport has received
A.M. Best's quality rating of "A+" (Superior) since 1976, the first year
Keyport was rated by A.M. Best. S&P currently rates Keyport "AA-" and Moody's
currently rates Keyport "A1." These ratings are not "market" ratings or
recommendations to use or invest in Keyport or Liberty Financial, but merely
reflect the opinion of the rating company as to the relative financial
strength of Keyport and Keyport's ability to meets its contractual
obligations to its policyholders. See "Glossary of Certain Insurance Terms"
for a description of A.M. Best's rating categories. No assurances can be
given that Keyport will be able to maintain its current financial ratings.
See "Risk Factors--Importance of Credit Ratings."
Underwriting and Reinsurance
Keyport is not committed or obligated to accept any business submitted to it.
Keyport retains the absolute right to accept or reject submitted business
whether or not it meets Keyport's guidelines or limitations. Generally, if
conditions relating to contract terms, crediting rate, commission structure
and estimated profitability are met, the business will be accepted. Liberty
Financial seeks to maximize the profitability of its SPDAs while
conservatively managing its capital and therefore will not increase sales if
it believes competitive conditions would render the incremental business
unprofitable. Keyport has established certain limits pertaining to new
annuity policies which cannot be exceeded unless specifically approved by
Keyport's management. For instance, Keyport has the right to limit the size
of the premium or purchase payment.
Liberty Financial believes that Keyport employed underwriting standards
generally accepted in the life insurance industry when issuing its
outstanding SPWL policies. Keyport's experience to date with respect to the
closed block of these policies has been consistent with or more favorable
than Keyport's estimates as to lapse and mortality.
In accordance with general practices in the life insurance industry, Keyport
attempts to limit its maximum net loss exposure with respect to its life
insurance obligations from large mortality risks by reinsuring portions of
the life insurance risks with unaffiliated insurance carriers under
traditional reinsurance agreements. Such reinsurance provides for a portion
of the risk to be retained by Keyport, with the excess being ceded to the
reinsurer at a premium based upon the age and risk classification of the
insured. Reinsurance coverage for life insurance varies with retention limits
ranging up to $150,000 of coverage per individual life. Keyport reinsures
under a number of different arrangements with various companies. Reinsurance
does not discharge Keyport from the liability to the policyholder for the
full amount of the policy, but the reinsurance carrier is obligated to
Keyport for the portion assumed by such carrier. To the extent that any
reinsurance carrier is unable to meet its obligation, Keyport would remain
liable for the reinsured amount.
Keyport currently has seven life reinsurance ceded treaties. Six of the seven
treaties are annually renewable term which cede a portion of the mortality
risk on Keyport's single premium life insurance. For 1993 and the nine months
ended September 30, 1994, Keyport paid premiums of $663,719 and $775,716
respectively, and received benefits of $633,654 and $1,118,557, respectively.
At September 30, 1994, all of the reinsurers to which Keyport had ceded
insurance were rated "A" or better by A.M. Best, except for one reinsurer
which is not rated, but whose obligations were fully cash-collateralized. At
September 30, 1994, life insurance in force ceded amounted to $283.4 million
or approximately 9.3% of total life insurance in force. In addition, at that
date, Keyport had one co-insurance treaty in force, which
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<PAGE>
is fully paid up. No benefits were received during 1993 or the nine months
ended September 30, 1994, and approximately $1.8 million of life insurance
was ceded thereunder at September 30, 1994. Keyport has never experienced any
default under any of its reinsurance or co-insurance treaties. Keyport had
one life insurance assumed treaty in force in 1994 on an annually renewable
term basis, for which it received $12,329 of premiums, and paid benefits of
$10,339 for the nine months ended September 30, l994, with approximately $1.1
million insurance assumed as of September 30, 1994.
As of September 30, 1994, Keyport had an annuity reinsurance treaty in force
which ceded the "free look" risk on all SPDA policies. See "--Products."
During 1993 and the nine months ended September 30, 1994, Keyport paid
approximately $5.9 million and $1.8 million, respectively, in premiums and
received approximately $5.1 million and $1.5 million in payments from the
reinsurer thereunder.
In December 1992, FASB issued SFAS No. 113, "Accounting and Reporting for
Reinsurance of Short- Duration and Long-Duration Contracts." The provisions
of SFAS No. 113 are not material to Keyport's life reinsurance treaties and
are not applicable to Keyport's "free look" reinsurance treaty.
Stein Roe
Stein Roe was founded in 1932 as an investment counselor to wealthy
individuals. The firm has evolved into a diversified investment adviser which
seeks to provide quality investment management and client service to individuals
and institutions. As of September 30, 1994, Stein Roe had approximately $26.2
billion of assets under management (approximately $22.9 billion as of December
31, 1994), including $8.8 billion (at market value) relating to Keyport's
products, $4.1 billion for private investment counsel clients (primarily wealthy
individuals and families), $7.2 billion for unaffiliated institutional investors
and $6.1 billion in load and no-load mutual funds. Stein Roe's investment
management operations are organized into three separate divisions according to
the clients they serve. The Mutual Fund division manages no-load and load mutual
funds targeted primarily at middle and upper income individuals. Stein Roe's
Investment Counsel division provides private account management primarily to
wealthy individuals and families. The Institutional Asset Management division
manages private accounts for institutional investors such as insurance
companies, retirement funds, endowments and foundations.
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The following table provides a summary of Stein Roe's assets under management
as of the dates indicated:
Stein Roe Assets Under Management
(in millions)
<TABLE>
<CAPTION>
As of
As of December 31, September 30,
1991 1992 1993 1994
<S> <C> <C> <C> <C>
Mutual Fund division:
No-Load mutual funds(1 ) $ 4,111 $ 4,329 $ 4,924 $ 4,730
Load mutual funds 753 1,221 1,576 1,347
Keyport variable annuity funds 366 476 690 706
Total mutual funds 5,230 6,026 7,190 6,783
Investment Counsel division(2 ) 6,385 6,105 5,155 4,125
Institutional Asset
Management division:
Keyport general account 7,663 8,248 8,388 8,072
Other clients(2) 7,238 8,622 8,003 7,246
Total $26,516 $29,001 $28,736 $26,226
</TABLE>
(1) Includes assets under management for Investment Counsel division clients
which were invested in Stein Roe's no-load mutual funds. As of December 31,
1991, 1992 and 1993 and September 30, 1994, these assets totaled
approximately $1.3 billion, $1.3 billion, $1.4 billion and $1.2 billion,
respectively.
(2) In 1993, approximately $544.0 million managed assets were transferred
from the Investment Counsel division to the Institutional Asset Management
division.
As shown in the above table, Stein Roe's assets under management decreased by
approximately $2.5 billion between December 31, 1993 and September 30, 1994.
This decrease is attributable to net outflows of assets under management of
approximately $1.0 billion and a decrease of approximately $1.5 billion in
the market value of managed assets. Based on asset balances at September 30,
1994, institutional and investment counsel clients withdrew additional assets
of approximately $2.7 billion during the fourth quarter of 1994. Of this
amount, approximately $1.0 billion of assets were attributable to client
relationships that moved with a portfolio manager who resigned prior to
September 30, 1994, and an additional $1.3 billion of assets were
attributable to client relationships that moved with four other portfolio
managers who resigned after September 30, 1994. In connection with this
latter departure of assets, these four portfolio managers have agreed make
certain payments to Stein Roe based on a specified formula. The amount owed
to Stein Roe under this formula through December 31, 1994 was approximately
$5.6 million. Such amount is subject to adjustment in certain circumstances.
The $2.7 billion of asset withdrawals in the fourth quarter is anticipated to
result in an annualized revenue reduction of approximately $6.3 million. See
"Management Discussion and Analysis of Results of Operations and Financial
Condition--Results of Operations."
Liberty Financial believes that these resignations are due primarily to the
expiration on December 31, 1993 of the non-competition covenants, described
below, to which such persons had been subject. The non-competition covenants
were entered into in July, 1990 when Liberty Financial acquired the remaining
minority equity interests in Stein Roe. See "General--Corporate Structure and
History." The Stein Roe employees who sold such interests entered into a
purchase agreement which, among other things, prohibited them from (i)
competing with Stein Roe and (ii) soliciting Stein Roe's clients or
personnel. The non-competition covenants terminated on December 31, 1993,
while the provisions which prohibit solicitation of Stein Roe's clients or
employees will continue until the expiration of the two-year period following
the termination of any such person's employment with Stein Roe. As of the
date of this Prospectus/Proxy Statement, nine former Stein Roe executives
(including six portfolio managers) have resigned from the firm since December
31, 1993, and 36 of Stein Roe's current executives, portfolio managers and
research analysts remain subject to this agreement.
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Stein Roe currently is engaged in an ongoing program to restructure and
streamline its operations, enhance its product offerings, expand its
marketing efforts, increase assets under management and increase its
profitability. As part of this process, during the past two years Stein Roe
has introduced new and enhanced advisory products and services and expanded
its marketing efforts. In addition, Stein Roe undertook a comprehensive
efficiency improvement study begun in the fall of 1994 and completed in
January, 1995. This study was performed to develop a program for building a
more efficient organization with enhanced customer service and improved
profitability. This program, which will begin to be implemented in the first
quarter of 1995, will involve a comprehensive reorganization of Stein Roe's
research and investment management activities and its administrative
operations and procedures. Liberty Financial intends to recognize a charge to
income of approximately $3.0 million in connection with this program,
reflecting anticipated severance costs, project costs, consulting fees and
other direct expenses incurred in its implementation. See "Management's
Discussion and Analysis of Results of Operations and Financial
Condition--Restructuring Charges." As is the case with any reorganization of
this nature, there is a risk that it could lead to additional resignations of
key employees and losses of client relationships. See "Risk Factors--Reliance
on Key Personnel."
Mutual Fund Division
Stein Roe's Mutual Fund division develops and sponsors mutual fund products
for no-load, load and variable annuity customers. As of September 30, 1994,
the division managed approximately $6.8 billion of net assets in 17 no-load
mutual funds marketed under the "SteinRoe Funds" name, five load mutual funds
marketed under the "Liberty Financial Trust" name, and seven of the 13 mutual
funds which support Keyport's variable annuities. Stein Roe seeks to expand
both its no-load and load mutual fund assets and manage new assets generated
by Keyport's sale of variable annuities, thereby leveraging Stein Roe's
mutual fund management expertise and Liberty Financial's product development
and distribution capabilities.
SteinRoe Funds. The 17 SteinRoe Funds, which had net assets of approximately
$4.7 billion at September 30, 1994, include equity growth, growth and income,
international equity, taxable bond, money market, and municipal bond funds.
Historically, the SteinRoe Funds have been marketed through direct mail and
newspaper and magazine advertising. In August 1992, Stein Roe began selling
the SteinRoe Funds through discount brokerage firms, including Charles Schwab
& Co., Inc. ("Schwab"). As of September 30, 1994, the Schwab arrangement had
generated over $415.2 million in no-load fund assets under management. 45.7%
of Stein Roe's sales through Schwab were shares of the SteinRoe Special Fund,
a value-oriented fund, which invests in special situations.
Stein Roe introduced its Counselor(SM) mutual fund advisory service in
February 1993. The basic Counselor service offers asset allocation guidance
for no additional fee to investors who commit a minimum of $50,000 to the
SteinRoe Funds. Each investor completes a questionnaire regarding his or her
investment time horizon, risk tolerance, individual circumstances and
financial goals. Stein Roe analyzes the client's data and provides
recommendations for allocating investments among the various SteinRoe Funds.
The client receives monthly updates of these recommendations and is assigned
a personal investment professional who is available to discuss allocation
recommendations. Liberty Financial believes the Counselor programs allow
Stein Roe to extend to the retail marketplace and its existing clientele a
level of advisory service formerly reserved for larger private accounts. The
Counselor programs had approximately $319.4 million in assets under
management at September 30, 1994 (approximately $274.9 million of which were
derived from existing clients of the Investment Counsel and Mutual Fund
divisions).
Liberty Financial Trust Funds. The five Liberty Financial Trust mutual funds
(the "LFT Funds"), which had net assets of approximately $1.3 billion at
September 30, 1994, include tax-exempt income, U.S. government securities,
utilities, insured municipal securities, and growth and income funds.
Historically, the LFT Funds have been distributed almost exclusively through
the Bank Marketing Group.
Liberty Financial currently is soliciting consents from shareholders of four
of the five LFT Funds for the merger of each such fund into a Company Fund
having similar investment objectives. As of
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September 30, 1994, these four LFT Funds had net assets of approximately $1.1
billion. In the case of the other LFT Fund, Liberty Financial currently is
soliciting consents from its shareholders to merge such fund into a
newly-created Colonial fund having multiple classes of shares similar to the
shares offered by the Company Funds, although Stein Roe would continue to
manage such fund. Obtaining such consents is not a condition precedent to the
Merger, and there can be no assurances that such shareholder consents will be
obtained.
Investment Counsel Division
The Investment Counsel division continues the tradition of the firm's
founders by providing personal attention in developing and managing
investment portfolios primarily for wealthy individuals and families. The
Investment Counsel division, which managed approximately $4.1 billion of
assets at September 30, 1994, services its clients from Stein Roe's
headquarters in Chicago, as well as from regional offices in Cleveland, Fort
Lauderdale and New York.
The Investment Counsel division currently targets clients with at least one
million dollars in investable assets. Liberty Financial believes that Stein
Roe's strengths in managing assets for wealthy individuals are its client
service, investment performance and independence.
Historically, the majority of Stein Roe's new high net worth accounts have
been generated by referrals from existing clients and other persons doing
business with the firm. Stein Roe has been expanding its internal sales force
and developing marketing programs designed to increase its visibility among
potential private counseling clients. Stein Roe frequently invests portions
of the assets of Investment Counsel clients in shares of the SteinRoe funds
to obtain the benefits of diversification and for other investment reasons.
Smaller Investment Counsel accounts (those of less than $1 million) may be
invested exclusively in shares of SteinRoe funds.
Institutional Asset Management Division
In 1949, Stein Roe expanded its focus beyond individual accounts to serve the
needs of insurance companies, public and private retirement funds,
endowments, foundations and other institutions. The Institutional Asset
Management Division, which at September 30, 1994, managed approximately $15.3
billion of assets is currently organized into four groups.
The largest group is dedicated to managing assets for Keyport's general
account ($8.1 billion as of September 30, 1994). See "--Keyport--General
Account Investments." The other three groups are designed to serve separate
segments in the institutional marketplace and managed an aggregate of $7.2
billion as of September 30, 1994. The Insurance Asset Management group, with
assets under management of approximately $2.3 billion as of September 30,
1994, manages general account fixed- income securities for insurance
companies by coordinating investment strategy with liability management and
applicable regulatory constraints. The group managed assets for 21 insurance
companies at September 30, 1994. The Fixed-Income Management group, with
approximately $2.0 billion of assets under management as of September 30,
1994, manages portfolios of high-grade debt securities with the objectives of
minimizing credit risk and seeking enhanced value through exploiting market
inefficiencies in securities pricing. The Capital Management group, with
approximately $1.6 billion of managed assets as of September 30, 1994,
manages portfolios of large capitalization growth stocks. Because certain
institutional clients have become more specialized in their portfolio
management and servicing requirements, Liberty Financial believes that these
market-oriented groups will more effectively serve the specific needs of each
targeted client segment.
Institutional investors increasingly rely on a competitive review process
when selecting investment advisory firms. This process often includes the
assistance of independent investment management consultants, which analyze,
rank and recommend advisers as well as conduct searches for advisers on
behalf of their clients. The consultants classify firms according to their
investment style and place heavy emphasis on a demonstrated record of
investment performance within a particular style. The targeted clients of
Stein Roe's Fixed-Income Management, Capital Management and Insurance Asset
Management groups generally rely heavily on consultants.
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Bank Distribution Channel
In the past 10 years, banks have emerged as an important distribution channel
for insurance and investment products and services. In recent years, Keyport
has emphasized distribution through banks. Keyport has a wholesaling group
dedicated to expanding further the distribution of its products through the
bank channel. See "--Keyport--Marketing and Distribution." Substantially all
of the sales of the LFT Funds have been through the Bank Marketing Group.
During 1993 and the nine months ended September 30, 1994, the bank
distribution channel (including the Bank Marketing Group) accounted for 38.1%
and 39.7%, respectively, of Liberty Financial's total proprietary annuity and
mutual fund product sales and 77.7% and 70.0%, respectively, of Keyport's
annuity sales. Liberty Financial developed the Bank Marketing Group as a
proprietary distribution vehicle for its products and services in the bank
channel. The Bank Marketing Group accounted for 19.2% and 15.0%,
respectively, of Liberty Financial's total proprietary annuity and mutual
fund product sales in 1993 and the nine months ended September 30, 1994.
In the early 1990s, declining interest rates offered on traditional retail
banking products such as certificates of deposit and other interest-bearing
accounts led many bank customers to transfer assets into alternative products
offered by mutual funds, life insurance companies and other investment firms.
To counter the outflow of customer deposits, many banks implemented
alternative marketing programs designed to generate fee income while
preserving their traditional customer relationships. Liberty Financial
believes that the expansion into such fee-generating businesses is a
permanent development in the banking industry and that bank distribution will
continue to be an important distribution channel for Liberty Financial's
proprietary products. The distribution of products through banks is subject
to economic factors impacting the banking industry (including consolidation
within the industry and an emphasis within banks on internalizing
fee-generating businesses) and also is heavily regulated. No assurances can
be given as to the impact of these developments on Liberty Financial's
ability to sell products through the bank channel. See "Risk
Factors--Reliance on Bank Distribution Channels and Certain Distributors" and
"--Regulation."
Bank Marketing Group
The Bank Marketing Group designs and implements programs that market both
proprietary and third-party sponsored products, licenses and trains sales
personnel and provides administrative support to meet the evolving needs of
banks and their customers. As of September 30, 1994, the Bank Marketing Group
had 57 relationships in 27 states. The table below sets forth certain
information with respect to product sales by the Bank Marketing Group for the
periods indicated.
Bank Marketing Group
Product Sales and Number of Programs
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
1991 1992 1993 1993 1994
(in millions)
<S> <C> <C> <C> <C> <C>
Mutual Funds:
Proprietary ((1)) $369.3 $ 517.4 $ 431.4 $ 369.0 $ 97.7
Third-Party Sponsored 328.1 354.1 620.3 393.5 462.8
Annuities:
Proprietary 203.8 226.2 213.7 154.9 205.0
Third-Party Sponsored 93.2 115.9 235.3 139.5 273.9
Total $994.4 $1,213.6 $1,500.7 $1,056.9 $1,039.4
Number of Client Banks 50 56 67 68 57
</TABLE>
(1) Consists of shares of the LFT Funds. As described above under
"SteinRoe--Mutual Funds Division," Liberty Financial proposes to merge the
LFT Funds with certain Company Funds or newly created Colonial Funds.
The purpose of the Bank Marketing Group is to sell proprietary products which
will generate additional spread- or fee-based income for Liberty Financial.
Although sales of non-proprietary products
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generate commission revenues, such revenues are not material to Liberty
Financial's results of operations. Between December 31, 1993 and September
30, 1994, there occurred a net decline of 10 programs operated by the Bank
Marketing Group. Terminated programs accounted for $214.1 million and $75.9
million, respectively, of the Bank Marketing Group's proprietary product
sales in 1993 and the nine months ended September 30, 1994. The primary cause
of these program terminations has been decisions by client banks to
internalize their programs. In addition, certain client banks have been
acquired by larger banks having their own internal programs or programs with
other bank marketing companies. It is anticipated that seven additional bank
programs which accounted for $127.6 million and $43.9 million, respectively,
of proprietary product sales in 1993 and the nine months ended September 30,
1994 will be terminated between the date of this Prospectus/Proxy Statement
and April, 1995.
Liberty Financial believes that the decrease in proprietary mutual fund sales
in the nine months ended September 30, 1994 compared to the comparable period
in 1993 reflected in the table above is attributable primarily to an
increasing interest rate environment and general market conditions which
resulted in mutual funds with a fixed income orientation, such as four of the
five LFT Funds, being less attractive to bank customers. Such lower mutual
fund sales have been offset in part by higher sales of Keyport's annuities
(predominantly SPDAs, sales of which have benefited from such interest rate
environment). As described above under "--Stein Roe--Mutual Fund Division,"
Liberty Financial is soliciting consents from the shareholders of the LFT
Funds to merge such funds into existing or newly created Colonial funds.
As a result of these terminated programs and the decrease in proprietary
mutual fund sales, the Bank Marketing Group has experienced overcapacity in
its administrative operations. Accordingly, Liberty Financial will recognize,
in the fourth quarter of 1994, a restructuring charge of approximately
$300,000. This charge primarily reflects anticipated severance costs of
certain Bank Marketing Group administrative employees. See "Management's
Discussion of Results of Operations and Financial Condition--Restructuring
Charges."
The Merger will reduce the relative importance of the Bank Marketing Group as
a distributor of Liberty Financial's proprietary products. In this regard,
Colonial has developed relationships in the bank channel similar to those of
Keyport. Following the Merger, Liberty Financial may explore opportunities to
consolidate marketing efforts through the bank channel.
Program Structures. The Bank Marketing Group's programs typically include
sales of Liberty Financial's proprietary load mutual funds and annuities,
third party-sponsored load mutual funds and annuities and, in certain cases,
the client bank's proprietary mutual funds. Product sales through the Bank
Marketing Group generate sales commissions, the rates and structures of which
vary according to the type of product. A portion of the total commission is
paid as compensation to the salesperson. In addition, the Bank Marketing
Group typically makes rental or license fee payments to its client banks
based either on a percentage of commission revenues or on a fixed-rate basis.
Each program is conducted pursuant to a written agreement with the client
bank, which typically is terminable by either party upon 60 days' notice.
The Bank Marketing Group has developed three general program structures which
are customized for each bank client. In fully-managed programs, all
salespersons are Bank Marketing Group employees. In platform programs, bank
employees who perform standard banking functions in the branch (the
"platform") also sell mutual funds and/or annuities. In dedicated programs,
salespeople employed by the bank or a bank affiliate sell securities and/or
insurance products and do not perform banking functions. In platform and
dedicated programs, sales persons may be licensed to sell investment or
insurance products either through a bank affiliate or through the Bank
Marketing Group.
Fully-managed programs are "turnkey" arrangements in which the bank leases or
otherwise makes available to the Bank Marketing Group space in its branches.
Client banks in these programs wish to provide investment and insurance
products to their customers, but have not chosen to develop their own retail
sales force and product distribution infrastructure. Sales are made by the
Bank Marketing Group investment executives.
In platform and dedicated programs, the Bank Marketing Group provides
proprietary and third-party sponsored investment products, assistance in
obtaining licensing for sales personnel, and marketing,
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training and administrative support (including order processing). The
services which the Bank Marketing Group provides to a bank client in such
programs will depend on the size, experience and requirements of that client.
Some clients elect hybrid programs containing elements of both platform and
dedicated programs. In certain cases, the Bank Marketing Group's role may be
limited to one of wholesaler of the Liberty Financial's proprietary products.
In addition, the Bank Marketing Group operates a program for one client bank
that combines elements of fully managed and platform sales.
Licensing. The Bank Marketing Group is an operational unit of Liberty
Financial conducted through LSC and certain other subsidiaries of Liberty
Financial. LSC is registered as a broker-dealer with the SEC, and is a member
of the National Association of Securities Dealers, Inc. LSC is licensed as a
broker-dealer in all 50 states, the District of Columbia and The Commonwealth
of Puerto Rico, and LSC and such other subsidiaries collectively are licensed
as insurance agencies in 46 states and the District of Columbia.
Other Asset Management Businesses
Liberty Financial also manages investment assets through two other business
units: Liberty Asset Management Company ("LAMCO"), which provides investment
management services to three investment funds with approximately $885.7
million of managed assets as of September 30, 1994; and Liberty Real Estate
Group, Inc. ("Liberty Real Estate") with approximately $532.2 million of
managed assets as of that date.
LAMCO manages two investment funds employing a "multi-management" investment
methodology: the Liberty ALL-STAR Equity Fund, which is a closed-end fund
listed on the New York Stock Exchange that had approximately $729.2 million
in net assets as of September 30, 1994, and the Liberty ALL-STAR World
Portfolio, which is an open-end fund organized under the laws of Luxembourg
that had $34.7 million in net assets as of September 30, 1994. LAMCO's
"multi-management" approach involves the selection by LAMCO of a team of
independent investment management firms to manage each fund. Each firm is
selected for its success and consistency in the application of a distinct
investment management style. LAMCO typically maintains an approximately equal
allocation among the different styles by shifting assets among the portfolio
managers from time to time. This multi-management approach of selecting
independent investment management firms, combining different investment
management styles within a specific fund and then maintaining the allocation
of the assets among the portfolio managers is designed to achieve good
long-term investment performance with greater consistency and less volatility
than management by a single advisory firm employing only one investment
style.
In June, 1994, pursuant to an agreement (the "GSO Agreement") by and among
LAMCO, Charles Allmon and Growth Stock Outlook, Inc. ("GSO"), investment
adviser to The Charles Allmon Trust, Inc. (the "Allmon Trust"), a New York
Stock Exchange-listed closed-end fund, LAMCO became an investment adviser
with respect to a portion of the portfolio assets of the Allmon Trust. LAMCO
has implemented its multi-management approach with respect to this portion of
the Allmon Trust portfolio ($24.8 million as of September 30, 1994). GSO
continues to manage the remainder of such portfolio ($97.0 million as of
September 30, 1994). Under the terms of the GSO Agreement, subject to certain
conditions (including the approval of the shareholders of the Allmon Trust),
LAMCO is expected to replace GSO as investment adviser for the remainder of
the Allmon Trust in May, 1995.
LAMCO's management fee income was approximately $5.3 million and $4.3 million
in 1993 and the nine months ended September 30, 1994, respectively (40% of
which was paid to the independent investment management firms).
Liberty Real Estate was organized in 1990 to provide asset management
services and property management services to real estate limited partnerships
(the "Affiliated Partnerships") for which an affiliate of Liberty Mutual
serves as general partner. Liberty Real Estate also provides such services to
other real estate investors and owners. See "Relationship With Liberty
Mutual--Certain Other Transactions." Properties managed by Liberty Real
Estate include office, retail, residential, hotel and health care properties
in 21 states. Liberty Real Estate's asset management and property management
fees totaled approximately $8.3 million and $6.4 million in 1993 and the nine
months ended September 30, 1994, respectively. To take advantage of the
recent strengthening of real estate values, it has been determined to offer
for sale substantially all of the properties held by the Affiliated
Partnerships and
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managed by Liberty Real Estate. The effect of these property sales, upon
completion, will be to reduce materially the management fees earned by
Liberty Real Estate and the concomitant compensation and benefits expense of
the terminated employees. Accordingly, Liberty Financial intends to
recognize, in the fourth quarter of 1994, a restructuring charge of
approximately $2.0 million. This charge reflects anticipated severance costs
associated with the staff reductions at Liberty Real Estate.
On November 11, 1994, Liberty Financial entered into an agreement to acquire
for cash all the outstanding capital stock of Newport Holdings Ltd. ("Newport
Holdings"), the parent company of Newport Pacific Management, Inc. ("Newport
Pacific"). Newport Pacific is a registered investment adviser under the
Investment Advisers Act and owns 75.1% of the outstanding capital stock of
Newport Fund Management, Inc. ("NFM"). Simultaneously, Liberty Financial
entered into an agreement to acquire the remaining 24.9% of NFM not owned by
Newport Pacific. NFM acts as investment adviser to the Newport Tiger Fund, an
open-end investment company with total net assets of $454.0 million as of
September 30, 1994. As of September 30, 1994, NFM also managed $119.8 million
for other clients. For the year ended December 31, 1993, Newport Pacific
recorded total management fees and other income of $2.5 million, including
$1.7 million with respect to Newport Tiger Fund. Although no assurances can
be given, Liberty Financial anticipates that this acquisition, which is not
material to Liberty Financial's operations or financial condition, will be
consummated following the Closing Date. This transaction is subject to the
approval of the stockholders of the Newport Tiger Fund and certain other
conditions.
Business Relationships with Colonial
Liberty Financial and Colonial have maintained various business relationships
during the periods for which financial statements are presented or
incorporated by reference in this Prospectus/Proxy Statement. As described
above under "--Keyport--Products--Variable Annuities," since July, 1993
Colonial has managed certain mutual funds sponsored by Keyport that are
available as investment options underlying its variable annuities. During
1993 and the nine months ended September 30, 1994, an affiliate of Keyport
paid $181,285 and $438,050, respectively, to Colonial for investment
management services provided by Colonial. These amounts constituted a portion
of the total management fees paid by the funds to such Keyport affiliate.
As described above under "The Companies--Colonial," Colonial also distributes
Keyport's variable annuities (an arrangement commenced in April, 1994).
During the nine months ended September 30, 1994, Liberty Financial paid
Colonial $138,420 for these services.
The Bank Marketing Group also distributes shares of the Company Funds. During
1991, 1992, 1993 and the nine months ended September 30, 1994, Colonial paid
the bank marketing group sales commissions and similar fees in the aggregate
amount of $11,409, $250,970, $449,262 and $893,246, respectively.
Investment Management Agreements and Fees
Liberty Financial's investment management accounts are each managed pursuant
to a written investment management agreement with the client which, with very
limited exceptions, is terminable at any time or upon relatively short notice
(typically 30 to 60 days) by either party. Services generally are offered on
a discretionary basis, where the investment management firm makes the
investment decisions for the assets under management. The contracts may not
be assigned without the consent of the client. Investment management
agreements with mutual funds may be terminated at any time by the mutual fund
upon 60 days' notice, terminate automatically in the event of their
assignment, and are subject to annual renewal by the disinterested trustees
of the mutual fund. For purposes of all contracts entered into by those
Liberty Financial subsidiaries which are SEC-registered investment advisors,
"assignment" of investment management contracts is defined to include certain
changes in ownership of Liberty Financial or of such subsidiaries. See "Risk
Factors--Regulation" and "--Regulation--Asset Management."
In providing investment management services, Liberty Financial's investment
management firms are principally compensated on the basis of fees calculated
as a percentage of assets under management. Fees of clients other than mutual
funds are generally billed and are payable quarterly and typically are
calculated on the asset value of an account at the beginning or end of a
quarter. Assets are valued at
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their current market values. The fee schedules typically provide lower
incremental fees above certain levels of managed assets. Management fees for
mutual funds are calculated based upon fund average daily net assets. Fees
paid by a fund must be approved by the fund's Board of Trustees, including a
majority of the disinterested trustees. Increases in the fees must be
approved by the fund's shareholders.
Regulation
Liberty Financial's business activities are subject to extensive regulation.
Set forth below is a summary discussion of the principal regulatory
requirements applicable to Liberty Financial.
Insurance Activities
Keyport is subject to the insurance laws and regulations of the State of
Rhode Island, where it is organized, and of the other jurisdictions in which
it transacts business. (Keyport is currently licensed to conduct business in
every state except New York and in the District of Columbia.) Such laws and
regulations and the level of supervisory authority that may be exercised by
the state insurance agencies vary from jurisdiction to jurisdiction. The
primary regulator of Keyport's operations is the Department of Business
Regulation for the State of Rhode Island.
State insurance laws generally provide regulators with broad administrative
and supervisory powers related to the grant and revocation of licenses to
transact business, the supervision of guaranty fund associations, the
approval of contract and policy forms, the establishment of reserve
requirements, the prescription of the form and content of required financial
statements and reports, the determination of the reasonableness and adequacy
of statutory capital and surplus, the regulation of both the type and amount
of investments and the rehabilitation and liquidation of insolvent insurance
companies. The state regulators also make periodic examinations of individual
companies and review annual and other reports on the financial conditions of
all companies operating within their respective jurisdictions. The Rhode
Island Department of Business Regulation (the "Rhode Island Department")
completed an examination of Keyport in February 1991 for the period ended
December 31, 1989. Keyport responded to all the recommendations contained in
the report. The Rhode Island Department is currently conducting an
examination of Keyport for the period ended December 31, 1993.
Liberty Financial is not licensed to offer variable annuities in New York.
Liberty Life, a subsidiary of Liberty Mutual which is authorized to offer
variable annuities in the State of New York, issues variable annuities having
substantially the same terms and the same underlying investment options to
those issued by Keyport in other jurisdictions. See "--Keyport--Licensing"
and "Relationships with Liberty Mutual--Certain Other Transactions."
Insurance Holding Company Regulation. Applicable insurance holding company
laws grant additional powers to state insurance commissioners to regulate
acquisitions, sales and other dispositions of insurance companies. These laws
impose prior approval requirements for certain transactions with affiliates
and generally regulate dividend payments by an insurance subsidiary to its
parent company. Keyport may not make dividend payments in excess of the
lesser of (i) 10% of its statutory surplus as of the preceding December 31 or
(ii) its statutory net gain from operations for the preceding fiscal year
without prior approval by the Commissioner of Insurance of the State of Rhode
Island. As of September 30, 1994, such restriction would limit dividends
without such approval to approximately $51.7 million. Keyport has not paid
any dividends since its acquisition by Liberty Mutual in December 1988. See
"Dividend Policy."
Guaranty Fund Assessments. Under the insurance guaranty fund laws existing in
each state, insurers licensed to do business in the state can be assessed for
certain obligations of insolvent insurance companies to policyholders and
claimants. The amounts actually assessed to and paid by Keyport for the years
ended December 31, 1991, 1992 and 1993 and for the nine months ended
September 30, 1994 were approximately $2.1 million, $6.2 million, $7.3
million and $2.7 million, respectively. Because such assessments are
typically not made for several years after an insurer fails and depend upon
the final outcome of liquidation or rehabilitation proceedings, Keyport
cannot accurately determine the precise amount or timing of its exposure to
known insurance company insolvencies at this time. However, based in part on
industry estimates compiled by NOLHGA, Keyport increased its reserves
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in 1992 by a $28.2 million provision reflecting Keyport's estimate of the
future assessments with respect to such known insolvencies. During 1991, 1992
and 1993 and the nine months ended September 30, 1994, Keyport recorded $3.2
million, $35.0 million (which amount includes the $28.2 million referred to
above), $3.7 million and $5.4 million, respectively, of provisions for state
guaranty fund association expenses. Based on information provided by NOLHGA
as of January, 1994 with respect to aggregate assessments related to known
insolvencies, the range of future assessments with respect to known
insolvencies is estimated by Keyport to be between $19.0 million and $28.0
million, taking into account the NOLHGA information as well as Keyport's own
estimate of its potential share of such aggregate assessments. At September
30, 1994, Keyport's reserve for such assessments was $27.2 million. No
assurances can be given that the reserve will be adequate. The reserve does
not include any provision for future assessments related to unknown failures
or to known failures for which no estimate of Keyport's exposure currently
can be made. Liberty Financial is not aware of any significant insurance
company insolvencies for which an estimate of Keyport's guaranty fund
assessments has not been made. The insolvency of large life insurance
companies in future years could result in additional material assessments to
Keyport by state guaranty funds that could have a material adverse impact on
Liberty Financial's future earnings and financial condition. Keyport reviews
at least quarterly information regarding known failures of insurers and
revises its estimate of future guaranty fund assessments accordingly. See
"Risk Factors--Guaranty Fund Assessments" and "Management's Discussion and
Analysis of Results of Operations and Financial Condition--Insurance Company
Guaranty Fund Assessments."
NAIC Initiatives. Recently, the insurance regulatory framework has been
placed under increased scrutiny by various states and the NAIC. Various
states have considered or enacted legislation that changes, and in many cases
increases, the state's authority to regulate insurance companies. The NAIC
recently approved and recommended to the states for adoption and
implementation several regulatory initiatives designed to reduce the risk of
insurance company insolvencies. These initiatives include new investment
reserve requirements, risk-based capital standards, and additional
restrictions on an insurance company's ability to pay dividends or other
distributions to its stockholders. A discussion draft of a model investment
law also has been issued by a NAIC subcommittee. These initiatives may be
adopted by the states in which Keyport is licensed to transact business, but
the timing and final form of any statutes and regulations resulting from
these initiatives is uncertain at this time.
IRIS Ratios. The NAIC's Insurance Regulatory Information System ("IRIS")
was developed by a committee of state insurance regulators primarily to
assist state insurance departments in executing their statutory mandates to
oversee the financial condition of insurance companies operating in their
respective states. IRIS identifies 13 industry ratios and specifies "usual
ranges" for each ratio. Departure from the usual values on four or more of
the ratios in any year could lead to inquiries from individual state
insurance commissioners as to certain aspects of Keyport's business. The IRIS
ratios were designed to advise state insurance regulators of significant
changes in the operations of an insurance company which may or may not
reflect a potential insolvency or financial deficiency. Such changes may
merely indicate changes in certain ratios outside ranges defined as normal by
the NAIC for reasons which do not necessarily reflect unfavorably on an
insurance company's financial condition. Keyport fell outside the usual
values for one of the 13 ratios in 1992 and for two of such ratios in 1991.
Keyport fell within the usual values for all 13 ratios in 1993. During 1991
and 1992 Keyport's change in reserving ratio was outside the usual value
range. This value range represents the number of percentage points difference
between the reserving ratio for current and prior years. For each of these
years, the "reserving ratio" is equal to the aggregate increase in reserves
for individual life insurance taken as a percentage of renewal and single
premiums for individual life policies. Keyport's results were outside the
usual range due to the significant decrease in its SPWL sales. This decrease
was largely due to changes in the Code enacted in 1986 which eliminated
certain of the attractive investment features of SPWLs. For 1991, Keyport's
gross change in capital and surplus of 92% exceeded the usual maximum value
of 50%. The increase in capital and surplus exceeded the usual value due to
the $100 million capital contribution from Liberty Financial, the funds for
which Liberty Financial received from Liberty Mutual and which were applied
to purchase certain mortgages from certain affiliate of Liberty Mutual. See
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"Relationships with Liberty Mutual--Certain Other Transactions." State
regulators typically do not initiate investigations unless an insurer departs
from usual values on four or more of the NAIC IRIS ratios, Keyport has not
received any inquiries from any state regulatory authorities as a result of
its falling outside the usual values for such ratios in 1991 and 1992.
Mandatory Investment Reserves. Under rules adopted by the NAIC and
implemented in 1992, a life insurance company is required to calculate an
asset valuation reserve ("AVR"), and an interest maintenance reserve ("IMR").
These reserves are not recorded under the provisions of GAAP and therefore
have no impact on Liberty Financial's reported results of operations or
financial position. These reserves affect the determination of statutory
policyholders' surplus, and changes in such reserves may impact the ability
of Keyport to pay dividends or make other distributions to Liberty Financial.
The extent of the impact of AVR will depend upon the future composition of
Keyport's investment portfolio. The extent of the impact of IMR will depend
on the amount of future interest- related realized gains and losses on fixed
maturity investments. Based on Keyport's current investment portfolio,
Liberty Financial does not anticipate that either the AVR or IMR will
materially adversely affect the ability of Keyport to pay dividends or make
other distributions to Liberty Financial.
Risk-Based Capital Requirements. The NAIC has adopted risk-based capital
("RBC") requirements that require insurance companies to calculate and report
information under a risk-based formula that attempts to measure statutory
capital and surplus needs based on the risks in a company's mix of products
and investment portfolio. Under the formula, a company first determines its
"risk-based capital" by taking into account (i) the risk with respect to the
insurer's assets; (ii) the risk of adverse insurance experience with respect
to the insurer's liabilities and obligations; (iii) the interest rate risk
with respect to the insurer's business; and (iv) all other business risks and
such other relevant risks as are set forth in the RBC instructions. A
company's "Total Adjusted Capital" is defined for these purposes as the sum
of statutory capital and surplus and such other items as the RBC instructions
may provide. The RBC formula also defines each company's "Authorized Control
Level RBC." The formula is intended to allow state insurance regulators to
identify inadequately capitalized companies that require regulatory
attention. The reporting requirement became effective for statutory-basis
financial statements beginning with year-end 1993.
The requirements provide for four different levels of regulatory attention.
Generally, the "Company Action Level" is triggered if a company's Total
Adjusted Capital is less than 2.0 times its Authorized Control Level RBC but
greater than or equal to 1.5 times its Authorized Control Level RBC. At the
Company Action Level, the company must submit a comprehensive plan to the
regulatory authority which proposes corrective actions to improve its capital
position. The "Regulatory Action Level" is triggered if a company's Total
Adjusted Capital is less than 1.5 times but greater than or equal to 1.0
times its Authorized Control Level RBC. At the Regulatory Action Level, the
regulatory authority will perform a special examination of the company and
issue an order specifying corrective actions that must be followed. The
"Authorized Control Level" is triggered if a company's Total Adjusted Capital
is less than 1.0 times but greater than or equal to 0.7 times its Authorized
Control Level RBC, and the regulatory authority may take action it deems
necessary, including placing the company under regulatory control. The
"Mandatory Control Level" is triggered if a company's Total Adjusted Capital
is less than 0.7 times its Authorized Control Level RBC, and the regulatory
authority is mandated to place the company under its control. As of September
30, 1994, Keyport's Total Adjusted Capital was approximately 2.9 times the
level at which the Company Action Level would be triggered.
Federal Regulation. Although the federal government generally does not
directly regulate the insurance industry, federal initiatives often have an
impact on the business. Congress and certain federal agencies are
investigating the current condition of the insurance industry in the United
States in order to decide whether some form of federal role in the regulation
of insurance companies would be appropriate. It is not possible to predict
the outcome of any such congressional activity or the potential effects
thereof on Liberty Financial.
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Asset Management
Liberty Financial's asset management business is also subject to extensive
regulation. Each of Stein Roe, LAMCO, Keyport Advisory Services Corporation
("KASC"), a wholly owned subsidiary of Keyport, and Liberty Financial
Advisers, Inc. ("LFA"), an indirect wholly-owned subsidiary of Liberty
Financial, is registered with the SEC under the Advisers Act and is
registered under certain state securities laws. Each of the mutual funds
managed by a Liberty Financial subsidiary is registered with the SEC under
the Investment Company Act and, in most cases, under certain state securities
laws. Stein Roe, LAMCO, KASC and LFA are subject to the Investment Company
Act insofar as it relates to investment advisors to registered investment
companies. A wholly-owned subsidiary of Stein Roe is registered as a
commodities trading advisor with the Commodity Futures Trading Commission.
LSC is a registered broker-dealer under the Exchange Act and certain state
securities laws. Keyport Financial Services Corp. ("KFSC"), a wholly-owned
subsidiary of Keyport and the principal underwriter of Keyport's annuities,
is similarly registered as a broker-dealer. Each of LSC and KFSC is subject
to minimum net capital requirements imposed by the SEC on broker-dealers, and
currently is in compliance with such requirements. In addition, each of LSC
and KFSC is subject to oversight by both the SEC and the National Association
of Securities Dealers, Inc. These securities regulators require that, in
addition to net capital requirements discussed above, LSC and KFSC comply
with a variety of operational standards, including proper record-keeping and
the licensing, registration and/or approval of their employees and
representatives. The regulators make periodic examinations of LSC and KFSC
and review annual, monthly and other reports on their operations and
financial condition.
Stein Roe is subject to ERISA and to regulations promulgated thereunder,
insofar as it is a "fiduciary" under ERISA with respect to its clients which
are employee benefit plans subject to ERISA.
The securities laws and regulations referred to above generally grant
supervisory agencies and bodies broad administrative powers, including the
power to limit or restrict a firm from conducting its business in the event
that it fails to comply with such laws and regulations. In addition to
maintaining registrations, the regulatory requirements include reporting,
maintenance of books and records in prescribed forms, mandatory custodial
arrangements, approval of employees, representatives and, in some cases,
owners, and other compliance procedures. Possible sanctions that may be
imposed in the event of noncompliance include the suspension of individual
employees, limitations on the firm's engaging in business for specified
periods of time, revocation of the firm's registration as an investment
advisor, broker-dealer or commodity trading advisor, censures and fines. The
regulators make periodic examinations and review annual, monthly and other
reports on the operations of Liberty Financial or its subsidiaries. Changes
in or a failure to comply with these laws or regulations could have a
material adverse impact on the profitability and mode of operations of
Liberty Financial.
As a registered investment adviser, Stein Roe is subject to various minimum
capital, net capital or net worth standards under the securities laws of
various states in which it conducts business. Compliance with such standards
may restrict Stein Roe's ability to pay dividends or other distributions to
Liberty Financial. As of December 31, 1994, Stein Roe exceeded the most
restrictive of these requirements by approximately $0.4 million. Such
standards may restrict Stein Roe's ability to make such payments to Liberty
Financial in an amount necessary to fund contemplated dividends on the LFC
Stock. See "Dividend Policy."
The Advisers Act provides that every investment management agreement between
a registered investment advisor and its client must expressly provide that it
may not be assigned by the investment advisor without the consent of the
client. Under the Advisers Act and the Investment Company Act, an investment
management agreement of any firm is deemed to have been assigned when there
is a "change in control" of the firm, either directly or indirectly, as
through a transfer of a "controlling block" of the firm's voting securities
or, under certain circumstances, upon the transfer of a "controlling block"
of the voting securities of its parent corporation. The Investment Company
Act presumes that any person holding more than 25% of the voting stock of any
person "controls" such person. The Advisers Act provides, in substance, that
if such a change in control were to occur, all investment management
agreements between the firm and its clients would terminate, unless the
clients consent to the
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continuation of the agreements. Under the Investment Company Act,
substantially similar change of control principles apply with respect to
investment management agreements with registered investment companies and
mandate approval by the board of trustees and fund shareholders approval for
deemed assignments of such investment management agreements. Following
completion of the Merger, sales by Liberty Mutual or other stockholders or
new issuances of equity securities by Liberty Financial, among other things,
may raise issues relating to a deemed assignment of the investment advisory
agreements of Liberty Financial or its subsidiaries under such statutes. The
LFC Restated Articles provide that no person or group deemed to be a
beneficial owner (as defined therein) of LFC Stock may vote more than 20% of
the total voting power of the LFC Stock outstanding. These provisions of the
LFC Restated Articles do not apply to Liberty Mutual, subsidiaries or
affiliates of Liberty Mutual, direct or indirect subsidiaries of Liberty
Financial and certain employee plans established or to be established by
Liberty Financial. Liberty Financial's Board of Directors may approve the
exemption of other persons or groups from the provisions described above.
While this voting limitation is in place to reduce the likelihood, under
certain circumstances, of inadvertent terminations of advisory agreements of
Liberty Financial or its subsidiaries as a result of "assignments" of such
investment advisory contracts, there can be no guarantees that this
limitation will prevent such a termination from occurring. In addition, such
limitation could be deemed to have an anti-takeover effect and to make
changes in management more difficult. See "Risk Factors--Regulation" and
"Comparison of Stockholders' Rights and Description of LFC Capital
Stock--Other Provisions Pertaining to a Change in Control."
The officers, directors and employees of Liberty Financial's investment
management subsidiaries may from time to time own securities which are also
owned by one or more of their clients. Each subsidiary has internal policies
with respect to individual investments and requires reporting of securities
transactions and restricts certain transactions so as to reduce the
possibility of conflicts of interest.
Bank Distribution
A substantial percentage of Liberty Financial's insurance and mutual fund
products is currently sold through the bank distribution channel involving
banks, including the Bank Marketing Group. During 1993 and the nine months
ended September 30, 1994, sales through this channel accounted for 38.1% and
39.7%, respectively, of Liberty Financial's sales and 77.7% and 70.0%,
respectively, of Keyport's annuity sales.
The recent growth in sales of mutual funds, annuities and other insurance and
investment products through or at banks has prompted increased scrutiny by
federal bank regulators and the SEC. The Office of the Comptroller of the
Currency (the regulator of national banks), the Office of Thrift Supervision
(the regulator of federally-chartered savings associations and banks), the
Board of Governors of the Federal Reserve System (the federal regulator of
state-chartered banks that are members of the Federal Reserve System), and
the Federal Deposit Insurance Corporation (the federal regulator of
state-chartered, non- member banks) in February 1994 jointly issued
guidelines which pertain to sales activities for non-deposit investment
products to retail bank customers. These guidelines, among other things, (i)
require the implementation of procedures to insure that the bank customers to
whom the mutual funds, annuities and other non-deposit investment products
are being offered or sold are informed that such products do not carry
deposit insurance, are not obligations of the bank and involve investment
risk, (ii) regulate the setting and manner of presentation in which such
products may be sold inside retail banking offices, (iii) restrict bank
employees who accept retail bank deposits from also selling non-bank deposit
investments and the manner in which such employees may be compensated for
referring customers to personnel who can offer non-deposit investment
products and (iv) impose on the management of the banks a duty to train their
personnel involved in sales of non-deposit investment products and to
establish compliance procedures, including procedures for monitoring the
non-deposit investment product sales activities conducted from the bank by
third parties such as the Bank Marketing Group. Subsequent to the issuance of
these guidelines, the various federal banking regulators have published
additional interpretations and procedures relative to the sale of non-deposit
investment products, and bank examiners have inspected numerous sales
programs conducted in bank lobbies by the Bank Marketing Group and other
marketing companies that distribute Liberty Financial's products. Liberty
Financial believes that these regulations and guidelines, as currently in
effect, will not have a material adverse effect on its business.
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The Bank Marketing Group's lease arrangements with its bank clients are
subject to, among other things, federal and state securities and banking laws
and state insurance laws. Securities sales activities through the Bank
Marketing Group are operated in accordance with the provisions of a
"no-action" letter issued to LSC by the staff of the SEC requiring, among
other things, that all the Bank Marketing Group's securities sales activities
be conducted by sales personnel who are registered representatives of LSC and
are subject to the supervision and control of LSC and limiting the functions
of non-registered bank personnel to ministerial duties. The "no action"
letter provides, in effect, that the SEC staff will not recommend enforcement
action against Liberty Financial if it operates in accordance with the
letter. The letter is not binding, however, on the courts and no assurances
can be given that the SEC will not change its position with respect to such
"no action" letter.
The Bank Marketing Group's insurance sales activities are subject to state
insurance laws, which in general require the licensing of all sales personnel
and, in many states, prohibit the insurance licensing of banks and their
affiliates and employees. LSC and certain other Liberty Financial
subsidiaries collectively are registered as insurance agencies in 46 states
with authority to sell annuities in those states and the District of
Columbia.
The Bank Marketing Group's staff includes persons who oversee and implement
legal compliance programs for Liberty Financial and assist its client banks
in the development and operation of their own programs. The Bank Marketing
Group's compliance procedures provide that all customers of its programs
complete a customer disclosure form prior to their initial purchase of
insurance or investment products.
In the last session of Congress, legislation was introduced which, among
other things, would prohibit bank tellers and other bank employees who accept
deposits from referring bank customers to persons offering non-deposit
investments unless the customer explicitly requests such a referral. Similar
legislation may be introduced in the future. Such provisions, if enacted,
could materially adversely affect Liberty Financial's distribution of
products in the bank marketing channel.
The legal authority of banks to sell annuities has been challenged in the
courts. In NationsBank of North Carolina, N.A. v. Variable Annuity Life
Insurance Co., the Supreme Court of the United States recently deferred to
the Comptroller of the Currency's determination that the selling of annuity
contracts by a national bank did not involve the bank in insurance activities
that would be impermissable for a national bank under federal law. Certain
courts have recently ruled that state law restrictions on the licensing of
insurance agents may prevent banks from being registered insurance agents if
the law of the state imposes restrictions on banks. To Liberty Financial's
knowledge, to date no bank has been prohibited from leasing space to a party
such as the Bank Marketing Group which sells annuities as a result of such
litigation.
The Florida Department of Insurance has proposed regulations effectively
prohibiting sales of insurance products in Florida at all banks (whether
federal or state) doing business in Florida. Liberty Financial and certain
other bank marketers have challenged the department's authority to adopt
these regulations. A decision by a Florida administrative hearing officer
upholding certain portions of these regulations and striking down certain
other portions has been rendered and subsequently appealed to the Florida
courts by Liberty Financial and various other parties in interest. If these
appeals are decided adversely to Liberty Financial, and the proposed
regulations take effect, Keyport would be prevented from selling its
annuities in Florida through the bank channel and the Bank Marketing Group
would be prohibited from selling annuities at Florida banks. Keyport's sales
through Florida banks were $212.2 million in 1993 and $94.4 million in the
nine months ended September 30, 1994, of which $5.9 million and $3.3 million,
respectively, were through the Bank Marketing Group. The Bank Marketing
Group's sales commissions on annuity sales at Florida banks were $300,000 and
$200,000 in 1993 and the nine months ended September 30, 1994, respectively.
There can be no assurance that Liberty Financial's appeals will be successful
or that other states will not seek to promulgate similar regulations.
Competition
All of Liberty Financial's business activities are conducted in extremely
competitive markets.
Keyport competes with a large number of other life insurance companies, some
of which are larger and more highly capitalized and have higher ratings than
Keyport. No one company dominates the
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industry. In addition, Keyport's products compete with alternative investment
vehicles available through financial institutions, brokerage firms and
investment managers. Liberty Financial believes that Keyport competes
principally with respect to product features, pricing, ratings and service.
According to A.M. Best, Keyport ranked 16th among U.S. life insurers in sales
of individual annuities in 1993 (the most recent period reported by A.M.
Best). Keyport's 1993 market share in this highly fragmented market was 1.5%
as reported by A.M. Best. (The market share of the highest ranking firm was
4.8% as so reported.) As indicated above, Keyport relies heavily on
distribution of its annuities through the bank channel. The overall growth of
annuity sales through banks has caused several other insurance companies to
emphasize this distribution channel, including a number of companies which
are larger and have greater access to capital than Liberty Financial. Liberty
Financial believes that Keyport can continue to compete successfully in this
market by offering innovative products and superior services. Liberty
Financial also believes that the Merger will allow Keyport to broaden its
market presence through Colonial's distribution channels, particularly with
respect to sales of variable annuities. In addition, financial institutions
and broker-dealers focus on the insurer's ratings for claims-paying ability
in determining whether to market the insurer's annuities. At present, Keyport
is rated "A+" (Superior) by A.M. Best, "AA-" by S&P and "A1" by Moody's.
Keyport's ratings can be withdrawn or downgraded at any time by the
applicable rating agency. If any of Keyport's ratings were downgraded from
their current levels or if the ratings of Keyport's competitors improved and
Keyport's did not, sales of Keyport's products (and the level of surrenders
on existing policies) could be materially adversely affected. These ratings
are not "market" ratings or recommendations to use or invest in Keyport or
Liberty Financial, but merely reflect the opinion of the rating company as to
the relative financial strength of Keyport and Keyport's ability to meet its
contractual obligations to its policyholders. See "Risk Factors--Importance
of Credit Ratings" and "--Keyport-- Financial Ratings."
Liberty Financial's investment management operations compete with a large
number of other investment management firms, commercial banks, insurance
companies, broker-dealers and others in the business. Many of these firms are
larger and have access to greater resources than Liberty Financial. Stein Roe
directly competes with more than 100 investment advisory firms of similar or
larger size (in terms of client assets under management) and scope (in terms
of range of investment advisory services offered), and with as many as
several thousand firms which are of smaller size or more limited scope. The
investment advisory industry is characterized by relatively low cost of
entry, and the formation of new investment advisory entities which may
compete directly with Stein Roe is a frequent occurrence. Liberty Financial
believes that the most important factors affecting competition for investment
management clients are the performance records and reputations of investment
managers, marketing and access to distribution, product innovation, customer
service, and pricing policies. Liberty Financial's ability to increase and
retain clients' assets could be materially adversely affected if client
accounts underperform the market or if key investment managers leave the
firm. As indicated above, since December 31, 1993, nine former Stein Roe
executives (including six portfolio managers) have left Stein Roe. See
"--Stein Roe." The ability of Liberty Financial's investment management
subsidiaries to compete with other investment management firms also is
dependent, in part, on the relative attractiveness of their investment
philosophies and methods under prevailing market conditions.
A large number of mutual funds are sold to the public by investment
management firms, broker- dealers, insurance companies and banks in
competition with Liberty Financial's funds. Many of Liberty Financial's
competitors apply substantial resources to advertising and marketing their
mutual funds which may adversely affect the ability of Liberty
Financial-sponsored funds to attract new assets. Load mutual funds have for
some time faced significant competition from no-load funds, resulting in the
reduction of front-end sales loads and leading to consideration of
alternative load structures. Shareholder account service is also important to
retaining mutual fund customers. A number of banks with which the Bank
Marketing Group maintains marketing programs have launched or intend to
launch proprietary mutual funds that will compete directly with Liberty
Financial-sponsored funds. Liberty Financial expects that there will be
increasing pressures among mutual fund sponsors to obtain and hold market
share.
In addition, competition is increasing among sponsors of load mutual funds to
access and maintain wholesaling relationships with third party distribution
firms. Liberty Financial believes that the most important factors affecting
competition for such relationships are the performance records and
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reputations of the fund sponsor, the degree of marketing support and other
services the fund sponsor provides to the distribution firm and its customers
(fund shareholders), the scope of the fund sponsor's product line, and the
fund sponsor's pricing structure. A substantial percentage of Colonial's
mutual fund product sales currently are made through a relatively small
number of third party distribution firms. In January, 1995, the firm which
has been Colonial's largest distributor, accounting for approximately 14.1%
of Colonial's gross mutual fund sales during the nine months ended September
30, 1994 and for approximately 18.4% of its assets under management as of
September 30, 1994, removed Colonial from its list of preferred providers.
Additional impairment of Colonial's significant distribution relationships
could have a material adverse effect on Colonial's product sales and
redemptions and, consequently, on Liberty Financial. See "RISK
FACTORS--Reliance on the Bank Distribution Channel and Certain Distributors."
Several firms sponsor bank marketing programs in competition with those
sponsored by the Bank Marketing Group. Liberty Financial believes that the
most important factors in attracting client banks are flexibility in meeting
the bank's needs in structuring and implementing programs, the quality of
service and support to the bank and its customers and the ability to make
available a wide range of insurance and investment products.
Employees
As of September 30, 1994, the Liberty Financial had 1,239 full-time employees
summarized by activity as follows: 320 in insurance operations; 498 in asset
management activities; 354 employees in marketing and distribution
operations; and 67 in general corporate. Liberty Financial provides its
employees with a broad range of employee benefit programs. Liberty Financial
believes that its relations with its employees are excellent.
Properties
As of September 30, 1994, Liberty Financial maintained its executive,
administrative and sales offices at 13 locations, all of which were leased.
See Note 15 of Notes to Liberty Financial's Consolidated Financial Statements
for a discussion of the obligations of Liberty Financial under such leases.
Liberty Financial believes that its offices and facilities are adequate to
serve its present needs.
Legal Proceedings
Liberty Financial is from time to time involved in litigation incidental to
its businesses. In the opinion of Liberty Financial's management, the
resolution of such litigation is not expected to have a material adverse
effect on Liberty Financial.
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Management
Executive Officers and Directors
The following table sets forth certain information regarding the persons who
will be executive officers of Liberty Financial (including an executive
officer of Colonial who will be elected as an executive officer of Liberty
Financial) as of the Effective Time.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Gary L. Countryman 55 Chairman and Director
Kenneth R. Leibler 45 Chief Executive Officer, President and Director
John A. Benning Senior Vice President, General Counsel and
60 Clerk
C. Allen Merritt, Jr. 54 Senior Vice President and Treasurer
Porter P. Morgan 54 Senior Vice President, Marketing
Lindsay Cook 42 Senior Vice President, Mutual Funds
Hans P. Ziegler 54 Chief Executive Officer of Stein Roe
John W. Rosensteel President and Chief Executive Officer of
54 Keyport
Harold W. Cogger 59 Executive Vice President
</TABLE>
The following table sets forth certain information regarding the persons who
will be directors of Liberty Financial (including three directors of Colonial
who will be elected as directors of Liberty Financial) as of the Effective
Time.
<TABLE>
<CAPTION>
Expiration of
Name Age Term of Office
<S> <C> <C>
Gary L. Countryman(1)(2) 55 1997
Kenneth R. Leibler(1) 45 1998
Gregory H. Adamian(2) 68 1998
Gerald E. Anderson 63 1998
Michael J. Babcock(2) 53 1997
Michael von Clemm 59 1998
Harold W. Cogger(1)(4) 59 1997
Paul J. Darling, II 58 1996
C. Herbert Emilson(1)(4) 66 1996
David F. Figgins(3) 65 1996
John B. Gray(3) 67 1996
John P. Hamill(2) 54 1997
Marian L. Heard 54 1997
Raymond H. Hefner, Jr. 67 1996
Edmund F. Kelly(1) 49 1997
Stuart L. Lerner 64 1996
Sabino Marinella(1) 65 1997
John A. McNeice, Jr.(1)(4) 62 1998
Edward W. Mulligan 70 1996
Ray B. Mundt(2) 66 1998
Richard A. Smith 70 1997
Ira Stepanian(3) 58 1996
Glenn P. Strehle (3) 58 1998
Stephen J. Sweeney(3) 66 1996
Stanley A. Wainer(2) 68 1997
</TABLE>
(1) Member of the Executive Committee.
(2) Member of the Compensation and Stock Option Committee.
(3) Member of the Audit Committee.
(4) Will be elected as a director as of the Effective Time.
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The terms of office of members of the Board of Directors are staggered so
that as nearly as possible one-third of the Board will be elected at each
annual meeting of stockholders, beginning in 1996. Officers are elected or
appointed by the Board of Directors and serve at the discretion of the Board
until their successors are duly elected and qualified. The President, the
Treasurer and the Clerk are elected annually by the Board of Directors at the
first meeting following the annual meeting of stockholders. Other officers
are elected or appointed by the Board of Directors at the aforesaid meeting
or at any other time. Mr. Countryman and 19 non-officer members of the Board
are also members of the Board of Directors of Liberty Mutual, with terms of
office which approximate those with respect to Liberty Financial.
All references contained under the caption "MANAGEMENT" to a person's term of
office, compensation or other position or relationship with Liberty Financial
shall be deemed references to such person's term of office, compensation or
other position or relationship with Parent for periods prior to the Effective
Time. As of the date hereof, Kenneth R. Leibler, John A. Benning and C. Allen
Merritt, Jr. are the sole directors of Liberty Financial.
Mr. Countryman has been the Chairman of Liberty Financial since October, 1989
and prior thereto was a director of Liberty Financial Services, Inc., from
1985 to October, 1989. He has been Chief Executive Officer of Liberty Mutual
and Liberty Mutual Fire Insurance Company, an affiliate of Liberty Mutual,
since 1986, and has been Chairman of both companies since 1991. He has also
served as Chairman and Chief Executive Officer of Liberty Life since March,
1987. He currently serves as a director of Liberty Mutual, Liberty Mutual
Fire Insurance Company, Liberty Life, Bank of Boston Corporation, The First
National Bank of Boston, Boston Edison Company and The Neiman Marcus Group,
Inc.
Mr. Leibler became Chief Executive Officer of Liberty Financial on January 1,
1995, has been President of Liberty Financial since August, 1990, and was
Chief Operating Officer from August, 1990, until December, 1994. He was
elected to the Board of Directors in May, 1991. Prior thereto, he was
President and Chief Operating Officer of the American Stock Exchange, Inc.
Mr. Leibler currently serves as a director of the Boston Stock Exchange and a
Governor of the Investment Company Institute.
Mr. Benning has been Senior Vice President, General Counsel and Clerk of
Liberty Financial since October, 1989. From 1985 to that time he held the
same positions with Liberty Financial Services, Inc.
Mr. Merritt has been Senior Vice President and Treasurer of Liberty Financial
since March, 1993. From 1988 until that time, he served as Senior Vice
President of Liberty Financial Services, Inc.
Mr. Morgan has been Senior Vice President, Marketing of Liberty Financial
since January, 1991. From 1985 through December, 1990, he was Executive Vice
President of the American Stock Exchange, Inc., where he was responsible for
world-wide marketing, market research and investor relations.
Mr. Cook became Senior Vice President, Mutual Funds of Liberty Financial in
February, 1994. From 1985 to that time he was a Vice President of Liberty
Financial and Liberty Financial Services, Inc., with responsibilities
pertaining to mutual fund product development.
Mr. Rosensteel joined Keyport in September, 1992 as Chief Operating Officer.
He was appointed President and Chief Executive Officer of Keyport effective
January 1, 1993. From 1986 until 1992, he served as Senior Vice President of
Aetna International, Inc., a subsidiary of Aetna Life and Casualty Company,
where he was responsible for world-wide marketing and operational support for
European affiliates.
Mr. Ziegler has been Chief Executive Officer of Stein Roe since June, 1994.
Mr. Ziegler was President of Stein Roe's Investment Counsel division from
July, 1993 to July, 1994. From 1989 to July, 1993 Mr. Ziegler was President
and Chief Executive Officer with the Pitcairn Trust Company.
Mr. Cogger was elected President of Colonial in 1994 and of Colonial
Management Associates, Inc. in 1989. He has held various positions with
Colonial Management Associates, Inc., including Executive Vice President,
since joining Colonial in 1983. He will be elected to the Board of Directors
of Liberty Financial on the Closing Date. He serves as a Governor of The
Investment Company Institute.
Dr. Adamian was elected to the Board of Directors in May, 1991. Dr. Adamian
has been the Chancellor of Bentley College since 1991 and prior thereto, from
1970 to 1991, served as President thereof. He currently serves as a director
of Liberty Mutual, Liberty Mutual Fire Insurance Company and Liberty Life.
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Mr. Anderson was elected to the Board of Directors in May, 1991. From 1974
until his retirement in 1992, Mr. Anderson served as President, Chief
Executive Officer and Trustee of Commonwealth Energy System, a public utility
holding company. He currently serves as a director of Liberty Mutual, Liberty
Mutual Fire Insurance Company and Liberty Life.
Mr. Babcock was elected to the Board of Directors in May, 1991. Mr. Babcock
became President and Chief Operating Officer of Leslie Fay Companies, Inc., a
specialty retailer, in January, 1993. He served as Chairman and Chief
Executive Officer of Gallerios Preciados, a Spanish department store chain,
from 1991 to 1992. From 1987 to 1991, he was President and Chief Executive
Officer of L. J. Hooker Retail Group, a retail department store. He currently
serves as a director of Liberty Mutual Insurance Company, Liberty Mutual Fire
Insurance Company and Liberty Life. On April 5, 1993, Leslie Fay Companies,
Inc. filed for protection from creditors under Chapter 11 of the federal
Bankruptcy Code.
Dr. von Clemm was elected to the Board of Directors in February, 1993.
Currently Dr. von Clemm is a consultant. He was Executive Vice President of
Merrill Lynch from March, 1986 until his retirement at the end of 1992. He
currently serves as a director of Liberty Mutual, Liberty Mutual Fire
Insurance Company, Liberty Life, Rust International, Inc. and Eastman
Chemical Company, a trustee of the Massachusetts General Hospital, and is a
member of the Board of Fellows of the Harvard Medical School.
Mr. Darling was elected to the Board of Directors in May, 1991. Since 1983
Mr. Darling has served as President and Chief Executive Officer of Corey
Steel Company, a manufacturer of steel bars and a metal service center. He
currently serves as a director of Liberty Mutual, Liberty Mutual Fire
Insurance Company, Liberty Life and Alco Standard Corporation.
Mr. Emilson was elected Vice Chairman of Colonial in November, 1994, and was
President and Chief Operating Officer from 1983 through October, 1994. He
will be elected to the Board of Directors of Liberty Financial on the Closing
Date. He currently serves as a director of the South Shore Health and
Educational Foundation and the South Shore YMCA and is a member of the Board
of Overseers of WGBH Educational Foundation, Inc.
Mr. Figgins was elected to the Board of Directors in May, 1991. Since 1991
Mr. Figgins has served as President of Trafalgar House Construction, Inc., a
construction company. From 1989 to 1991, Mr. Figgins served as President and
Chief Executive Officer of Figgins Construction Group, a construction
company. Prior thereto, since 1957, he was with the Mellon-Stuart Company,
serving as Chairman and Chief Executive Officer from 1986 to 1988. Mr.
Figgins currently serves as a director of Liberty Mutual, Liberty Mutual Fire
Insurance Company, Liberty Life and Bell Federal Savings and Loan
Association.
Mr. Gray was elected to the Board of Directors in May, 1991. From 1986 until
his retirement in 1990, Mr. Gray served as President of Dennison
Manufacturing Company, a manufacturer of self-adhesive materials and office
supplies. He currently serves as a director of Liberty Mutual, Liberty Mutual
Fire Insurance Company, Liberty Life, EG&G Inc. and Stackpole Corporation.
Mr. Hamill was elected to the Board of Directors in May, 1991. He became
President of Fleet Bank of Massachusetts, N.A. in October, 1992. Prior
thereto, he was President and Chief Executive Officer of Shawmut Bank, N.A.
from 1986 to 1988 and served as Vice Chairman of Shawmut National
Corporation, a regional bank holding company, from 1988 to October, 1992. Mr.
Hamill currently serves as a director of Liberty Mutual, Liberty Mutual Fire
Insurance Company, Liberty Life, Greater Boston Chamber of Commerce and the
Massachusetts Bankers Association.
Mrs. Heard was elected to the Board of Directors in November, 1994. She
became President and Chief Executive Officer of the United Way of
Massachusetts Bay and Chief Executive Officer of the United Ways of New
England in February, 1992. Prior thereto, she joined the United Way of
Eastern Fairfield County in Bridgeport, Connecticut and served as its
President and Chief Executive Officer from 1989 to 1992. She currently serves
as a director of Liberty Mutual Insurance Company, Fleet Bank of
Massachusetts, N.A. and Fleet National Bank, Blue Cross and Blue Shield of
Massachusetts, Inc., the New England Aquarium and Heal the World Foundation.
Mr. Hefner was elected to the Board of Directors in May, 1991. He has served
as Chairman of Bonray Drilling Corporation, an oil and gas-drilling company,
since its inception in 1980 and President of Bonray,
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Inc., an oil and gas exploration company. He founded Bonray Energy
Corporation, a company engaged in oil and gas exploration and production in
1957, and served as Chairman of the Board, Chief Executive Officer and
Treasurer until its sale in November, 1991. Mr. Hefner currently serves as
President of Bonray, Inc., an oil and gas investment company, President of
Canadian Valley Ranch, Inc., and Managing General Partner of Hefner
Enterprises. He currently serves as a director of Liberty Mutual, Liberty
Mutual Fire Insurance Company, Liberty Life, Liberty Bancorp, Inc., Liberty
Bank and Trust Company of Oklahoma City, N.A., and Liberty Bank and Trust
Company of Tulsa, N.A.
Mr. Kelly was elected to the Board of Directors in May, 1992. In April, 1992
he was elected President and Chief Operating Officer of Liberty Mutual and
Liberty Mutual Fire Insurance Company and to their Boards of Directors. He
also is a director of Liberty Life. Prior thereto, Mr. Kelly held various
positions with the Aetna Life and Casualty Company since 1974, most recently
as Group Executive.
Mr. Lerner was elected to the Board of Directors in May, 1991. Since 1982 he
has served as President and Chief Administrative Officer of Liberty Life. He
currently serves as a director of Liberty Mutual, Liberty Mutual Fire
Insurance Company and Liberty Life.
Mr. Marinella became Vice Chairman of Liberty Financial on January 1, 1995.
From October, 1989 to December, 1994, he was Chief Executive Officer of
Liberty Financial. He was elected to the Board of Directors in May, 1990. He
was President and Chief Executive Officer of Liberty Financial Services,
Inc., from 1985 to October, 1989. Liberty Financial Services, Inc. was a
subsidiary of Liberty Mutual which, prior to Liberty Financial's formation,
served as the holding company for certain of Liberty Mutual's direct and
indirect financial services subsidiaries.
Mr. McNeice has been Chairman and Chief Executive Officer of Colonial since
1983, having served the firm in various offices since 1956. He will be
elected to the Board of Directors of Liberty Financial on the Closing Date.
He currently serves as a director and trustee of many local Boston non-profit
institutions, including the United Way of Massachusetts Bay, American Ireland
Fund, the Peter F. Drucker Foundation For Not For Profit Management, Boston
College and the Pope John XXIII Medical-Moral Research and Education Center.
Mr. Mulligan was elected to the Board of Directors in May, 1991. Since 1985
he has been President and Chief Executive Officer of Newburyport
Silversmiths, a silverware and silver plate manufacturer. He currently serves
as a director of First and Ocean National Bank, Liberty Mutual, Liberty
Mutual Fire Insurance Company and Liberty Life.
Mr. Mundt was elected to the Board of Directors in May, 1991. From 1985 until
September, 1993 Mr. Mundt served as Chairman and Chief Executive Officer and
since September, 1993 has served as Chairman of Alco Standard Corporation, a
distributor of paper packaging products and office equipment. He currently
serves as a director of Liberty Mutual, Liberty Mutual Fire Insurance
Company, Liberty Life Assurance Company of Boston, Clark Equipment Company,
Corestates Bank, Alco Standard Corporation and Nocopi International.
Mr. Smith was elected to the Board of Directors in May, 1991. Mr. Smith has
been since September, 1993 the Chairman of the Board, President and Chief
Executive Officer of GC Companies, Inc., which operates a leading motion
picture circuit in the United States. He has also served as Chairman of the
Board of Directors of Harcourt General Inc., a diversified holding company
(formerly General Cinema Corporation) ("Harcourt General"), since 1961 and as
Chairman of the Board of the Neiman Marcus Group, Inc. ("Neiman Marcus"), a
chain of retail specialty stores and majority owned subsidiary of Harcourt
General, since its formation in 1987. Mr. Smith also served as Chief
Executive Officer of Harcourt General and Neiman Marcus until November 1991.
Mr. Smith is a director of Liberty Mutual, Liberty Life Assurance Company of
Boston, Bank of Boston Corporation and The First National Bank of Boston.
Mr. Stepanian was elected to the Board of Directors in May, 1991. Since 1987
Mr. Stepanian has been Chief Executive Officer of Bank of Boston Corporation,
a bank holding company, and of its principal subsidiary, The First National
Bank of Boston; in 1989 he was also named Chairman of the Board of both
corporations. He currently serves as a director of Liberty Mutual, Liberty
Mutual Fire Insurance Company, Liberty Life and New York and New England
Telephone and Telegraph Company.
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Mr. Strehle was elected to the Board of Directors in May, 1991. Since 1975
Mr. Strehle has been Treasurer of the Massachusetts Institute of Technology
and Vice President since 1986 (becoming Vice President for Finance and
Treasurer in June, 1994). He currently serves as a director of Liberty
Mutual, Liberty Mutual Fire Insurance Company, Liberty Life, BayBanks, Inc.,
and SofTech, Inc., and a Trustee of Property Capital Trust.
Mr. Sweeney was elected to the Board of Directors in May, 1991. Mr. Sweeney
has held various management positions with Boston Edison Company, an electric
utility company, serving as President and Chief Executive Officer from 1984
to 1986, as Chairman and Chief Executive Officer from 1987 to 1990, and as
Chairman from 1990 until his retirement in 1992. Mr. Sweeney currently serves
as a director of Liberty Mutual, Liberty Mutual Fire Insurance Company,
Liberty Life, Boston Edison Company, the Boston Stock Exchange, Bank of
Boston Corporation, The First National Bank of Boston, Uno Restaurants, Inc.
and Selecterm, Inc.
Mr. Wainer was elected to the Board of Directors in May, 1991. Mr. Wainer
currently serves as Chairman of the Executive Committee of Wyle Electronics,
a distributor of electronic components and computer systems. Prior to his
retirement in 1991 he held executive management positions with Wyle
Electronics, serving as Chairman from 1988 to 1991. Mr. Wainer currently
serves as a director of Wyle Electronics, Liberty Mutual, Liberty Mutual Fire
Insurance Company and Liberty Life.
Certain Transactions
Dr. Michael von Clemm, who was elected to Liberty Financial's Board of
Directors in February, 1993, was an executive vice president of Merrill Lynch
from March, 1986, until his retirement at the end of 1992. Since January 1,
1990, Merrill Lynch has performed various investment banking services for
Liberty Mutual and Liberty Financial, for which it has received customary
compensation. Merrill Lynch may perform additional investment banking
services for Liberty Mutual and Liberty Financial in the future. Dr. von
Clemm is a director of Merrill Lynch Capital Partners, Inc., a wholly-owned
subsidiary of Merrill Lynch.
In 1994, the Bank Marketing Group entered into a program with The First
National Bank of Boston and certain of its affiliates. Ira Stepanian, a
director of Liberty Financial, is the Chairman of the Board of each of such
entities. During the nine months ended September 30, 1994, the aggregate
sales of Liberty Financial's proprietary products through this program were
$803,000 and the aggregate commissions earned under the program were $38,000.
On September 26, 1994, Liberty Financial entered into a separation agreement
with Ronald S. Robbins, a former executive officer of Liberty Financial. The
agreement provides for the termination of Mr. Robbins' employment and the
payment to Mr. Robbins of $20,250 per month through September 30, 1995. If
Mr. Robbins is not employed by September 30, 1995, Liberty Financial shall
continue to make monthly payments of $20,250 until Mr. Robbins is employed or
until December 31, 1995, whichever comes first. Under the agreement, Mr.
Robbins is entitled to certain other benefits, including payment for accrued
vacation and of vested account balances under Liberty Financial savings plans
and health and life insurance.
On October 14, 1994, Stein Roe entered into a separation agreement with
Timothy A. Schlindwein, the former Chairman and Chief Executive Officer of
Stein Roe. The agreement provides for the termination of Mr. Schlindwein's
employment and the payment to Mr. Schlindwein of $12,083.33 semi-monthly
through December 31, 1994, a lump sum of $309,042.33 in January 1995, and a
bonus of between $187,920 and $208,800 in March, 1995. Under the agreement,
Mr. Schlindwein is entitled to certain other benefits, including health
insurance.
Directors' Compensation
As indicated above, 20 of the 22 non-employee members of Liberty Financial's
Board of Directors are also members of the Board of Directors of Liberty
Mutual and, in many cases, certain affiliates of Liberty Mutual. Each member
of the Board of Directors who is not an officer of Liberty Financial or
Liberty Mutual has been paid by Liberty Mutual an annual retainer in the
amount of $18,000. Liberty Mutual will continue to make such payments to such
directors following the Merger. Liberty Financial has paid each such director
a $200 fee for each Board or committee meeting attended. Liberty Financial
will continue to make such payments to such directors following the Merger.
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<PAGE>
Committees of the Board of Directors
There are three standing committees of the Board of Directors. The functions
of these committees are described below:
Executive Committee. The Executive Committee has and may exercise all the
powers of the full Board of Directors, except as otherwise limited by the
MBCL or the LFC Restated Articles or Liberty Financial's Restated By-laws.
Compensation and Stock Option Committee. The Compensation and Stock Option
Committee (i) reviews and approves all director and management compensation,
including salaries, incentive compensation, pension and fringe benefit
policies and procedures, (ii) administers the 1990 Stock Option Plan, the
1995 Stock Incentive Plan and the 1995 Employee Stock Purchase Plan and has
the power and authority to grant options (and determine the terms thereof) to
eligible officers and key employees thereunder, and (iii) acts on such other
matters as the Board of Directors may request.
Audit Committee. The Audit Committee is responsible for obtaining and
reviewing independent analysis of Liberty Financial's accounting policies and
procedures, financial controls and financial information provided to the
Board of Directors. The Audit Committee makes reports and recommendations to
the Board of Directors, at least annually, with respect to such reviews,
including matters such as: accounting records, practices and procedures; the
annual appointment of outside auditors, together with the scope, adequacy,
cost and results of the annual audit and the relationship between management
and such outside auditors; the scope and adequacy of internal audit
procedures; controls for disbursement procedures and asset safekeeping; and
such other matters as the Board of Directors may request.
Executive Compensation
Summary Compensation Table. The following table sets forth certain
information with respect to annual and long-term compensation of Liberty
Financial's Chief Executive Officer and the four other most
highly-compensated executive officers for the fiscal year ending December 31,
1994. None of the named executive officers received any perquisites during
1994 exceeding the lesser of $50,000 or 10% of such officer's total salary
and bonus for such year.
Summary Compensation Table
1994 Compensation
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
Awards
Name and
Principal Base Securities All Other
Position during 1994 Salary ($) Bonus ($)(1) Underlying Options (#) Compensation ($)(2)
<S> <C> <C> <C> <C>
Sabino Marinella 710,000 454,000 44,221 33,156
Chief Executive Officer
Kenneth R. Leibler 593,500 350,000 66,332 26,417
President and Chief Operating
Officer
John W. Rosensteel 346,500 220,000 22,111 24,245
President and Chief Executive
Officer of Keyport
Hans P. Ziegler 275,000 375,000 22,111(3) 19,668
Chief Executive Officer of
Stein Roe
John A. Benning 288,000 139,680 13,266 14,217
Senior Vice President,
General Counsel and Clerk
</TABLE>
136
<PAGE>
(1) Except for Mr. Ziegler, the amounts presented are bonuses earned for 1993
and paid during 1994. Except for Mr. Ziegler, the bonuses earned with respect
to 1994, which have not yet been determined, will be paid in 1995. The amount
for Mr. Ziegler represents his actual bonus for 1994.
(2) Consists of (a) insurance premiums paid by Liberty Financial during the
fiscal year with respect to term life insurance for the benefit of the named
executive officers, individually as follows: Mr. Marinella, $3,428; Mr.
Leibler, $2,960; Mr. Ziegler, $0, Mr. Rosensteel, $5,000 and Mr. Benning,
$1,378; and (b) contributions by Liberty Financial during the fiscal year to
defined benefit plans or defined contribution plans for the benefit of the
named executive officers, individually as follows: Mr. Marinella, $29,728;
Mr. Leibler, $23,457; Mr. Ziegler, $19,668; Mr. Rosensteel, $19,245; and Mr.
Benning, $12,839.
(3) Does not include compensation accrued by Mr. Ziegler under a long-term
incentive plan to be adopted by Stein Roe. See "--Long-Term Incentive Plan."
Option Grant Table. The following table sets forth certain information
regarding options to purchase LFC Common Stock granted during the fiscal year
ended December 31, 1994 by Liberty Financial to the individuals named in the
above summary compensation table. All numbers reflect the Effective Time
Adjustment described above under "The Merger--Conversion of Liberty Financial
Stock," but do not reflect the Additional Adjustments.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates
of Stock Price
Appreciation
for Option
Term(2)
Percent of Total
Options Options Granted
Granted to Exercise Price Expiration
Name (#) Employees in 1994 Per Share($) Date(1) 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Sabino Marinella 44,221 21.7% $34.52 6/07/04 $ 960,016 $2,432,868
Kenneth R. Leibler 66,332 32.6% $34.52 6/07/04 1,440,023 3,649,302
John W. Rosensteel 22,111 10.9% $34.52 6/07/04 480,008 1,216,434
Hans P. Ziegler 22,111 10.9% $34.52 6/07/04 480,008 1,216,434
John A. Benning 13,266 6.5% $34.52 6/07/04 288,005 729,860
</TABLE>
(1) Each option becomes exercisable in four equal annual installments,
commencing on March 9, 1994, and vests in full upon the death, disability or
retirement of the optionee or a change of control of Liberty Financial.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if such options are not exercised until the end of the
option term. These gains are based on assumed rates of stock price
appreciation of 5% and 10% set by the SEC, compounded annually from the dates
the respective options were granted until their respective expiration dates
and, therefore, are not intended to forecast possible future appreciation, if
any, in the LFC Common Stock. This table does not take into account any
appreciation in the price of the LFC Common Stock after the date of grant.
Year-End Option Table. The following table sets forth certain information
regarding the stock options held as of December 31, 1994 by the individuals
named in the above summary compensation table. No options were exercised in
1994 by such individuals. All numbers reflect the Effective Time Adjustment,
but do not reflect the Additional Adjustments.
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<PAGE>
Aggregate Option Values at Fiscal Year-End
<TABLE>
<CAPTION>
Number of Value of Unexercised
Unexercised Options In-the-Money Options
at Year-End(#) at Year-End($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C>
Sabino Marinella 146,086 170,433 $2,981,612 $3,478,548
Kenneth R. Leibler 74,693 146,619 1,292,929 2,537,971
John W. Rosensteel 5,533 38,734 74,425 520,975
Hans P. Ziegler 2,767 30,440 28,475 313,225
John A. Benning 29,872 36,510 576,234 704,286
</TABLE>
(1) Based, for purposes of this table, on an assumed value of $32.50 per
share. Such amount corresponds to the value of the Common Stock used in the
preparation of the pro forma condensed consolidated information contained
elsewhere in this Prospectus/Proxy Statement.
Long-Term Incentive Plan
Stein Roe is in the process of developing a long-term incentive plan (the
"Stein Roe LTIP") for a total of approximately 39 key employees (including
Mr. Ziegler) to whom it has made commitments to provide such an incentive
compensation program. It is expected that such plan will be finalized during
1995. Liberty Financial anticipates that the Stein Roe LTIP will provide for
the annual allocation of fixed amounts to 18 of such key employees for the
years 1993, 1994 and 1995 only, and to 21 of such key employees for the year
1993 only. Pursuant to the Stein Roe LTIP, Stein Roe management will
determine the size of awards. Stein Roe LTIP awards become payable during the
first ninety days of the third calendar year following the year in which the
award was made (or sooner in the case of death, disability or involuntary
termination without cause). In anticipation of the adoption of the Stein Roe
LTIP, Liberty Financial accrued $150,000 for Mr. Ziegler under the Stein Roe
LTIP for 1994.
Defined Contribution Plans
Liberty Financial maintains defined contribution plans which cover
substantially all of its full-time employees (except Stein Roe employees who
participate in their own plans discussed below) and are intended, in part, to
qualify under Section 401 of the Code and, in part, to offer additional
non-qualifying benefits. Contributions to such plans up to a statutory limit,
and the income earned thereon, are not taxable to employees until withdrawn,
and contributions by Liberty Financial and its subsidiaries up to a statutory
limit are deductible when made. Participants elect to contribute up to
specified percentages of their compensation to these plans; Liberty Financial
makes additional matching contributions and may make additional discretionary
contributions under these plans. All amounts contributed by Liberty Financial
pursuant to such plans during 1994 are included in the Summary Compensation
Table above.
Stein Roe Profit Sharing Plans
In addition to the plans discussed under "Defined Contribution Plans" above,
Stein Roe has adopted profit sharing plans (the "Stein Roe Plans") that
permit participants to make contributions up to a specified percentage of
their compensation not exceeding the statutory limits, which contributions
are matched by Stein Roe, with all such employee and Stein Roe contributions
intended to qualify under Section 401 of the Code. In addition, the Stein Roe
Plans also provide that Stein Roe will contribute annually an amount equal to
7.5% of each participant's annual compensation to an account and that the
participant will become vested in such amount over a seven year period. All
amounts contributed by Liberty Financial to Mr. Ziegler's account pursuant to
the Stein Roe Plans during 1994 are included in the Summary Compensation
Table above.
Defined Benefit Retirement Programs
With the exception of Mr. Ziegler, each of the executive officers of Liberty
Financial named in the above Summary Compensation Table participates in
Liberty Financial's Pension Plan and Supplemental Pension Plan (collectively,
the "Pension Plans"). The following table shows the estimated annual pension
benefits payable upon retirement for the specified compensation and years of
service classifications under Liberty Financial's Pension Plans.
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<PAGE>
Estimated Annual Retirement Benefits at Age 65
Under Liberty Financial's Pension Plan and Supplemental Pension
<TABLE>
<CAPTION>
Years of Credited Service
Five-Year Average Compensation 15 20 25 30 35
<S> <C> <C> <C> <C> <C>
$ 200,000 $ 52,380 $ 69,840 $ 87,300 $ 93,967 $100,633
400,000 106,380 141,840 177,300 190,833 203,967
600,000 160,380 213,840 267,300 287,300 307,300
800,000 214,380 285,840 357,300 383,967 410,633
1,000,000 268,380 357,840 447,300 480,633 513,967
1,200,000 322,380 429,840 537,300 577,300 617,300
</TABLE>
Benefits under the Pension Plans are based on an employee's average pay for
the five highest consecutive years during the last ten years of employment,
the employee's estimated social security retirement benefit and years of
credited service with Liberty Financial. The current compensation covered by
the Pension Plans for each participating executive officer of Liberty
Financial named in the above Summary Compensation Table is as follows: Sabino
Marinella, $894,000; Kenneth R. Leibler, $715,688; John W. Rosensteel,
$389,000; and John A. Benning, $358,730. For purposes of determining benefits
payable upon retirement under such Pension Plans, compensation includes base
salary and bonus, subject to a deduction for primary Social Security
benefits. Benefits are payable in the form of a single-life annuity providing
for monthly payments. Actuarially equivalent methods of payment may be
elected by the recipient. As of the date of this Prospectus/Proxy Statement,
the executive officers of Liberty Financial named in the above summary
compensation table who participate in the Pension Plans had the following
full credited years of service under the Pension Plans: Mr. Marinella, 9
years; Mr. Leibler, 4 years; Mr. Rosensteel, 2 years; and Mr. Benning, 9
years. See Note 8 of Notes to Liberty Financial's Consolidated Financial
Statements.
Additional Retirement Benefits
Liberty Financial has agreed to pay Sabino Marinella, the Vice Chairman and
former Chief Executive Officer of Liberty Financial, over Mr. Marinella's
lifetime, an amount that, when added to Mr. Marinella's retirement benefits
from Liberty Financial's Pension Plans, will total $473,042 annually. The
benefit is payable as a life annuity, but actuarially equivalent optional
forms offered under Liberty Financial's Pension Plans may be elected. In
addition, Liberty Financial has agreed that, when calculating the pension
benefits for Mr. Benning, the benefit computation shall be figured using
October 1, 1973 as Mr. Benning's date of hire for determining years and
credited service and the highest three consecutive years' earnings, less
certain benefits previously received. (Mr. Benning's actual date of hire was
October 1, 1973). In exchange for above described benefits, each of Mr.
Marinella and Mr. Benning has agreed to release Liberty Financial from the
benefits and obligations flowing to him under an executive life insurance
program maintained by Liberty Financial.
1990 Stock Option Plan
Liberty Financial's 1990 Stock Option Plan, as amended (the "1990 Plan"), was
adopted by the Board of Directors and approved by the stockholders. The 1990
Plan provides for the grant of options to officers and other key employees of
Liberty Financial for the purchase of shares of LFC Common Stock. The
following summary of the 1990 Plan does not purport to be complete and is
qualified in its entirety by reference to the text of the 1990 Plan, a copy
of which is attached as an Exhibit to the Registration Statement.
Administration. The 1990 Plan is administered by the Compensation and Stock
Option Committee (the "Committee"). The Committee is comprised solely of
Directors qualified to administer the 1990 Plan pursuant to Rule 16b-3(c)(2)
of the Exchange Act.
Shares Subject to the 1990 Plan. The 1990 Plan authorizes the grant of up to
1,000,000 shares of LFC Common Stock (subject to appropriate adjustments
necessary to effect the Effective Time Adjustment and the Additional
Adjustments). If any corporate transaction occurs that causes a change in the
capitalization of Liberty Financial, the Committee is authorized to make such
adjustments to the
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<PAGE>
number and class of shares of LFC Common Stock delivered, and the number and
class and/or price of shares of LFC Common Stock subject to outstanding
awards granted under the 1990 Plan, as it deems appropriate and equitable to
prevent dilution or enlargement of participants' rights.
Amendment and Termination. No additional options will be granted under the
1990 Plan. The Board may amend, modify or terminate the 1990 Plan at any
time, provided that, without the approval of the stockholders of Liberty
Financial, no amendment may increase the total number of shares of Common
Stock that may be issued under the 1990 Plan, decrease the option price to
less than 100% of fair market value on the date of grant, change the class of
employees eligible to participate in the Plan, or extend the option term
beyond 10 years, and no amendment, modification or termination which would
impair the rights of a participant under an option previously granted will be
made without the participant's consent.
Grants of Stock Options. The Committee was authorized to grant incentive
stock options ("ISOs"), nonqualified stock options or a combination thereof
under the 1990 Plan. Options are granted at a price not less than the value
(the "Formula Value") of the LFC Common Stock based on book value with
certain adjustments as of the most recent valuation date. The Formula Value
of such Common Stock is determined annually pursuant to the formula specified
in the 1990 Plan. Options granted under the 1990 Plan begin to become
exercisable in installments one to four years after the date of grant and
expire ten years after the grant date. Options are not transferable by the
participant, except by will or by the laws of descent and distribution.
During a participant's lifetime, options are exercisable only by the
participant.
Change in Control. Upon a change of control of Liberty Financial (defined as
the transfer of 50% or more of the equity ownership of Liberty Financial
other than solely pursuant to a public offering in which securities are
issued for cash), all non-vested options will automatically vest and the
Committee may, in its discretion, elect to cancel all outstanding options by
paying the holders thereof an amount equal to the difference between the
Formula Value of the LFC Common Stock and the exercise price of the Options.
Grant Information. As of the date of this Prospectus/Proxy Statement, options
to acquire an aggregate of 1,402,211 shares of the LFC Common Stock were
outstanding under the 1990 Plan at a weighted average per share exercise
price of $18.01 (after giving effect to the changes in the outstanding LFC
Stock Options to be made as of the Effective Time, but without giving effect
to the Additional Adjustments).
The following table sets forth the number of outstanding options granted in
1994 under the 1990 Plan. All numbers reflect the Effective Time Adjustment,
but do not reflect the Additional Adjustments.
<TABLE>
<CAPTION>
Name Number of Options
<S> <C>
Sabino Marinella 44,221
Kenneth R. Leibler 66,332
John W. Rosensteel 22,111
Hans P. Ziegler 22,111
John A. Benning 13,266
All current officers as a group (6 persons) 181,307
All employees who were not executive officers
as a group (1 person) 8,840
</TABLE>
See "Management's Discussion and Analysis of Results of Operations and
Financial Condition-- Option Plan Compensation Expenses" for a discussion of
certain compensation expense charges and related accounting adjustments taken
and to be taken pertaining to options granted under the 1990 Plan.
As discussed below, Liberty Financial has adopted a 1995 Stock Incentive
Plan. There will be no further grants of options under the 1990 Plan.
1995 Stock Incentive Plan
Liberty Financial's 1995 Stock Incentive Plan, as amended (the "1995
Incentive Plan"), was adopted by the Board of Directors and approved by the
stockholders. The 1995 Incentive Plan provides for the
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<PAGE>
grant of stock options (both nonqualified and incentive), stock appreciation
rights, restricted stock, unrestricted stock, performance shares and cash and
other awards to key employees, directors and other individuals performing
services for Liberty Financial and its affiliates. The following summary of
the 1995 Incentive Plan does not purport to be complete and is qualified in
its entirety by reference to the text of the 1995 Incentive Plan, a copy of
which is attached as an Exhibit to the Registration Statement.
Administration. The 1995 Incentive Plan is administered by the Committee,
which has complete discretion to select the eligible individuals to receive
grants under the 1995 Incentive Plan and to establish the terms of the
grants. The Committee is comprised solely of Directors qualified to
administer the 1995 Incentive Plan pursuant to Rule 16b-3(c)(2) of the
Exchange Act.
Shares Subject to the 1995 Incentive Plan. The aggregate number of shares of
LFC Common Stock reserved for issuance under the 1995 Incentive Plan is the
sum of (x) the amount of the Assumed Options (827,900 shares as of February
8, 1995) and (y) 3,145,558 (less the sum of (i) shares subject to outstanding
awards under the 1990 Plan, (ii) shares issued upon exercise of options
granted under the 1990 Plan or upon exercise of the Assumed Options and (iii)
shares subject to Assumed Options which expire or are forfeited in accordance
with their terms). If any corporate transaction occurs that causes a change
in the capitalization of Liberty Financial, the Committee is authorized to
make such adjustments to the number and class of shares of LFC Common Stock
delivered and the number and class and/or price of shares of LFC Common Stock
subject to outstanding awards granted under the 1995 Incentive Plan, as it
deems appropriate and equitable to prevent dilution or enlargement of
participant's rights.
Amendment and Termination. In no event may any option or other award under
the 1995 Incentive Plan be granted on or after February 8, 2005. The Board
may amend, modify or terminate the 1995 Incentive Plan at any time, provided
that no amendment shall be effective unless and until it is approved by the
stockholders of Liberty Financial where the failure to obtain such approval
would adversely affect the compliance of the Plan with Rule 16b-3 under the
Exchange Act or the amendment would increase the total number of shares
reserved for issuance under the plan, decrease the option price of any
nonqualified stock option to less than 50% of fair market value on the date
of grant of the option, change the class of persons who may be eligible to
participate in the plan, or extend the termination date of the plan beyond
ten years, and no amendment, termination or modification shall adversely
affect in a material manner any right of a participant with respect to any
outstanding award without the consent of the participant.
Stock Options. The Committee may grant ISOs, nonqualified stock options or a
combination thereof under the 1995 Incentive Plan. The exercise price for
nonqualified stock options issued under the 1995 Incentive Plan must be at
least 50% of the fair market value of the underlying stock at the time of
grant, and the exercise price for ISOs under the 1995 Incentive Plan cannot
be less than 100% of the fair market value of the underlying stock at the
time of grant. Options granted under the 1995 Incentive Plan will expire ten
years after the grant date. The Committee will establish other terms for
options including the schedule for vesting or exercisability of options,
terms for payment of the option price and periods for exercise following the
optionholder's termination of employment. Options are not transferable by the
participant, except by will or by the laws of descent and distribution.
During a participant's lifetime, options are exercisable only by the
participant.
Stock Appreciation Rights. Stock appreciation rights ("SARs") issued under
the 1995 Incentive Plan entitle the recipient to receive a cash payment equal
to the appreciation in value of a share of LFC Common Stock from the initial
grant to the date the recipient elects to exercise the SAR, or until the date
the SAR expires. SARs may be granted either on a stand-alone basis or in
tandem with stock options or other types of awards; for example, the
recipient may exercise a stock option and thereby acquire shares of LFC
Common Stock, or, alternatively, he may exercise an SAR and receive a payment
equal to the appreciation in value of the option shares. When the SAR is
exercised, Liberty Financial may elect to pay the award in the form of shares
of LFC Common Stock or cash, or some combination. SARs are not transferable
by the participant, except by will or by the laws of descent and
distribution. During a participant's lifetime, SARs are exercisable only by
the participant.
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<PAGE>
Restricted and Unrestricted Stock. Grants of restricted stock involve the
issuance of shares of LFC Common Stock to the recipient subject to transfer
restrictions and Liberty Financial's right to repurchase the shares at the
original issue price if certain conditions (such as continuation of
employment) are not satisfied by the recipient. As the conditions are
satisfied, the repurchase restrictions "lapse" and the recipient is then free
to hold or sell the shares free of the restrictions. Grants of unrestricted
stock involve the issuance of shares of LFC Common Stock, free of any
transfer or repurchase restrictions.
Performance Shares. Grants of performance shares involve setting performance
goals and a certain amount of bonus to be paid if the performance goals are
fully satisfied, or some part of the bonus if the performance goals are not
fully satisfied. The performance goals may be individual or group- or
divisional- or Liberty Financial-wide goals. The award may be converted into
a specified number of shares of LFC Common Stock at the time the goals are
established, with the payoff, after satisfaction of the goals, being made in
the number of shares of LFC Common Stock or their current value at that time.
All rights with respect to performance shares shall be available only during
a participant's lifetime, and each performance shares award agreement shall
specify the participant's (and his or her beneficiary's) rights in the event
or retirement, death or other termination of employment.
Other Awards. The 1995 Incentive Plan also authorizes supplemental cash
grants which are cash payments that may be made to assist a recipient in the
payment of income taxes. In addition, the 1995 Incentive Plan authorizes the
grant of other types of awards that are consistent with the terms of the 1995
Incentive Plan.
Awards to Employees Covered by Section 162(m) of the Code. Section 162(m) of
the Code generally limits the income tax deduction for compensation paid by
an employer which is a publicly held corporation to certain key executives to
$1,000,000 per executive per year. The deduction limitation of Section 162(m)
does not apply, however, to certain performance-based compensation
arrangements, including plans providing for stock options and SARs having an
exercise price of not less than 100% of fair market value, which establish
specific performance goals and/or limits on the amount of awards, which are
administered by a committee composed exclusively of "outside" directors, and
which are disclosed to and approved by the stockholders of the public
company. In addition, the deduction limitation of Section 162(m) does not
apply with respect to compensation received by the key executives of a public
company from stock options, SARs, restricted stock or other awards granted
under a plan which was adopted before the company became a public company;
however, this exemption will only apply with respect to grants or awards made
during a specified reliance period (generally up to three years) after the
company becomes a public company.
The 1995 Incentive Plan includes provisions and limits on awards which are
intended to enable such awards to be exempt from the deduction limitation of
Section 162(m) of the Code, subject, however, to the further requirement that
the 1995 Incentive Plan be disclosed to and approved by the shareholders of
Liberty Financial after it becomes a public company under the Exchange Act.
Furthermore, because the 1995 Incentive Plan was adopted before Liberty
Financial will become a public company under the Exchange Act, options, SARs
and restricted stock as well as other awards made under the 1995 Incentive
Plan to key executives before the end of the reliance period will not be
subject to the deduction limit of Section 162(m). Before the end of the
reliance period, Liberty Financial will seek shareholder approval of the 1995
Incentive Plan, to assure that stock options and SARs and possibly other
awards made subsequently under the 1995 Incentive Plan will qualify as
performance-based compensation that is exempt from the deduction limitation
of Section 162(m) of the Code.
Grant Information. To date, no stock options, SARs, restricted or
unrestricted stock, performance shares or other awards have granted under the
1995 Incentive Plan. The Merger Agreement provides that all outstanding
Colonial options issued pursuant to Colonial's 1986 Stock Option Plan and
Director Option Plan shall be assumed by Liberty Financial at the Effective
Time. All such Colonial options shall be deemed issued pursuant to the 1995
Incentive Plan. See "THE MERGER--Effects of the Merger on Colonial Employee
Benefits--Colonial Stock Option Plans."
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1995 Employee Stock Purchase Plan
The Board of Directors and the stockholders of Liberty Financial have
approved the adoption of Liberty Financial's 1995 Employee Stock Purchase
Plan, as amended (the "1995 Purchase Plan"). The 1995 Purchase Plan is
intended to qualify as an "employee stock purchase plan" under Section 423 of
the Code. The following description of the 1995 Purchase Plan does not
purport to be complete and is qualified in its entirely by reference to the
text of the 1995 Purchase Plan, a copy of which is attached as an Exhibit to
the Registration Statement.
Administration. The 1995 Purchase Plan is administered by the Committee,
which is appointed by the Board.
Shares Subject to the 1995 Purchase Plan. The aggregate number of shares of
LFC Common Stock to be issued under 1995 Purchase Plan is 25,000 shares. To
date, no offering periods have established and no eligible employees have
elected to participate in the 1995 Purchase Plan. Under the terms of the 1995
Purchase Plan, the initial offering of LFC Common Stock under the plan will
not occur until at least one month after Liberty Financial has become a
public company under the Exchange Act. If any corporate transaction occurs
that causes a change in Liberty Financial's capitalization, an appropriate
adjustment shall be made in the number of shares and option price per share.
Eligibility and Participation. All employees of Liberty Financial and of
designated subsidiaries who are customarily employed for more than 20 hours
per week and more than five (5) months per year (other than those who may own
or hold options to acquire 5% or more of the outstanding LFC Common Stock)
may elect to participate in the 1995 Purchase Plan.
Amendment and Termination. The 1995 Purchase Plan will terminate when all of
the shares of stock reserved for issuance have been purchased, provided that
in no event will any offering period commence after December 31, 1996. The
Board may amend, modify or terminate the 1995 Purchase Plan at any time,
provided that no amendment shall be effective unless and until it is approved
by the shareholders of Liberty Financial where the amendment would increase
the total number of shares reserved for issuance under the plan, decrease the
option price of any Purchase Option to less than 85% of fair market value on
the date of grant or exercise (whichever is lower) of the option, change the
class of persons who may be eligible to participate in the plan, or
materially increase the benefits accruing to employees under the plan.
Purchases Under the 1995 Purchase Plan. The 1995 Purchase Plan provides that
during six month or other "offering periods," Liberty Financial will grant to
each eligible employee who has elected to be a participant in the 1995
Purchase Plan an option (a "Purchase Option") to purchase LFC Common Stock on
the last day of such offering period at an option price equal to 85% (or
higher percentage as determined by the Board) of the lesser of (i) the fair
market value of the stock at the beginning of the offering period or (ii) the
fair market value of the stock at the end of the offering period. Employees
who elect to participate in the 1995 Purchase Plan will save regularly by
payroll deductions of between 1% and 10% of their compensation. Participants
may not be granted an option to purchase stock at a rate that exceeds $25,000
of the fair market value of the stock for each calendar year in which the
option is outstanding. At the end of each six-month period these savings will
be used to acquire LFC Common Stock.
Federal Income Tax Consequences under the 1990 Plan, the 1995 Incentive Plan
and the 1995 Purchase Plan
The following is a brief description of the federal income tax consequences
related to options awarded under the 1990 Plan, the 1995 Incentive Plan and
the 1995 Purchase Plan.
Consequences to the Optionholder. There are no federal income tax
consequences to the optionholder solely by reason of the grant of ISOs,
nonqualified options or Purchase Options under the 1990 Plan, the 1995
Incentive Plan or the 1995 Purchase Plan. The exercise of an ISO or a
Purchase Option is not a taxable event for regular federal income tax
purposes if certain requirements are satisfied,
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including the restriction providing that the optionholder generally must
exercise the option no later than three (3) months following the termination
of his employment. However, the exercise of an ISO may give rise to an
alternative minimum tax liability (see discussion below).
Upon the exercise of a nonqualified option, the optionholder will generally
recognize ordinary income in an amount equal to the excess of fair market
value of the shares of LFC Common Stock at the time of exercise over the
amount paid as the exercise price. The ordinary income recognized in
connection with the exercise by an optionholder of a nonqualified option will
be subject to both income and employment tax withholding. The optionholder's
tax basis in the shares acquired pursuant to the exercise of an option will
be the amount paid upon exercise plus, in the case of a nonqualified option,
the amount of ordinary income recognized by the optionholder upon exercise.
If an optionholder disposes of shares of LFC Common Stock acquired upon the
exercise of an ISO or Purchase Option in a taxable transaction, and such
disposition occurs more than two years from the date on which the option is
granted and more than one year after the date on which the shares are
transferred to the optionholder pursuant to the exercise of the ISO or
Purchase Option (a "qualifying disposition"), the optionholder will recognize
long-term capital gain or loss equal to the difference between the amount
realized upon such disposition and the optionholder's adjusted basis in such
shares (generally the exercise price). In the case of LFC Common Stock
acquired under the 1995 Purchase Plan for less than 100% of the fair market
value at the time the Purchase Option was granted, any disposition of such
shares of LFC Common Stock in a qualifying disposition will result in the
optionholder being required to include as ordinary income (and not as gain)
in his or her gross income the excess of the lesser of (i) fair market value
of such shares of LFC Common Stock at the time of disposition or (ii) the
fair market value of the shares of LFC Common Stock at the time the Purchase
Option was granted over the Purchase Option Price.
If the optionholder disposes of shares of LFC Common Stock acquired upon the
exercise of an ISO or Purchase Option (other than in certain tax-free
transactions) within two years from the date on which the ISO or Purchase
Option is granted or within one year after the transfer of the shares to the
optionholder pursuant to the exercise of the ISO or Purchase Option (a
"disqualifying disposition"), then at the time of disposition the
optionholder will generally recognize ordinary income equal to the lesser of
(i) the excess of such shares' fair market value on the date of exercise over
the exercise price paid by the optionholder or (ii) the optionholder's actual
gain (i.e., the excess, if any, of the amount realized on the disposition
over the exercise price paid by the optionholder). If the total amount
realized on a taxable disposition (including return of capital and capital
gain) exceeds the fair market value on the date of exercise, then the
optionholder will recognize a capital gain in the amount of such excess. If
the optionholder incurs a loss on the disposition (i.e., if the total amount
realized is less than the exercise price paid by the optionholder), then the
loss will be a capital loss. In the case of certain disqualifying
dispositions of shares acquired upon the exercise of a Purchase Option where
the value of the shares at the date of exercise exceeded the option price,
but the value at the date of the disqualifying disposition is less than the
value at the date of exercise, the optionholder may recognize both ordinary
income and a capital loss on the taxable disposition.
If an optionholder disposes of shares of LFC Common Stock acquired upon
exercise of a nonqualified option in a taxable transaction, the optionholder
will recognize capital gain or loss in an amount equal to the difference
between his basis (as discussed above) in the shares sold and the total
amount realized upon disposition. Any such capital gain or loss (and any
capital gain or loss recognized on a disqualifying disposition of shares of
LFC Common Stock acquired upon exercise of ISOs as discussed above) will be
long-term depending on whether the shares of LFC Common Stock were held for
more than one year from the date such shares were transferred to the
optionholder.
Alternative minimum tax ("AMT") is imposed in addition to, but only to the
extent it exceeds, the optionholder's regular tax for the taxable year.
Generally, AMT is computed at the rate of 26% on the excess of a taxpayer's
alternative minimum taxable income ("AMTI") over the exemption amount, but
only if such excess amount does not exceed $175,000 ($87,500, in the case of
married individuals filing separate returns). The AMT tax rate is 28% of such
excess amount over the $175,000 ($87,500) amount.
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For these purposes, the exemption amount is $45,000 for joint returns or
returns of surviving spouses ($33,750 for single taxpayers and $22,500 for
married individuals filing separate returns), reduced by 25% of the excess of
AMTI over $150,000 for joint returns or returns of surviving spouses
($112,500 for single taxpayers and $75,000 for married individuals filing
separate returns). A taxpayer's AMTI is essentially the taxpayer's taxable
income adjusted pursuant to the AMT provisions and increased by items of tax
preference.
The exercise of ISOs (but not nonqualified options or Purchase Options) will
generally result in an upward adjustment to the optionholder's AMTI in the
year of exercise by an amount equal to the excess, if any, of the fair market
value of the stock on the date of exercise over the exercise price. The basis
of the stock acquired, for AMT purposes, will equal the exercise price
increased by the prior upward adjustment of the taxpayer's AMTI due to the
exercise of the option. This will result in a corresponding downward
adjustment to the optionholder's AMTI in the year the stock is disposed. The
AMT paid with respect to the exercise of an ISO is allowed as a credit
against the regular tax liability of the optionholder in a subsequent year
when he disposes of the stock; therefore, imposition of the AMT at the time
of exercise of an ISO may not increase the aggregate amount of income tax
paid by the optionholder, but instead may only affect the timing of such
payments.
Consequences to Liberty Financial. There are no federal income tax
consequences to Liberty Financial by reason of the grant of ISOs, Purchase
Options or nonqualified options or the exercise of ISOs or Purchase Options
(other than disqualifying dispositions). At the time the optionholder
recognizes ordinary income from the exercise of a nonqualified option,
Liberty Financial will be entitled to a federal income tax deduction in the
amount of the ordinary income so recognized (as described above), provided
that Liberty Financial satisfies its tax reporting obligations described
below. To the extent the optionholder recognizes ordinary income by reason of
a disqualifying disposition of the stock acquired upon exercise of ISOs or
Purchase Options, Liberty Financial will be entitled to a corresponding
deduction in the year in which the disposition occurs, provided that Liberty
Financial satisfies a tax reporting obligation described below. Liberty
Financial will be required to report to the Internal Revenue Service any
ordinary income recognized by any optionholder by reason of the exercise of a
nonqualified option or the disqualifying disposition of stock acquired upon
exercise of ISOs or Purchase Options. Liberty Financial will be required to
withhold income and employment taxes (and pay the employer's share of
employment taxes) with respect to ordinary income recognized by the
optionholder upon the exercise of nonqualified options.
Tax Treatment of Restricted Stock. An employee who receives a restricted
stock award under the 1995 Incentive Plan generally will not recognize
taxable income at the time the award is received, but will recognize ordinary
compensation income when the transfer and forfeiture restrictions lapse in an
amount equal to the excess of the aggregate fair market value, as of the date
the restrictions lapse, over the amount, if any, paid by the employee for the
restricted stock. Alternatively, an employee receiving stock may elect, in
accordance with Section 83(b) of the Code, to be taxed on the excess of the
fair market value of the shares of restricted stock at the time of grant over
the amount, if any, paid by the employee, notwithstanding the transfer and
forfeiture restrictions on the stock. All such taxable amounts are deductible
by Liberty Financial at the time and in the amount of the ordinary
compensation income recognized by the employee. The full amount of dividends
or other distributions of property made with respect to restricted stock
prior to the lapse of the transfer and forfeiture restrictions will
constitute ordinary compensation income to the employee and Liberty Financial
will be entitled to a deduction at the same time and in the same amount.
Tax Treatment of Unrestricted Stock. Upon receiving an award of unrestricted
stock under the 1995 Incentive Plan, the employee will realize ordinary
compensation income to the extent of the fair market value (determined at the
time of transfer to the employee) of such shares, over the amount, if any,
paid by the employee for the shares. Such taxable amounts are deductible as
compensation by Liberty Financial.
Tax Treatment of SARs. No income is realized by an employee upon the grant of
an SAR. Upon exercise of an SAR, the employee will realize ordinary
compensation income in the amount of any cash
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received and, if any shares of LFC Common Stock are received, the employee
will generally realize taxable income to the extent of the fair market value
(determined at the time of transfer to the employee) of such shares. All such
taxable amounts are deductible as compensation by Liberty Financial.
Limitation on Deduction Under Section 162(m) of the Code. Section 162(m) of
the Code generally limits an employer's income tax deduction for compensation
paid to certain key executives of a public company to $1,000,000 per
executive per year. The deduction limitation of Section 162(m) does not
apply, however, to certain performance-based compensation arrangements,
including plans providing for stock options and SARs having an exercise price
of not less than 100% of fair market value, which establish specific
performance goals and/or limits on awards, which are administered by a
committee composed exclusively of "outside" directors, and are disclosed to
and approved by the shareholders of the public company. In addition, the
deduction limitation of Section 162(m) does not apply with respect to
compensation received by the key executives of a public company from options,
SARs, restricted stock or other awards granted under a plan which was adopted
before the company became a public company; however, this exemption will only
apply with respect to grants or awards made during a specified reliance
period (generally up to three years) after the company becomes a public
company (the "reliance period").
The 1995 Incentive Plan includes provisions and limits on awards which are
intended to enable such awards to be exempt from the deduction limitation of
Section 162(m) of the Code, subject, however, to the further requirement that
the 1995 Incentive Plan be disclosed to and approved by the shareholders of
Liberty Financial after it becomes a public company under the Exchange Act.
Furthermore, because the 1995 Incentive Plan was adopted before Liberty
Financial will become a public company under the Exchange Act, options, SARs
and restricted stock as well as other awards made under the 1995 Incentive
Plan to key executives before the end of the reliance period will not be
subject to the deduction limit of Section 162(m). Before the end of the
reliance period, Liberty Financial will seek shareholder approval of the 1995
Incentive Plan, to assure that stock options and SARs and possibly other
awards made subsequently under the 1995 Incentive Plan will qualify as
performance-based compensation that is exempt from the deduction limitation
of Section 162(m) of the Code.
Other Tax Consequences. The foregoing discussion is not a complete
description of the federal income tax aspects of ISOs, Purchase Options and
nonqualified options under the 1990 Plan, the 1995 Incentive Plan and the
1995 Purchase Plan. In addition, administrative and judicial interpretations
of the application of the federal income tax laws are subject to change.
Furthermore, the foregoing discussion does not address state or local tax
consequences.
Compensation Committee Interlocks and Insider Participation
During 1994, Gregory H. Adamian, Michael J. Babcock, Gary L. Countryman, John
P. Hamill, Ray B. Mundt and Stanley A. Wainer served as members of the
Compensation and Stock Option Plan Committee of the Board of Directors. Mr.
Countryman is an executive officer of Liberty Financial. The membership of
such Committees is identical to the membership of the Compensation Committee
of the Board of Directors of Liberty Mutual. Mr. Countryman serves on the
Board of Directors and the Compensation Committee of Bank of Boston
Corporation and The First National Bank of Boston. Ira Stepanian, a director
of Liberty Financial, is the chairman of the board of each of these
companies. Mr. Countryman also serves on the Compensation Committee of the
Board of Directors of The Neiman Marcus Group, Inc. ("Neiman Marcus").
Richard A. Smith, a director of Liberty Financial, is Chairman of the Board
of Neiman Marcus. Mr. Countryman does not receive compensation from Liberty
Financial.
Principal Stockholders
The following table sets forth certain information with respect to the
beneficial ownership of LFC Common Stock by Liberty Mutual, each director of
Liberty Financial, each executive officer of Liberty Financial named in the
above Summary Compensation Table, and all directors and executive officers as
a group as of the date of this Prospectus/Proxy Statement, and as adjusted
assuming (a) that all holders of Colonial Common Stock receive only shares of
LFC Common Stock in the Merger and (b) the
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payment of the maximum amount of cash and the issuance of the maximum number
of shares of LFC Preferred Stock in the Merger. Each holder of LFC Common
Stock has or will have sole voting and investment power with respect to the
shares of LFC Common Stock set forth below.
<TABLE>
<CAPTION>
Percentage After the Merger(1)
Shares Percentage Maximum
Owned Before the Maximum LFC Cash and LFC
Beneficially Merger(1) Common Stock Preferred Stock(1)
<S> <C> <C> <C> <C>
LFC Holdings, Inc. 22,813,200 99.9% 75.4% 83.0%
c/o Liberty Mutual
175 Berkeley Street
Boston, MA 02117
Sabino Marinella(2) 214,091 * * *
Kenneth R. Leibler(2) 113,411 * * *
John A. Benning(2) 43,149 * * *
John W. Rosensteel(2) 11,064 * * *
Hans P. Ziegler(2) 2,766 * * *
All executive officers and directors as a
group (31 persons)(2) 458,888 2.0% 1.5% 1.6%
</TABLE>
* Less than 1%.
(1) Percentages are calculated pursuant to Rule 13d-3 under the Exchange Act
and assume, for each person and group, that all shares which may be acquired
by such person or group pursuant to options presently exercisable or which
become exercisable within 60 days following the date of this Prospectus/Proxy
Statement are outstanding for the purpose of computing the percentage of LFC
Common Stock owned by such persons or group, but are not deemed to be
outstanding for the purpose of computing the percentage of LFC Common Stock
owned by any other person.
(2) Consists of options to purchase shares of LFC Common Stock which are
presently exercisable or which become exercisable within 60 days following
the date of this Prospectus/Proxy Statement, after giving effect to the
Effective Time Adjustment but not the Additional Adjustments. Assuming all
outstanding options held by executive officers and directors were fully
vested and exercisable, all executive officers and directors as a group would
beneficially own 788,739 shares of the LFC Common Stock, or 2.5% of the LFC
Common Stock outstanding after the Merger, assuming that all holders of
Common Stock receive only shares of LFC Common Stock in the Merger (or 2.8%
of the voting power assuming the maximum amount of cash is paid and the
maximum number of shares of LFC Preferred Stock is issued in the Merger).
Relationships With Liberty Mutual
General
Prior to the Effective Time of the Merger, Liberty Financial has been an
indirect subsidiary of Liberty Mutual. Following the consummation of the
Merger and assuming that all holders of Common Stock receive only shares of
LFC Common Stock in the Merger, Liberty Mutual will own approximately 75.4%
of the outstanding shares of LFC Common Stock (approximately 83.0% of the
voting power of the LFC Stock if the maximum amount of cash is paid and the
maximum number of shares of LFC Preferred Stock is issued in the Merger).
Liberty Financial has been advised by Liberty Mutual that Liberty Mutual has
no specific plans regarding the disposition of its LFC Common Stock following
the Merger. However, Liberty Mutual may, from time to time depending on
future conditions, further reduce or increase its beneficial ownership of the
LFC Common Stock. Liberty Mutual has certain rights to have its shares of LFC
Common Stock registered under the Securities Act. See "Shares Eligible for
Future Sale."
Liberty Mutual is a Massachusetts-chartered mutual property and casualty
insurance company with more than $17.4 billion in assets and $2.9 billion in
surplus at September 30, 1994. The principal business activities of Liberty
Mutual's subsidiaries (other than Liberty Financial) are property-casualty
insurance,
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insurance services and life insurance (including group life and health
insurance products) marketed through its own sales force.
Although 20 of Liberty Financial's 22 non-employee directors are also
directors of Liberty Mutual, Liberty Financial's operations are separate from
and generally have been conducted independently of Liberty Mutual and its
other business activities. Liberty Financial and its operating subsidiaries
have their own personnel responsible for operations, marketing, finance,
administration, strategic planning, human resources, legal, accounting and
other management functions.
Reimbursement of Direct Costs
Liberty Mutual from time to time provides management, legal, audit and
treasury services to Liberty Financial, as well as to other Liberty Mutual
subsidiaries which are of the type normally performed by a parent company's
corporate staff. Liberty Mutual's cost allocation policy is based on state
insurance law requirements that all cost allocations be on a fair and
reasonable basis between entities and product lines within Liberty Mutual's
holding company structure. Reimbursements to Liberty Mutual for these
services and charges totaled approximately $1.4 million, $1.6 million, $1.6
million and $648,000 in 1991, 1992, 1993 and the nine months ended September
30, 1994, respectively. These reimbursements are based on direct and indirect
costs incurred by Liberty Mutual and are allocated to Liberty Financial
primarily based upon the amount of time spent by Liberty Mutual's employees
on Liberty Financial's behalf. As described under "--Intercompany Agreement,"
Liberty Mutual and Liberty Financial will enter into an agreement with
respect to the provision of such services following the Merger.
Liberty Financial provides asset management services to real estate limited
partnerships for which an affiliate of Liberty Mutual serves as the general
partner. See "Business--Other Asset Management Activities." An affiliate of
Liberty Mutual paid Liberty Financial fees for such services which totaled
approximately $6.3 million, $6.1 million, $6.1 million and $4.4 million in
1991, 1992, 1993 and the nine months ended September 30, 1994, respectively.
In addition, Liberty Financial provides investment advisory services to oil
and gas investment subsidiaries of Liberty Mutual. These subsidiaries
reimburse Liberty Financial for all direct out-of-pocket costs for these
services. These cost reimbursements totaled $255,000, $100,000 and $218,000
in 1992, 1993 and the nine months ended September 30, 1994, respectively.
Volume Discounts and Special Rates
As an indirect subsidiary of Liberty Mutual, Liberty Financial has paid
favorable prices or rates for certain services and products used in its
business and provided by third parties, including telephone services and
computer and other equipment, and received certain other benefits, including
insurance coverage. Following completion of the Merger, these favorable
prices and rates for the telephone services and provision of computer
equipment and insurance coverage may not continue to be available to Liberty
Financial if ownership of Liberty Financial by Liberty Mutual falls below 50%
or if Liberty Mutual replaces these arrangements with those negotiated with
different suppliers. However, Liberty Financial believes that the
discontinuance of any of these arrangements will not have a material adverse
effect on Liberty Financial's financial condition or results of operations.
Tax Sharing Agreement
The Parent and its subsidiaries (except for Keyport which filed a separate
federal income tax return through 1993) have been included in the
consolidated federal income tax return filed by Liberty Mutual. In accordance
with the Code, Liberty Mutual expects to include Liberty Financial and its
subsidiaries in its consolidated federal income tax return so long as Liberty
Mutual continues to own at least 80% of the outstanding stock of Liberty
Financial (determined by both vote and value). Prior to 1994, when Keyport
became eligible for inclusion in Liberty Mutual's consolidated tax return,
Keyport determined separately its individual liability for federal income
taxes. See Note 7 of Notes to Liberty Financial's Consolidated Financial
Statements.
Prior to the Merger, Liberty Financial, Parent and Liberty Mutual will enter
into a formal Tax Sharing Agreement (the "Tax Sharing Agreement"). The Tax
Sharing Agreement, effective for taxable years beginning on or after January
1, 1990, provides for the allocation of responsibility between Liberty
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Financial (either directly or as a successor to Parent for periods prior to
the Merger) and Liberty Mutual for paying federal income taxes and foreign,
state, and local income, franchise, or excise taxes, and details the
methodology and procedures for determining the payments or reimbursements to
be made by or to Liberty Financial (either directly or as a successor to
Parent) with respect to such taxes.
The Tax Sharing Agreement generally provides, among other things, that
Liberty Financial (either directly or as a successor to Parent) will pay to
Liberty Mutual an amount for federal income tax purposes determined as if
Liberty Financial (or Parent for periods prior to the Merger) filed a
separate consolidated federal income tax return for Liberty Financial (or
Parent) and its subsidiaries (i.e., as if Liberty Financial (or Parent) were
the common parent of an affiliated group including its subsidiaries but not
including Liberty Mutual and its other subsidiaries (in each case excluding
Keyport and its subsidiaries for periods prior to 1994)), regardless of the
amount of federal income tax shown on the actual consolidated federal income
tax return filed by Liberty Mutual on behalf of its entire affiliated group
including Liberty Financial (or Parent) and its subsidiaries. The
determination of the amounts to be paid by Liberty Financial (either directly
or as a successor to Parent) pursuant to the Tax Sharing Agreement will
generally take into account carryovers and carrybacks of net operating losses
and other attributes, again as if Liberty Financial (or Parent for periods
prior to the Merger) and its subsidiaries (other than Keyport and its
subsidiaries for periods prior to 1994) independently filed a consolidated
federal income tax return, as detailed in the Tax Sharing Agreement.
The Tax Sharing Agreement further provides that Liberty Financial (either
directly or as a successor to Parent) will pay to Liberty Mutual amounts for
foreign, state, or local income, franchise, or excise taxes on a basis
consistent with the methodology for determining federal income tax payments,
except that Liberty Financial generally will not be required to pay for a
taxable year an amount that exceeds the total liability shown on the
combined, joint, consolidated, or similar return actually filed on behalf of
Liberty Mutual and/or any of its other subsidiaries together with Liberty
Financial (or Parent for periods prior to the Merger) and/or any of its
subsidiaries (with subsequent adjustments as appropriate, however, to be
taken into account where tax payments have been thus limited in a prior
year).
The Tax Sharing Agreement also provides for procedures with respect to
adjustments to tax payments or reimbursements resulting from audits or other
proceedings with respect to taxable years for which Liberty Financial (or
Parent for periods prior to the Merger) and/or its subsidiaries have been
included with Liberty Mutual and/or its other subsidiaries in any
consolidated federal income tax return or any combined, joint, consolidated,
or similar foreign, state, or local income, franchise, or excise tax return.
In addition, while the Tax Sharing Agreement generally applies to taxable
years in which Liberty Financial (or Parent for periods prior to the Merger)
has been or will be included in a consolidated federal income tax return
filed by Liberty Mutual, it also contains provisions that may affect
carryovers or carrybacks of net operating losses or other tax attributes from
or to taxable years prior or subsequent to such consolidation.
As the common parent of an affiliated group filing a consolidated federal
income tax return and under the terms of the Tax Sharing Agreement, Liberty
Mutual has various rights. Among other things, it is the sole and exclusive
agent for Liberty Financial (either directly or as a successor to Parent) in
any and all matters relating to the U.S. income tax liability of Liberty
Financial (or Parent for periods prior to the Merger), it has sole and
exclusive responsibility for the preparation and filing of the U.S.
consolidated federal income tax return, and it has the power, in its sole
discretion, to contest or compromise any asserted tax adjustment or
deficiency and to file, litigate, or compromise any claim for refund on
behalf of Liberty Financial (either directly or as a successor to Parent).
Intercompany Agreement
In connection with the Merger, Liberty Financial and Liberty Mutual intend to
enter into an Intercompany Agreement (the "Intercompany Agreement")
pertaining to the matters described below.
Services. The Intercompany Agreement will govern services provided by Liberty
Mutual to Liberty Financial following the Merger. Such services will be
provided only as requested by Liberty Financial and may include legal, tax,
auditing, treasury and certain other services. Liberty Financial will pay
Liberty Mutual a fee based upon Liberty Mutual's direct costs allocable to
the services provided, and will
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reimburse Liberty Mutual for all out of pocket fees and expenses incurred by
it. The agreement will provide for estimated quarterly payments and
subsequent adjustments thereto based upon actual experience.
Financial Information. The Intercompany Agreement will provide that, during
any period in which Liberty Mutual owns at least 20% of the voting power of
the outstanding capital stock of Liberty Financial, Liberty Financial will
provide Liberty Mutual with certain financial and other information. During
any period in which Liberty Mutual owns at least 50% of the voting power of
the outstanding capital stock of Liberty Financial or in which Liberty Mutual
is required or elects to consolidate Liberty Financial's financial statements
with its own financial statements, Liberty Financial must obtain Liberty
Mutual's prior written consent to any significant changes in accounting
principles of Liberty Financial.
Indemnification. The Intercompany Agreement will provide that Liberty
Financial will indemnify Liberty Mutual, its subsidiaries other than Liberty
Financial and its subsidiaries, and each of their respective officers,
directors, employees, and agents against losses from third-party claims based
on, arising out of or resulting from (i) the activities of Liberty Financial
or its subsidiaries (including without limitation liabilities under the
Securities Act and other securities laws) and (ii) any other acts or
omissions arising out of performance of the Intercompany Agreement.
Registration Rights Agreement
In connection with the Merger, Liberty Financial and Liberty Mutual will
enter into a Registration Rights Agreement (the "Registration Rights
Agreement") which, among other things, will provide that after 180 days from
the date of the Merger, Liberty Financial will, upon Liberty Mutual's
request, register under the Securities Act any of the shares of LFC Common
Stock currently held indirectly or hereafter acquired directly or indirectly
by Liberty Mutual for sale in accordance with Liberty Mutual's intended
method of disposition thereof, and will take such other actions necessary to
permit the sale thereof in other jurisdictions. Liberty Mutual has the right
to request up to three such registrations per year, beginning 180 days from
the effective date of the Merger, subject to certain minimum share
requirements. Liberty Mutual also has the right, which it may exercise at any
time and from time to time in the future, to include the shares of LFC Common
Stock held directly or indirectly by it in certain other registrations of
common equity securities of Liberty Financial initiated by Liberty Financial
on its own behalf. Liberty Mutual has agreed to pay its pro rata share of all
costs and expenses in connection with each such registration.
Each of Liberty Financial and Liberty Mutual will indemnify the other, and
the officers, directors and controlling persons of the other, against certain
liabilities arising in respect of any registration or other offering covered
by the registration rights under the Registration Rights Agreement. Liberty
Financial has the right (exercisable not more than once in any 12 month
period) to require Liberty Mutual to delay any exercise by Liberty Mutual of
its rights to require registration and other actions for a period of up to
120 days if Liberty Financial determines, and the underwriters selected by
Liberty Financial concur, that any other offerings by Liberty Financial then
being conducted or about to be conducted would be adversely affected or if
Liberty Financial determines that it would be required to disclose publicly
material business information which would cause a material disruption of a
major corporate development then pending or in progress, or would have other
material adverse consequences.
Certain Other Transactions
Liberty Financial was organized in 1989 to become the holding company for the
direct and indirect financial services subsidiaries of Liberty Mutual. See
"General--Corporate Structure and History." For purposes of the SEC's rules
and regulations, Liberty Mutual may be deemed a "promoter" of Liberty
Financial.
Immediately prior to the Effective Time, an affiliate of Liberty Mutual will
loan up to $100.0 million (the "Merger Loan") to Liberty Financial, the
proceeds of which will be used to fund the cash portion of the Consideration
in the Merger. The Merger Loan will be evidenced by a note in the principal
amount of the cash Consideration bearing interest at up to 8.5% per annum
payable semiannually. The entire principal amount of such note shall be
payable on the tenth anniversary of issuance. The Merger Loan will be subject
to a prepayment penalty in the form of a "make whole" provision. Under the
"make whole" provision, the prepayment penalty will be an amount equal to the
present value of the loss of investment
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income resulting from the interest rate differential on the principal amount
prepaid between 8.5% and the interest rate, as of the prepayment date, of
U.S. Government Securities maturing on the tenth anniversary of the issuance
of the Merger Loan note.
In January, 1995, SSI issued the SSI Note to Parent. The SSI Note is in the
principal amount of $30.0 million, bearing interest, payable semi-annually,
at 8.0% per annum, with the entire principal amount being payable (without
scheduled mandatory prepayments) on March 31, 2000. Such note may be prepaid
without penalty or premium at any time. The SSI Note is an Excluded Asset,
and as such, the SSI Note will not be contributed to Liberty Financial in the
Parent Contribution.
On December 29, 1993, an affiliate of Liberty Mutual made a loan in the
principal amount of $75.0 million to Liberty Financial. Liberty Financial
applied the full amount of the proceeds of this loan on such date to make a
capital contribution to Keyport to strengthen Keyport's capital base. This
loan initially bore interest at a variable rate based on Liberty Mutual's
short-term funding costs and was refinanced by a note issued as of December
30, 1994 bearing interest at 7.51% per annum (the "Keyport Note"). The
Keyport Note is due and payable on April 28, 1995, and may be prepaid,
without penalty or premium, at any time. In connection with Liberty
Financial's proposed acquisition of Newport Holdings described above under
"Business--Other Asset Management Businesses," an affiliate of Liberty Mutual
will loan approximately $24.0 million to Liberty Financial. Liberty Financial
will apply the proceeds of the loan to finance such acquisition. In
connection with the loan to be made to finance the acquisition of Newport
Holdings (which is anticipated to be made prior to the expiration date of the
Keyport Note), Liberty will refinance and extend the Keyport Note and combine
the indebtedness evidenced by the Keyport Note with the indebtedness incurred
in connection with Newport Holdings acquisition. This combined indebtedness
in the amount of approximately $99.0 million will be evidenced by a note
which will bear interest at a fixed rate, the exact percentage of which will
be determined at the time the note is issued based on Liberty Mutual's
appropriate market rate (i.e., a rate designed to correspond to the rate
Liberty Mutual would charge to a then unaffiliated third-party borrower for a
similar loan). The combined loan will be due and payable on March 31, 2000,
and may be prepaid, without penalty or premium, at any time.
As indicated above, Colonial is a party to a credit agreement with The First
National Bank of Boston and certain other lenders pursuant to which the
lenders have agreed to lend up to $100.0 million to Colonial. The proceeds of
the loans made under the credit agreement are used to finance the sale of
Class B shares of the open-end mutual funds sponsored by Colonial. Following
the Effective Time, Liberty Financial and Colonial may explore the
possibility of refinancing such credit facility on more attractive terms.
Such refinancing may involve credit support (by way of guaranty or otherwise)
by Liberty Mutual or one of its affiliates. If such credit support were
provided, it is anticipated that Liberty Mutual would receive a fee from
Liberty Financial equal to the sum of (i) a percentage of any interest rate
and other savings which Liberty Financial receives as a result of the credit
support provided by Liberty Mutual determined by subtracting the percentage
equal to Liberty Mutual's direct or indirect equity interest from time to
time in Liberty Financial, calculated on a fully diluted basis, from 100%,
and (ii) 0.15% of the average outstanding borrowings under the Credit
Agreement.
In 1990, Liberty Mutual contributed to Liberty Financial approximately $145.0
million of previously outstanding indebtedness of Liberty Financial to
Liberty Mutual. In addition, Liberty Mutual contributed $142.5 million and
$1.8 million in cash to Liberty Financial during 1991 and 1992, respectively.
Of the $142.5 million received by Liberty Financial in 1991, $100.0 million
was used to increase the capital of Keyport, and $40.0 million was used to
extinguish the indebtedness incurred in 1990 to finance the acquisition of
the remaining ownership interest in Stein Roe. See "General--Corporate
Structure and History." The contribution to the capital of Keyport in 1991
was used to acquire mortgage notes of $100.0 million issued by indirect
subsidiaries of Liberty Mutual, as described below. Liberty Mutual has no
obligation to make any future capital contributions or loans or advances to
Liberty Financial. See "Management's Discussion and Analysis of Results of
Operations and Financial Condition--Liquidity and Capital Resources."
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In 1991 and 1992, Keyport acquired the mortgage notes described above, which
were in the aggregate principal amount of approximately $95.7 million and
$4.3 million, respectively, on properties owned by certain indirect
subsidiaries of Liberty Mutual (the "Affiliated Obligors"). The notes were
purchased for their face value. Two other affiliates of Liberty Mutual (the
"Contributing Affiliates") have executed a mortgage maintenance agreement
with Keyport pursuant to which the Contributing Affiliates agreed to provide
the Affiliated Obligors with such funds as from time to time shall be
necessary in order to meet any shortfall in cash available to the Affiliated
Obligors to make interest payments due to Keyport under the mortgage notes
and any deficiency balance owed to Keyport after any sale or foreclosure of
the underlying property securing a mortgage note. In addition, Liberty Mutual
has agreed to advance to the Contributing Affiliates such amounts as shall
from time to time be owed by them under the mortgage maintenance agreement.
The notes currently earn interest at above-market rates and Liberty Mutual
may, depending on market conditions and other factors, elect to prepay the
notes.
From 1990 through May, 1992, Liberty Mutual provided advisory management
services to LAMCO in connection with the investment management of two mutual
funds sponsored by Liberty Financial. In 1990, 1991 and 1992, Liberty
Financial paid Liberty Mutual $736,000, $1,129,000 and $634,000,
respectively, for these services.
Keyport has a sales arrangement with Liberty Life, a subsidiary of Liberty
Mutual which is authorized to offer variable annuities in the State of New
York. See "Business--Keyport--Licensing." Liberty Life issues variable
annuities in New York with substantially the same policy terms and underlying
investment options as Keyport's variable products, the premiums for which are
deposited in a separate account of Liberty Life. All contractual obligations
in respect of such annuities are those of Liberty Life rather than of
Keyport. Liberty Life charges the fees payable under the policies, pays
Keyport a fee designed to cover its expenses in administering these policies,
and retains the balance. During the year ended December 31, 1993 and the nine
months ended September 30, 1994, the aggregate fees paid to or retained by
Liberty Life under this arrangement were $73,000 and $68,000, respectively
(no such fees were paid or retained in prior periods). Liberty Financial
expects such arrangements to continue in the future.
As of September 30, 1994, Liberty Mutual and Liberty Mutual Fire Insurance
Company, an affiliate of Liberty Mutual, owned approximately 10.2% and 1.1%,
respectively, of the outstanding shares of beneficial interest of Liberty
ALL-STAR Equity Fund, a closed-end fund listed on the NYSE. All of such
shares were purchased in open market transactions. LAMCO is the investment
adviser to this fund. See "Business--Other Asset Management Businesses."
The existing and proposed agreements between Liberty Financial and Liberty
Mutual may be modified in the future and additional transactions or
agreements may be entered into between Liberty Financial and Liberty Mutual.
See "Risk Factors--Control by Liberty Mutual; Potential Conflicts of
Interest."
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Merger, based on shares outstanding as of February 8,
1995, Liberty Financial will have approximately 30,241,414 outstanding shares
of LFC Common Stock, assuming that all holders of Colonial Common Stock
receive only shares of LFC Common Stock in the Merger (26,390,765 shares if
the maximum amount of cash is paid and the maximum number of shares of LFC
Preferred Stock is issued in the Merger). The shares issued in the Merger and
the 3,294 shares held by persons who have exercised options granted under
Liberty Financial's 1990 Stock Option Plan will be freely tradeable without
restriction or further registration under the Securities Act, except for any
shares issued in the Merger to an "affiliate" of Liberty Financial, as that
term is defined in Rule 144 under the Securities Act (an "Affiliate"), or
issued to or purchased by an "affiliate" of Colonial, as that term is defined
in Rule 145 promulgated under the Securities Act ("a Colonial Affiliate") as
discussed below. The 22,813,200 remaining shares, representing 75.4% of the
total number of shares of LFC Common Stock to be outstanding after completion
of the Merger assuming all holders of Common Stock receive only shares of LFC
Common Stock in the Merger (83.0% of the voting power of the LFC Stock
assuming the
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maximum amount of cash is paid and the maximum number of shares of LFC
Preferred Stock is issued in the Merger), will be held indirectly by Liberty
Mutual. Any shares acquired in the Merger by an Affiliate of Liberty
Financial may not be resold except pursuant to an effective registration
statement filed by Liberty Financial or an applicable exemption from
registration, including an exemption under Rule 144.
The shares of LFC Common Stock and LFC Preferred Stock issuable to Colonial
stockholders in connection with the Merger will be registered under the
Securities Act. Upon registration, such shares will be freely transferable
under the Securities Act, except for shares issued to any person who is a
Colonial Affiliate and except for shares of LFC Preferred Stock issued to any
other person who has elected to become a party to the Stockholders Agreement
described above. See "The Merger--Stockholders Agreement." The shares of LFC
Common Stock or LFC Preferred Stock received by a Colonial Affiliate may not
be sold without registration of such shares for resale under the Securities
Act or the availability of an exemption (including the limited exemptions
provided by Rules 144 and 145) from such registration.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated in accordance with the provisions of such Rule) who has
beneficially owned restricted shares of the LFC Common Stock for at least two
years, and persons who may be deemed affiliates of Liberty Financial as that
term is defined in the Securities Act, would be entitled to sell within any
three-month period a number of shares of LFC Common Stock that does not
exceed the greater of (i) 1% of the then outstanding shares of LFC Common
Stock and (ii) the average weekly trading volume of LFC Common Stock on the
NYSE or Nasdaq, as the case may be, during the four calendar weeks preceding
the date notice of such sale is filed. Sales under Rule 144 are also subject
to certain manner of sale provisions, notice requirements, and the
availability of current public information about Liberty Financial. A person
who is not deemed an Affiliate of Liberty Financial at any time during the
three months preceding the sale by such person, and who has beneficially
owned shares for at least three years, is entitled to sell such shares under
Rule 144(k) without regard to the volume limitations, manner of sale,
information, and notice requirements described above. Liberty Mutual and its
other subsidiaries would be deemed an Affiliates of Liberty Financial. No
shares of LFC Common Stock to be outstanding after completion of the Merger
will be saleable under Rule 144(k). Following the Merger, Colonial Affiliates
will be entitled to sell shares of LFC Stock in accordance with the
provisions of Rule 144, provided that Colonial Affiliates will not be subject
to the requirement that they have held their LFC Stock for any specified
period or the notice requirements specified in Rule 144.
All shares of LFC Common Stock held directly or indirectly by Liberty Mutual
constitute restricted securities and will be eligible for sale by Liberty
Mutual in the public market under Rule 144 following the Merger. Pursuant to
the Registration Rights Agreement, Liberty Financial has granted Liberty
Mutual certain registration rights which provide that, commencing 180 days
after the effective date of the Merger, Liberty Financial, upon Liberty
Mutual's request, will register for sale under the Securities Act shares of
Liberty Financial which Liberty Mutual may wish to sell in such manner as
Liberty Mutual may request. See "CERTAIN INFORMATION REGARDING LIBERTY
FINANCIAL--Relationships with Liberty Mutual-- Registration Rights
Agreement." These registration rights could result in secondary offerings of
significant share amounts by Liberty Mutual. Liberty Financial is not aware
of any current plans by Liberty Mutual to exercise its registration rights.
In addition, at or prior to the Effective Time, Liberty Financial will enter
into a Registration Rights Agreement with John A. McNeice, Jr. and C. Herbert
Emilson, pursuant to which such individuals will be granted certain rights to
have the LFC Common Stock acquired by them in the Merger registered under the
Securities Act. See "The Merger--Interests of Certain Persons in the
Merger--Registration Rights Agreement."
No precise prediction can be made as to the effect, if any, that open market
sales of shares or the availability of shares for sale will have on the
market price of the LFC Common Stock prevailing from time to time. Liberty
Financial is unable to estimate the number of shares that may be sold in the
public market pursuant to Rule 144 or otherwise, since this will depend on
the market price of the LFC Common Stock, the personal circumstances of the
sellers, and other factors. Nevertheless, sales of significant amounts of the
LFC Common Stock after the Merger, or the perception that such sales could
occur, could adversely affect the market price of the LFC Common Stock.
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In addition, approximately (i) 983,295 shares issuable upon exercise of stock
options under the 1990 Plan which are currently exercisable or which will
become exercisable within 90 days following the date of this Prospectus/Proxy
Statement and (ii) 827,900 shares issuable as of the date of this Prospectus/
Proxy Statement under Colonial's 1986 Stock Option Plan and Director Option
Plan to be assumed on a share-for-share basis by Liberty Financial (which
Colonial Options will, unless acceleration is waived in whole or in part by
the holder thereof, become exercisable in full prior to the Merger and will
be deemed issued pursuant to Liberty Financial's 1995 Incentive Plan) will
become eligible for sale in the public market beginning on the effective date
of a registration statement on Form S-8 pertaining to such shares, which
registration statement Liberty Financial expects to file with the SEC
promptly following the Effective Time. See "CERTAIN INFORMATION REGARDING
LIBERTY FINANCIAL--Management--Executive Compensation--1990 Stock Option
Plan" and "CERTAIN INFORMATION REGARDING LIBERTY
FINANCIAL--Management--Executive Compensation--1995 Incentive Stock Plan."
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COMPARISON OF STOCKHOLDERS' RIGHTS AND DESCRIPTION OF LFC CAPITAL STOCK
Each of Liberty Financial and Colonial is incorporated in The Commonwealth of
Massachusetts. Stockholders of Colonial, whose rights as stockholders
currently are governed by Massachusetts law and by Colonial's Articles of
Organization, as amended (the "Colonial Charter"), and By-laws, will, upon
consummation of the Merger (and to the extent they do not receive all cash in
the Merger), become stockholders of Liberty Financial and their rights as
such will be governed by Massachusetts law and Liberty Financial's charter.
Prior to the consummation of the Merger, Liberty Financial will amend and
restate its Articles of Organization as the LFC Restated Articles of
Organization (the "LFC Restated Articles") and its By-Laws as the LFC
Restated By-Laws to increase Liberty Financial's authorized capital stock and
to amend and modify certain other provisions. The summary discussion below
assumes and gives effect to such amendment and restatement.
The following summary compares the material differences between the rights of
holders of shares of Colonial Common Stock and the rights of holders of
shares of LFC Common Stock. Because the rights of the Liberty Financial and
the Colonial stockholders are governed by Massachusetts law, these
differences are limited in number and they generally arise from the
distinctions between the Colonial Charter and the Colonial By-Laws and the
LFC Restated Articles and the LFC Restated By-Laws. The following summary
also describes generally the capital stock of Liberty Financial and certain
key provisions of the LFC Restated Articles and LFC Restated By-Laws and
related matters.
The summary includes all material aspects, but does not purport to be a
complete statement, of the rights of holders of shares of Colonial capital
stock and holders of shares of Liberty Financial capital stock under, and is
qualified in its entirety by reference to, the Colonial Charter and Colonial
By-Laws and the LFC Restated Articles and LFC Restated By-Laws.
Voting Rights
The Colonial Charter provides that the holders of shares of the Colonial
Class A Common Stock have no right to vote for the election of Colonial
directors or generally on any other matters submitted to a vote of the
Colonial stockholders, except as otherwise required by law and except that
the approval of the holders of two-thirds (2/3) of the shares of Colonial
Class A Common Stock is required (i) to approve the adoption of any amendment
to the Colonial Charter which would adversely affect the then existing rights
of the holders of the Colonial Class A Common Stock set forth in Article 4 of
the Colonial Charter or any amendment or waiver of the provisions of Article
5 of the Colonial Charter (regarding restrictions on the transfer of Colonial
Class B Common Stock), and (ii) if Colonial or any subsidiary is at the time
an investment advisor to any investment company registered under the
Investment Company Act, as amended, or any successor statute thereto, to
authorize the issuance or sale or other transfer of any shares of Colonial
Class B Common Stock by Colonial or any holder of Class B Common Stock which
Colonial determines requires the approval of the shareholders of any such
investment company. Thus, only the holders of shares of the Colonial Class B
Common Stock have the right to vote for the election of Colonial directors
and generally on any other matters submitted to a vote of the Colonial
stockholders.
The LFC Restated Articles provides that the holders of shares of LFC Common
Stock have a right to vote on all matters submitted to a vote of Liberty
Financial stockholders, except that no person or group other than Liberty
Mutual, certain affiliates of Liberty Mutual, certain savings, profit
sharing, stock bonus and employee stock ownership plans established by
Liberty Financial or certain subsidiaries of Liberty Financial and other
persons approved in advance by the Board of Directors of Liberty Financial
shall have the right to vote more than 20% of the combined voting power of
Liberty Financial's Voting Stock (as defined in the LFC Restated Articles and
below). Accordingly, assuming such 20% voting restriction does not apply,
holders of a majority of the shares of LFC Common Stock entitled to vote in
any election of directors may elect all of the directors standing for
election. As indicated above, following the Merger Liberty Mutual will own
approximately 75.6% of the LFC Common Stock, assuming all holders of Colonial
Common Stock receive only shares of LFC Common Stock in the Merger
(approximately 83.2% of the voting power of the LFC Stock if the maximum
amount of cash is paid and and the maximum number of shares of LFC Preferred
Stock is issued in the Merger).
The provisions in the LFC Restated Articles regarding the 20% voting
restriction are designed to prevent a deemed assignment under the Advisers
Act or the Investment Company Act of investment
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contracts that Liberty Financial's subsidiaries have with their clients. The
Investment Company Act and the Advisers Act define the term "assignment" to
include any "direct or indirect transfer" of "a controlling block of the
voting securities" of the issuer's outstanding voting securities. The
Investment Company Act presumes that any person holding 25% of the voting
stock of Liberty Financial "controls" Liberty Financial. The LFC Restated
Articles provide that a person or "group" (which includes affiliates and
associates of a person, as defined in the LFC Restated Articles) that owns
(as defined in the LFC Restated Articles) more than 20% of the voting shares
of Liberty Financial's issued and outstanding capital stock ("Voting Stock")
shall have the right to vote not more than 20% of the outstanding shares of
Voting Stock entitled to vote. The remaining shares of Voting Stock owned by
such person or group ("Excludable Shares") shall have no voting rights and
shall not be counted for quorum or stockholder approval purposes. These
provisions do not apply to Liberty Mutual, affiliates of Liberty Mutual,
direct or indirect subsidiaries of Liberty Financial and certain employee
plans established or to be established by Liberty Financial. The Board of
Directors of Liberty Financial may approve the exemption of other persons or
groups from the provisions described above. The foregoing limitation is
intended to have the effect of decreasing the chance of any assignment
occurring for purposes of the Advisers Act and the Investment Company Act,
including in connection with future issuances on sales of LFC Common Stock.
However, no assurances can be given that such an "assignment" will not occur
under these or other circumstances. See "RISK FACTORS--Regulation."
The 20% voting restriction may be viewed as having the effect of making more
difficult or of discouraging, absent the support of Liberty Mutual, a proxy
contest, a merger or other combination involving Liberty Financial, a tender
offer, an open-market purchase program or other purchase of LFC Common Stock
that could give Liberty Financial stockholders an opportunity to realize a
premium over the then-prevailing market price for their shares. However,
given the authority that Liberty Mutual will exercise over the affairs of
Liberty Financial following the completion of the Merger, this effect is not
considered significant.
Stock Transfer Restrictions
The Colonial Charter provides that Colonial shall not issue or sell or
otherwise transfer any shares of Colonial Class B Common Stock except to a
person who is an officer, director or employee of Colonial or any subsidiary
of Colonial at the time of such issuance, sale or transfer, and that no
holder of Colonial Class B Common Stock, other than Colonial, shall sell or
otherwise transfer any shares of Colonial Class B Common Stock except to
Colonial or to another holder of Colonial Class B Common Stock who is an
officer, director or employee of Colonial or any subsidiary of Colonial and
except for transfers by operation of law, provided that a holder of shares of
Colonial Class B Common Stock may pledge, grant a security interest in,
hypothecate or otherwise encumber any of such shares.
Neither the LFC Restated Articles nor the LFC Restated By-Laws restricts the
transfer of shares of LFC Common Stock.
Other Provisions Pertaining to a Change in Control
The LFC Restated Articles and LFC Restated By-Laws also contain certain
provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board of Directors of Liberty Financial
and in the policies formulated by the Board of Directors of Liberty
Financial. These provisions may serve to delay, defer or prevent a change in
control of Liberty Financial if the Board of Directors of Liberty Financial
determines that such a change in control is not in the best interests of
Liberty Financial. These provisions, which are summarized below, could have
the effect of discouraging certain attempts to acquire Liberty Financial or
remove incumbent management even if some or a majority of Liberty Financial's
stockholders deemed such an attempt to be in their best interest.
Although the Board of Directors of Liberty Financial and the Liberty
Financial stockholders have elected that Liberty Financial shall be exempt
from the statutory staggered board provisions of Massachusetts General Laws,
Chapter 156B, S.50A, the LFC Restated Articles provide that, except for
Liberty Financial directors elected by holders of shares of the Preferred
Stock, the Liberty Financial directors shall be elected on a staggered basis.
This means that Liberty Financial's Board of Directors is divided into three
classes whose members each serve for staggered three-year terms, with one
class
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being elected each year. The Board of Directors of Colonial is not divided
into classes or elected on a staggered basis.
The LFC Restated Articles and LFC Restated By-Laws contain provisions
concerning the removal of directors and the filling of vacancies. Liberty
Financial directors may be removed only for cause (as defined in the LFC
Restated Articles) and only upon the affirmative vote of the holders of at
least 67% of the outstanding shares of Voting Stock entitled to vote thereon,
voting as a single class. The number of Liberty Financial directors may be
increased to a maximum of 30 or decreased to a minimum of three (but only to
eliminate vacancies) by a majority of the Liberty Financial directors. No
decrease in the number of Liberty Financial directors may reduce the term of
any incumbent director. A majority of the remaining Liberty Financial
directors then in office are empowered to fill any vacancy on the Board of
Directors of Liberty Financial.
The Colonial By-Laws provide that Colonial directors may be removed with or
without cause by the holders of a majority in interest of the capital stock
of Colonial entitled to vote in the election of Colonial directors (currently
the holders of the Colonial Class B Common Stock) and with cause by a
majority of the Colonial directors then in office. The number of Colonial
directors may be a maximum of 12 and a minimum of three with the precise
number to be determined by vote of either the Colonial stockholders or the
Colonial directors. A majority of the remaining Colonial directors then in
office are empowered to fill any vacancy on the Board of Directors of
Colonial.
The LFC Restated Articles and LFC Restated By-Laws establish procedures with
regard to the nomination of candidates for election as Liberty Financial
directors who have not been nominated by the Board of Directors of Liberty
Financial. In general, notice must be received by Liberty Financial not less
than 60 days and no more than 90 days prior to the applicable Liberty
Financial stockholder meeting and must contain certain specified information
concerning the persons to be nominated and the Liberty Financial stockholder
submitting the proposal. In addition, the LFC Restated Articles authorizes
and the LFC Restated By-Laws requires that any such nomination of candidates
for election as a Liberty Financial director be accompanied by a petition
signed by at least 100 record holders of LFC capital stock entitled to vote
in the election of Liberty Financial directors, representing in the aggregate
at least 1% of the outstanding Liberty Financial capital stock entitled to
vote thereon. The LFC Restated Articles and LFC Restated By-Laws also
establish procedures with regard to Liberty Financial stockholder proposals
for bringing business for consideration at Liberty Financial stockholder
meetings, which procedures apply to proposals that Liberty Financial
stockholders are entitled to make under applicable law. In general, notice
must be received by Liberty Financial not less than 60 days and no more than
90 days prior to the applicable Liberty Financial stockholder meeting and
must contain certain specified information concerning the business desired to
be brought before the meeting and the Liberty Financial stockholder
submitting the proposal. Neither the Colonial Charter nor the Colonial
By-Laws contains any provisions restricting the nomination of persons as
Colonial directors or the submission of Colonial stockholder proposals for
consideration at Colonial stockholder meetings.
The LFC Restated By-Laws provide that a special meeting of Liberty Financial
stockholders shall be called at the request of Liberty Financial stockholders
only upon the application of the holders of shares of Voting Stock
representing at least 67% of the outstanding shares of Voting Stock entitled
to vote generally in the election of Liberty Financial directors. The
Colonial By-Laws provide that a special meeting of Colonial stockholders
shall be called at the request of Colonial stockholders only upon the
application of the holders of shares of Colonial capital stock representing
10% of such capital stock entitled to vote at such meeting.
The Board of Directors of Liberty Financial is permitted pursuant to
Massachusetts law and the LFC Restated Articles to consider special factors
when evaluating proposed tender or exchange offers or certain consolidations,
mergers or other fundamental transactions. These special factors may include,
but are not limited to, social, legal and economic effects upon employees,
suppliers, customers and others having similar relationships with Liberty
Financial, the communities in which Liberty Financial conducts its business,
and the future prospects of Liberty Financial.
Although the Colonial Charter and the Colonial By-Laws do not specifically
provide for the consideration of these special factors by the Colonial Board
when evaluating tender or exchange offers
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or consolidations or mergers, the Colonial Board is permitted by
Massachusetts law to consider such factors.
The affirmative vote of Liberty Financial stockholders representing a
majority of the combined voting power of the outstanding shares of Voting
Stock, voting as a single class, is required to amend certain provisions of
the LFC Restated Articles and LFC Restated By-Laws, including the provisions
concerning the inability to vote certain shares of Voting Stock defined as
Excludable Shares, the staggered term of the Board of Directors of Liberty
Financial, the removal of Liberty Financial directors, the filling of
vacancies on the Board of Directors of Liberty Financial and increasing and
decreasing the size of the Board of Directors of Liberty Financial, the
regulation of Liberty Financial stockholder nominations of candidates for
election as Liberty Financial directors and of Liberty Financial stockholder
proposals, and the special factors which may be considered by the Board of
Directors of Liberty Financial in evaluating tender or exchange offers or
certain mergers or fundamental transactions. In addition, the LFC Restated
Articles require the affirmative vote of Liberty Financial stockholders
representing a majority of the combined voting power of the outstanding
shares of Voting Stock for adoption, amendment or repeal of the LFC Restated
By-laws by the LFC stockholders.
The Colonial Charter permits the Colonial directors to make, amend or repeal
the Colonial By-Laws, except with respect to provisions which by law or the
Colonial By-Laws require action by the stockholders. The Colonial By-Laws
prohibit the Colonial directors from making any amendment which changes those
provisions of the By-Laws relating to meetings of stockholders, to the
removal of directors, to the duties, election or removal of the Chairman of
the Board, or the President, Treasurer or Clerk of Colonial, or to the
requirements for amendments of the By-Laws.
Exculpation and Indemnification for Officers and Directors
As permitted by Massachusetts General Laws, Chapter 156B ("Chapter 156B"),
the LFC Restated Articles contain a provision which limits the personal
liability of a Liberty Financial director to Liberty Financial for monetary
damages for breach of his fiduciary duty of care as a director. Under current
Massachusetts law and the LFC Restated Articles, liability is not eliminated
for (i) any breach of the Liberty Financial director's duty of loyalty to
Liberty Financial or its stockholders, (ii) acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) unlawful payment of dividends or stock purchases or redemptions
pursuant to Section 61 and Section 62 of Chapter 156B, or (iv) any
transaction from which the Liberty Financial director derived an improper
personal benefit. This provision does not eliminate a Liberty Financial
stockholder's right to seek non-monetary remedies, such as an injunction or
rescission, which are equitable, to redress action taken by the Liberty
Financial directors. However, equitable remedies may not be available in all
situations, and there may be instances in which no effective equitable remedy
is available.
Colonial's Charter also contains a provision which limits the personal
liability of a Colonial director to Colonial. The provision is substantially
the same as that contained in the LFC Restated Articles.
The LFC Restated Articles provide that Liberty Financial shall, to the
maximum extent permitted from time to time under Massachusetts law, indemnify
any person who is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit, proceeding or claim, by reason
of the fact that such person is or was a director, officer, employee or other
agent of Liberty Financial and any person who at the request of Liberty
Financial is or was serving as a director, officer, employee or other agent
of another organization, including service in any capacity with respect to
employee benefit plans, against expenses (including attorneys' fees and
expenses), judgments, fines, penalties and amounts paid in settlement
incurred in connection with the investigation, preparation to defend or
defense of such action, suit, proceeding or claim. Such indemnification is
not exclusive of other indemnification rights arising under any by-law,
agreement, vote of directors or stockholders or otherwise.
The Colonial By-Laws provide that Colonial shall indemnify each director and
officer against all judgments, fines, settlement payments and expenses
(including reasonable attorneys' fees) paid or incurred in connection with
any claim, action, suit or proceeding, civil or criminal, to which such
director or officer may be made a party or with which such director or
officer may be threatened by reason of
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his or her being or having been a director or officer of Colonial, or, at
Colonial's request, a director, officer, stockholder or member of any other
corporation, firm or association of which Colonial is a stockholder or
creditor and by which such director or officer is not so indemnified, or by
reason of any action or omission by him or her in such capacity, whether or
not he or she continues to be a director or officer at the time of incurring
such expenses or at the time the indemnification is made. The Colonial
By-Laws further provide that no such indemnification will be made (a) with
respect to payments and expenses incurred in relation to matters as to which
such director or officer shall be finally adjudged in such action, suit or
proceeding not to have acted in good faith and in the reasonable belief that
his or her action was in the best interest of the corporation, or (b) if
otherwise prohibited by law. The right to indemnification provided in the
Colonial By-Laws is not exclusive of other indemnification rights to which
any director or officer may otherwise be entitled and inures to the benefit
of the executor or administrator of such director or officer.
Currently applicable Massachusetts law provides that officers and directors
may receive indemnification from their corporations for actual or threatened
lawsuits, except that indemnification may not be provided for any person with
respect to any matter to which such person has been adjudicated not to have
acted in good faith in the reasonable belief that such person's action was in
the best interest of the corporation or, to the extent that such matter
relates to service with respect to any employee benefit plan, in the best
interest of the participants or beneficiaries of such employee benefit plan.
Massachusetts law further provides that a corporation may purchase
indemnification insurance, such insurance providing indemnification for the
officers and directors whether or not the corporation would have the power to
indemnify them against such liability under the provisions of the
Massachusetts law. Liberty Financial currently maintains such insurance, as
does Colonial.
Certain Other Massachusetts Law Provisions
The LFC Restated By-Laws include a provision that will exclude Liberty
Financial from the applicability of Chapter 110D of the Massachusetts General
Laws, entitled "Regulation of Control Share Acquisitions." In general,
Chapter 110D provides that any stockholder of a corporation subject to this
statute who acquires 20% or more of the outstanding voting stock of a
corporation may not vote such stock unless the stockholders of the
corporation so authorize. The Board of Directors of Liberty Financial, by
majority vote, and the Liberty Financial stockholders by vote of the Liberty
Financial stockholders representing a majority of the combined voting power
of the outstanding shares of Voting Stock entitled to vote thereon, voting as
a single class, may amend the LFC Restated By-laws at any time to subject
Liberty Financial to this statute prospectively.
On July 30, 1994, the Colonial Board of Directors amended Article VI of the
Colonial By-Laws so as to exclude Colonial from the applicability of Chapter
110D. The Colonial Board, by majority vote, or the holders of a majority of
the combined voting power of the outstanding shares of Class B Common Stock,
may amend the Colonial By-Laws at any time to subject Colonial to this
statute prospectively.
The LFC Restated By-Laws also include a provision that excludes Liberty
Financial from the applicability of Chapter 110F of the Massachusetts General
Laws, entitled "Business Combinations with Interested Shareholders." Chapter
110F prohibits Massachusetts corporations from engaging in a "business
combination" with an "interested stockholder" for a period of three years
after the date of the transaction in which the person becomes an interested
stockholder, unless: (a) the interested stockholder obtains the approval of
the board of directors prior to becoming an interested stockholder, or (b)
the interested stockholder acquires 90% of the outstanding voting stock of
the corporation (excluding shares held by certain affiliates of the
corporation) at the time that he becomes an interested stockholder, or (c)
the business combination is approved by both the board of directors and
two-thirds of the outstanding voting stock of the corporation (excluding
shares held by the interested stockholder). Under Chapter 110F, an
"interested stockholder" is a person who, together with affiliates and
associates, owns (or at any time within the prior three years did own) 5% or
more of a corporation's voting stock. A "business combination" includes
mergers, stock and asset sales and other transactions resulting in a
financial benefit to the stockholders. Such exclusion will become effective
on November 9, 1995 (twelve months following adoption of the LFC Restated
By-Laws). Prior to such time, such statute would not apply to any business
combination with Liberty Mutual. Under Chapter 110F, the stockholders of
Liberty Financial
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may, by amendment to the LFC Restated Articles or LFC Restated By-Laws,
provide that the provisions of Chapter 110F apply to LFC. Chapter 110F
applies to Colonial.
Massachusetts law explicitly permits directors to adopt stockholder rights
plans (so-called "poison pills"). At present, Liberty Financial has no plans
to adopt any such plans, but may do so in the future. Colonial also has not
adopted any such plan.
General Provisions Regarding LFC Common Stock and LFC Preferred Stock;
Description of Series A Convertible Preferred Stock
As of the Effective Time of the Merger, the authorized capital stock of
Liberty Financial will consist of 100,000,000 shares Common Stock, $.01 par
value per share (the "LFC Common Stock"), and 10,000,000 shares of Preferred
Stock, $.01 par value per share, of which 1,040,000 shares have been
designated as Series A Convertible Preferred Stock (the "LFC Preferred
Stock"). The LFC Restated Articles and LFC Restated By-Laws do not grant the
holders of LFC Common Stock any preemptive, subscription, redemption or
conversion rights or the right to accumulate votes for the election of
directors. Subject to prior dividend rights and preferences of holders of
shares of LFC Preferred Stock, if any, holders of LFC Common Stock are
entitled to receive such dividends as may be declared by the Board of
Directors of Liberty Financial from funds legally available therefor. Holders
of LFC Common Stock are entitled to receive ratably such dividends, if any,
as may be declared by the Board of Directors of Liberty Financial out of
funds legally available therefor, subject to any preferential dividend rights
of then outstanding LFC Preferred Stock. Upon the liquidation, dissolution or
winding up of Liberty Financial, the holders of LFC Common Stock are entitled
to receive ratably the net assets of Liberty Financial available after the
payment of all debts and other liabilities and subject to the prior rights of
any outstanding LFC Preferred Stock. The rights, preferences and privileges
of holders of LFC Common Stock and LFC Preferred Stock are subject to and may
be adversely affected by, the rights of the holders of shares of any series
of Preferred Stock which Liberty Financial may designate and issue in the
future.
Under the LFC Restated Articles, the Board of Directors of Liberty Financial
has the authority, subject to any limitations prescribed by law, without
further action by or notice to the Liberty Financial stockholders, to issue
from time to time shares of Preferred Stock in one or more series and to fix
the rights, preferences, privileges and restrictions thereof, including
dividend rights, conversion rights, voting rights, rights and terms of
redemption (including sinking fund provisions), liquidation preferences and
the number of shares constituting any series or designation of such series.
The ability of the Board of Directors of Liberty Financial to issue
additional Preferred Stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
making it more difficult for a third party to remove current Liberty
Financial management, even if such removal may be in the Liberty Financial
stockholders' best interest, and may have the effect of delaying, deterring
or preventing a change in control of Liberty Financial, or of discouraging a
third party from acquiring a majority of the outstanding voting stock of
Liberty Financial. Other than the LFC Preferred Stock described below
required to be issued in connection with the Merger, Liberty Financial has no
present plans to issue any of the Preferred Stock.
Summary of Terms of Series A Convertible Preferred Stock
Immediately prior to the consummation of the Merger, Liberty Financial shall
execute and file with the Massachusetts Secretary of State pursuant to
Massachusetts General Laws, Chapter 156B, S.26, a Certificate of Designation
(the "Certificate") designating a series of Preferred Stock consisting of
1,040,000 shares, which series shall have the following preferences, voting
powers, qualifications, and special or relative rights and privileges (the
following summary is qualified in its entirety by reference to the
Certificate).
Dividends. The face amount of each share of LFC Preferred Stock shall be
$50.00. The holders of shares of the LFC Preferred Stock will be entitled to
receive cumulative cash dividends on the shares of the LFC Preferred Stock at
the rate of $2.875 per annum per share, payable in equal quarterly
installments on March 31, June 30, September 30 and December 31, in each
year, commencing on the first such date following the 30th business day
following the Closing Date. Such dividends shall be cumulative from the date
of original issue of each share of the LFC Preferred Stock to and including
the
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date provision for the payment of liquidation value, or redemption price, as
the case may be, plus all then accrued and unpaid dividends, has been made in
accordance with the Certificate, whether or not such dividends are declared
and whether or not there are profits, surplus or other funds of LFC legally
available for the payment of dividends. The Board of Directors of Liberty
Financial shall declare such quarterly dividends in each case from and to the
extent Liberty Financial has funds legally available therefor. Each such
dividend shall be paid to the holders of record of the shares of the LFC
Preferred Stock as they appear on the share register of Liberty Financial on
such record date, not more than 30 days nor less than 10 days preceding the
dividend payment date thereof, as shall be fixed by the Board of Directors of
Liberty Financial.
If dividends are not paid in full, or declared in full and sums set apart for
the payment thereof, upon the shares of the LFC Preferred Stock and shares of
any other LFC Preferred Stock ranking on a parity as to dividends with the
LFC Preferred Stock ("Dividend Parity Stock"), all dividends declared upon
shares of the LFC Preferred Stock and shares of any Dividend Parity Stock
shall be paid or declared pro rata so that in all cases the amount of
dividends paid or declared per share on the LFC Preferred Stock and such
Dividend Parity Stock shall bear to each other the same ratio that
accumulated dividends per share, including dividends accrued or in arrears,
if any, on the shares of the LFC Preferred Stock and such Dividend Parity
Stock bear to each other. Except as provided in the immediately preceding
sentence, unless full cumulative dividends on the shares of LFC Preferred
Stock have been paid or declared in full and sums set aside for the payment
thereof, (x) no dividends (other than a dividend in shares of the LFC Common
Stock or in shares of any other capital stock of Liberty Financial ranking
junior to the LFC Preferred Stock as to dividends ("Junior Dividend Stock"))
shall be paid or declared and sums set aside for payment therefor or other
distribution made upon the LFC Common Stock, any Dividend Parity Stock or any
Junior Dividend Stock and (y) no shares of the LFC Common Stock, any Dividend
Parity Stock or any Junior Dividend Stock shall be redeemed, repurchased or
otherwise acquired for any consideration (or any payment made to or available
for a sinking fund for the redemption of any such shares) by Liberty
Financial or any subsidiary of Liberty Financial (except by conversion into
or exchange for shares of LFC Common Stock or shares of Junior Dividend
Stock). No interest or sum of money in lieu of interest shall be payable in
respect of any dividend payment or payments on the shares of the LFC
Preferred Stock that may be in arrears. Dividends payable on the shares of
the LFC Preferred Stock for any period less than a full quarterly dividend
period shall be computed on the basis of a 365 or 366-day year, as the case
may be, and the actual number of days elapsed in the period for which
payable.
Redemption. The shares of the LFC Preferred Stock will be redeemable at the
option of Liberty Financial by resolution of the Board of Directors of
Liberty Financial, in whole or from time to time in part, at any time on or
after the third anniversary of the closing date of the Merger; provided,
however, that prior to the fifth anniversary of the closing date of the
Merger, a condition to any such redemption by Liberty Financial shall be that
the Trading Price (as hereinafter defined) of the LFC Common Stock shall have
exceeded $59.20 (adjusted from time to time for any stock split, stock
dividend, combination of shares, recapitalization or similar event pertaining
to the LFC Common Stock following the initial issuance of shares of LFC
Preferred Stock, including other events which would result in an adjustment
to the conversion rate then in effect for the LFC Preferred Stock) for 20
Trading Days out of the 30 consecutive Trading Days immediately preceding the
date notice of such Redemption is mailed by the Liberty Financial.
The redemption price per share for any period shall be the amount set forth
below opposite such period, plus, in each case, all dividends accrued and
unpaid on the shares of LFC Preferred Stock to be redeemed up to and
including the date fixed for redemption.
<TABLE>
<CAPTION>
If redemption during the
twelve-month period beginning
the date of the Closing Date,
in the year specified below Price
<S> <C>
1998 $50.000
1999 $50.000
2000 $51.500
2001 $51.125
2002 $50.750
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2003 $50.375
2004 $50.000
</TABLE>
"Trading Price," with respect to any Trading Day, means the last reported
sales price regular way for such Trading Day, or in case no such reported
sale takes place on such Trading Day, the average of the reported closing bid
and asked prices regular way for such Trading Day, of the LFC Common Stock,
in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on
the New York Stock Exchange, or if the LFC Common Stock is not listed or
admitted to trading on such exchange, as reported in the principal
consolidated transaction reporting system with respect to securities listed
on the principal national securities exchange on which the LFC Common Stock
is listed or admitted to trading or, if not listed or admitted to trading on
any national securities exchange, the last quoted sale price or, if not so
quoted, the average of the high bid and low asked prices in the
over-the-counter market, as reported by Nasdaq or such other system then in
use, or, if on any such date the LFC Common Stock is not quoted by any such
organization, the average of the closing bid and asked prices as furnished by
a professional market maker making a market in the LFC Common Stock selected
by the Board of Directors of Liberty Financial. If the LFC Common Stock is
not publicly held or so listed or publicly traded, "Trading Price" shall mean
the Fair Market Value per share as determined in good faith by the Board of
Directors of Liberty Financial.
"Trading Day" means a day on which the principal national securities exchange
on which the LFC Common Stock is listed or admitted to trading is open for
the transaction of business or, if the LFC Common Stock is not listed or
admitted to trading on any national securities exchange, any day other than a
Saturday, Sunday, or a day on which banking institutions in the State of New
York are authorized or obligated by law or executive order to close.
"Fair Market Value" means the amount which a willing buyer would pay a
willing seller in an arms- length transaction.
If less than all of the outstanding shares of the LFC Preferred Stock are to
be redeemed, the number of shares to be redeemed shall be determined by the
Board of Directors of Liberty Financial and the shares to be redeemed shall
be determined pro rata or by lot or in such other manner and subject to such
regulations as the Board of Directors of Liberty Financial in its sole
discretion shall prescribe; provided, however, that no fraction of a share
shall be redeemed, and if a proration would result in a fraction of a share,
the number of shares to be redeemed from each holder shall be rounded off to
the nearest full share.
On the tenth anniversary of the closing date of the Merger, Liberty Financial
shall redeem all shares of LFC Preferred Stock which then remain outstanding
at a redemption price of $50.00 per share, plus all dividends accrued and
unpaid on such shares of LFC Preferred Stock, provided, however, that if
there are insufficient legally available funds for such redemption in full,
Liberty Financial shall redeem such lesser number of shares of LFC Preferred
Stock as may lawfully be redeemed from funds legally available therefor, and
shall redeem all or part of the remainder of the shares of LFC Preferred
Stock as shall thereafter remain outstanding as soon as Liberty Financial has
sufficient funds which are legally available therefor until all such shares
of LFC Preferred Stock have been redeemed.
At least 30 days but not more than 60 days prior to the date fixed for each
redemption of shares of the LFC Preferred Stock, a written notice shall be
mailed to each holder of record of LFC Preferred Stock to be redeemed in a
postage prepaid envelope addressed to such holder at his post office address
as shown on the records of Liberty Financial, notifying such holder of the
election of Liberty Financial to redeem such shares, stating the date fixed
for redemption thereof (the "Redemption Date"), and calling upon such holder
to surrender to Liberty Financial on or after the Redemption Date at the
place designated in such notice his certificate or certificates representing
the number of shares specified in such notice of redemption. Such notice also
shall specify (i) the date on which the conversion rights of the holder shall
terminate in accordance with Section 6 of the Certificate and (ii) the
current conversion rate for shares of LFC Preferred Stock.
On or after the Redemption Date each holder of shares of the LFC Preferred
Stock to be redeemed shall present and surrender his certificate or
certificates for such shares to Liberty Financial at the place
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designated in such notice and thereupon the redemption price of such shares
shall be paid to or on the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be cancelled. In case less than all shares represented by
any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. From and after the Redemption Date
(unless default shall be made by Liberty Financial in payment of the
redemption price), all dividends on the shares of the LFC Preferred Stock
designated for redemption in such notice shall cease to accrue, and all
rights of the holders thereof as stockholders of Liberty Financial, except
the right to receive the applicable redemption price of such shares
(including all accrued and unpaid dividends up to and including the
Redemption Date) upon the surrender of certificates representing the same
shall cease and terminate and such shares shall not thereafter be transferred
(except with the consent of Liberty Financial) on the books of Liberty
Financial, and such shares shall not be deemed to be outstanding for any
purpose whatsoever.
If the certificates for any shares of LFC Preferred Stock so called for
redemption shall not have been duly surrendered for redemption within six
months from and after the Redemption Date, all holders of certificates for
the shares so called for redemption but unsurrendered during such six months
shall thereafter have only the rights of general creditors against Liberty
Financial for the amount sufficient to redeem the shares evidenced by such
certificates, without interest thereon.
As indicated below under "Stockholders Agreement," the Stockholders Agreement
provides that at any time during the first sixty days after the fifth
anniversary of the Closing Date of the Merger, the holder of any shares of
LFC Preferred Stock subject to the Stockholders Agreement may elect to sell
to Liberty Mutual, and Liberty Mutual shall be obligated to purchase, all,
but not less than all, of the LFC Preferred Stock then owned by such
stockholder at a price of $50 per share plus accrued but unpaid dividends on
such shares through the date of purchase. Liberty Mutual may designate
Liberty Financial (without any further action or approval by Liberty
Financial), or any other affiliate of Liberty Mutual, as the purchaser of
such shares, provided that no such designation shall relieve Liberty Mutual
of its purchase obligations. In the event that Liberty Financial acquires any
shares of LFC Preferred Stock pursuant to the terms of the Stockholders
Agreement, such acquisition shall not be deemed a redemption of such shares
for purposes of the Certificate.
Voting Rights. Each share of LFC Preferred Stock shall be entitled to such
number of votes as shall equal the number of shares of LFC Common Stock into
which such share is then convertible. Except as otherwise provided in Section
7 of the Certificate (see the discussion under "Limitations" below), or by
the LFC Restated Articles, as amended from time to time, or by law, the
shares of LFC Preferred Stock, the shares of LFC Common Stock and any other
shares of LFC Preferred Stock at the time entitled to vote generally shall
vote together as one class on all matters submitted to a vote of Liberty
Financial stockholders.
Liquidation Rights. In the event of any liquidation, dissolution or winding
up of the affairs of Liberty Financial, whether voluntary or otherwise, after
payment or provision for payment of the debts and other liabilities of
Liberty Financial, the holders of shares of the LFC Preferred Stock shall be
entitled to receive, in cash, out of the remaining net assets of Liberty
Financial, the amount of Fifty Dollars ($50.00) for each share of the LFC
Preferred Stock held, plus an amount equal to all dividends accrued and
unpaid on each such share up to and including the date fixed for
distribution, before any distribution shall be made to the holders of shares
of the LFC Common Stock or any other capital stock of Liberty Financial
ranking (as to any such distribution) junior to the LFC Preferred Stock
("Junior Liquidation Stock"), or before Liberty Financial shall redeem,
repurchase or otherwise acquire for value any shares of LFC Common Stock or
Junior Liquidation Stock. If upon any liquidation, dissolution or winding up
of Liberty Financial, the assets distributable among the holders of shares of
the LFC Preferred Stock and all other classes and series of LFC Preferred
Stock ranking (as to any such distribution) on a parity with the LFC
Preferred Stock ("Parity Liquidation Stock") are insufficient to permit the
payment in full to the holders of all such shares of all preferential amounts
payable to all such holders, then the entire assets of Liberty Financial thus
distributable shall be distributed ratably among the holders of the shares of
the LFC Preferred Stock and such Parity Liquidation Stock in proportion to
the respective amounts that would be payable per share if such assets were
sufficient to permit payment in full.
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For purposes of the liquidation rights of the holders of shares of LFC
Preferred Stock, a distribution of assets in any dissolution, winding up or
liquidation shall not include (i) any consolidation or merger of Liberty
Financial with or into any other corporation or entity, (ii) any dissolution,
liquidation, winding up or reorganization of Liberty Financial immediately
followed by reincorporation of another corporation which shall succeed to all
or substantially all of the assets of Liberty Financial or (iii) a sale or
other disposition of all or substantially all of Liberty Financial's assets
to another corporation or entity; provided, however, that in each case,
effective provision is made in the articles of organization of the resulting
or surviving corporation or otherwise for the protection of the conversion
rights of the holders of shares of the LFC Preferred Stock provided for in
Section 6 of the Certificate.
After the payment of the full preferential amounts to the holders of shares
of the LFC Preferred Stock or funds necessary for such payment have been set
aside in trust for the holders thereof, such holders shall be entitled to no
other or further participation in the distribution of the assets of Liberty
Financial.
Conversion. Section 6 of the Certificate provides that holders of shares of
the LFC Preferred Stock shall have the right, exercisable at any time and
from time to time (subject, in the case of shares of the LFC Preferred Stock
called for redemption to the limitation described below), to convert all or
any such shares of the LFC Preferred Stock into shares of LFC Common Stock
(calculated as to each conversion to the nearest 1/100th of a share) at a
rate of 1.0559 shares of LFC Common Stock for each share of the LFC Preferred
Stock so converted, subject to adjustment as described below. In the case of
shares of the LFC Preferred Stock called for redemption, conversion rights
will expire at the close of business on the fifth business day preceding the
Redemption Date; provided, however, that if Liberty Financial defaults in its
obligations to redeem shares of LFC Preferred Stock after calling for such
redemption, the right to convert such shares at any time or from time to time
shall be restored. Upon conversion, no adjustment or payment will be made for
dividends or interest, but if any holder surrenders a share of the LFC
Preferred Stock for conversion after the close of business on the record date
for the payment of a dividend and prior to the opening of business on the
next dividend payment date, then, notwithstanding such conversion, the
dividend payable on such dividend payment date will be paid to the registered
holder of such share on such record date.
In order to exercise his conversion rights, the holder of any shares of LFC
Preferred Stock to be converted shall surrender his certificate or
certificates therefor to the designated office of the transfer agent or
register for shares of LFC Preferred Stock, if such be appointed, and
otherwise at the principal office of Liberty Financial, and shall give
written notice to Liberty Financial at said office that the holder elects to
convert the shares of LFC Preferred Stock represented by such certificate or
certificates, or any number thereof. Such notice shall also state the name or
names (with address or addresses) in which the certificate or certificates
for shares of LFC Common Stock issuable upon such conversion shall be issued.
If required by Liberty Financial, the certificate or certificates so
surrendered for conversion shall be endorsed or accompanied by written
instruments of transfer, in form satisfactory to Liberty Financial, duly
executed by the registered holder thereof or by his attorney-in-fact
thereunto duly authorized in writing. The date of receipt by such transfer
agent or registrar (or Liberty Financial) of the certificate or certificates
so surrendered for conversion and such notice shall be the conversion date,
and the conversion rate in effect on the conversion date shall be the
applicable conversion rate. As soon as practicable after the conversion date,
Liberty Financial shall cause to be issued and delivered to such holder, or
on his written order, a certificate or certificates for the number of full
shares of LFC Common Stock issuable upon such conversion in accordance with
the provisions of Section 6 of the Certificate and cash in respect of any
fraction of a share of LFC Common Stock which would otherwise be issuable
upon such conversion.
No fractional shares of LFC Common Stock or scrip representing fractional
shares shall be issued upon conversion of shares of the LFC Preferred Stock.
If more than one share of the LFC Preferred Stock shall be surrendered for
conversion at one time by the same holder, the number of full shares of LFC
Common Stock which shall be issuable upon conversion thereof shall be
computed on the basis of the aggregate number of shares of the LFC Preferred
Stock so surrendered. Instead of any fractional shares of LFC Common Stock
which would otherwise be issuable upon conversion of any shares of the LFC
Preferred Stock, Liberty Financial shall pay a cash adjustment in respect of
such fraction in an amount equal to the same fraction of the Trading Price
for the LFC Common Stock on the last Trading Day preceding the date of
conversion.
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If a holder converts a share or shares of the LFC Preferred Stock, Liberty
Financial shall pay any documentary, stamp or similar issue or transfer tax
due on the issue of LFC Common Stock upon the conversion. The holder,
however, shall pay to Liberty Financial the amount of any tax which is due
(or shall establish to the satisfaction of Liberty Financial payment
therefor) if the shares are to be issued in a name other than the name of
such holder.
Liberty Financial shall reserve and shall at all times have reserved out of
its authorized but unissued shares of LFC Common Stock a sufficient number of
shares of LFC Common Stock to permit the conversion of the then outstanding
shares of the LFC Preferred Stock. All shares of LFC Common Stock which may
be issued upon conversion of shares of the LFC Preferred Stock shall be
validly issued, fully paid and nonassessable. In order that Liberty Financial
may issue shares of LFC Common Stock upon conversion of shares of the LFC
Preferred Stock, Liberty Financial will endeavor to comply with all
applicable federal and state securities laws and will endeavor to list such
shares of LFC Common Stock to be issued upon conversion on each securities
exchange on which LFC Common Stock is listed.
The conversion rate in effect at any time shall be subject to adjustment from
time to time as described in detail in Section 6 of the Certificate. In the
event that, as a result of an adjustment made in the conversion rate, the
holder of any share or the LFC Preferred Stock thereafter surrendered for
conversion shall become entitled to receive any shares of capital stock of
Liberty Financial other than shares of LFC Common Stock, thereafter the
number of such other shares so receivable upon conversion of any shares of
the LFC Preferred Stock shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the provisions
with respect to the LFC Common Stock contained in Section 6 of the
Certificate.
Whenever the conversion rate is adjusted, Liberty Financial shall promptly
(i) file with any transfer agent for the LFC Preferred Stock a certificate
setting forth the conversion rate after such adjustment and setting forth a
brief statement of the facts requiring such adjustment, which certificate
shall be presumptive evidence of the correctness of such adjustment, and (ii)
mail or cause to be mailed a notice of such adjustment setting forth in
reasonable detail the method of calculation of and the facts requiring such
adjustment to the holders of shares of LFC Preferred Stock at their last
addresses as they shall appear upon the books of Liberty Financial.
If any of the following shall occur, namely (i) any reclassification or
change of outstanding shares of the LFC Common Stock issuable upon conversion
of shares of the LFC Preferred Stock (other than a change in par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), (ii) any consolidation or merger to
which Liberty Financial is a party, other than a merger in which Liberty
Financial is the continuing corporation and which does not result in any
reclassification of, or change (other than a change in name, or par value, or
from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination) in, outstanding shares of the LFC
Common Stock, or (iii) any sale or conveyance of all or substantially all of
the property or business of Liberty Financial as an entirety, then Liberty
Financial, or such successor or purchasing corporation, as the case may be,
shall, as a condition precedent to such reclassification, change,
consolidation, merger, sale or conveyance, provide in its articles of
organization or other charter document that each share of the LFC Preferred
Stock shall be convertible into the kind and amount of shares of capital
stock and other securities and property (including cash) receivable upon such
reclassification, change, consolidation, merger, sale or conveyance by a
holder of the number of shares of LFC Common Stock deliverable upon
conversion of such share of the LFC Preferred Stock immediately prior to such
reclassification, change, consolidation, merger, sale or conveyance. Such
articles of organization or other charter document shall provide for
adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in Section 6 of the Certificate. If, in the case of
any such consolidation, merger, sale or conveyance, the capital stock or
other securities and property (including cash) receivable thereupon by a
holder of the LFC Common Stock includes shares of capital stock or other
securities and property of a corporation other than the successor or
purchasing corporation, as the case may be, in such consolidation, merger,
sale or conveyance, then the articles of organization or other charter
document of such other corporation shall contain such additional provisions
to protect the interests of the holders of shares of the LFC Preferred Stock
as the Board of Directors of Liberty Financial shall reasonably consider
necessary by reason of the foregoing.
165
<PAGE>
Limitations. Section 7 of the Certificate provides that, in addition to any
other rights provided by applicable law, so long as any shares of the LFC
Preferred Stock are outstanding, Liberty Financial shall not, without the
affirmative vote of the holders of at least two-thirds (2/3) of the
outstanding shares of the LFC Preferred Stock, voting separately, create,
authorize or issue any class or series of capital stock ranking either as to
payment of dividends or distribution of assets upon liquidation prior to or
on a parity with the LFC Preferred Stock; provided, however, that no such
vote or written consent of the holders of the shares of the LFC Preferred
Stock shall be required if, at or prior to the time when the issuance of any
such shares ranking prior to the LFC Preferred Stock is to be made or any
such change is to take effect, as the case may be, provision is made for the
redemption of all the then outstanding shares of the LFC Preferred Stock in
accordance with the provisions of the Certificate.
Stockholders Agreement. Each holder of Colonial Common Stock who elects to
receive LFC Preferred Stock in exchange therefor shall be entitled, but not
obligated, to become a party to a Stockholders Agreement in substantially the
form attached as Exhibit C to the Merger Agreement (the "Stockholders
Agreement"). The following is a summary of the provisions of the Stockholders
Agreement (the following summary is subject and qualified in its entirety by
reference to the Stockholders Agreement).
The Stockholders Agreement provides that the holder of shares of LFC
Preferred Stock who becomes a party to the Stockholders Agreement (a
"Holder") may not voluntarily or involuntarily Transfer (as hereinafter
defined) the Holder's LFC Preferred Stock without the prior written consent
of Liberty Financial prior to the fifth anniversary of the closing date of
the Merger, except to a Permitted Transferee (as hereinafter defined).
"Permitted Transferee" means (i) if the Holder is an individual, a trust or
similar entity for the benefit, primarily, of the Holder or the Holder's
Immediate Family, (ii) a person or entity to whom a Transfer is made by
operation of law or legal process, including, without limitation, a decree of
divorce, order in a proceeding under Title 11 of the United States Code (or
any successor statute), the laws of descent and distribution or otherwise by
reason of the Holder's death or legal incompetency, (iii) if the Holder is a
corporation, a successor corporation in the event of a reorganization of such
corporate Holder, (iv) a corporation or trust qualified under section
501(c)(3) of the Internal Revenue Code or (v) a bona fide pledgee. "Transfer"
means any voluntary or involuntary sale, transfer, disposition, pledge or
assignment, by gift or otherwise; provided, however, that the term shall not
include ordinary proxies or powers of attorney with respect to voting of
shares. "Immediate Family" means, with respect to an individual, such
individual's spouse, children, adopted children and parents.
Subject to certain exceptions, a precondition to each Transfer of LFC
Preferred Stock to a Permitted Transferee shall be that the Permitted
Transferee shall have duly executed and delivered to Liberty Financial an
agreement in a form reasonably satisfactory to Liberty Financial by which
such Permitted Transferee shall become a party to the Stockholder Agreement
and such LFC Preferred Stock shall be made subject to the Stockholders
Agreement; provided, however, that a person or entity to whom a Transfer is
made by operation of law or legal process as described above shall have the
option of not becoming a party to the Stockholders Agreement, exercisable by
written notice to Liberty Financial in connection with the registration of
such Transfer to such Permitted Transferee, in which case such Permitted
Transferee and such LFC Preferred Stock, shall cease to be subject to the
restrictions, or entitled to the benefits, of the Stockholders Agreement.
The Stockholders Agreement also provides that at any time during the first 60
days after the fifth anniversary of the Closing Date of the Merger, any
Holder may elect to sell to Liberty Mutual, and Liberty Mutual shall be
obligated to purchase, all, but not less than all, of the LFC Preferred Stock
then owned by such Holder (the "Put Shares") at a price (the "Put Price") of
$50.00 per Put Share (adjusted for any stock splits, dividends or similar
recapitalization events affecting the Put Shares), plus accrued but unpaid
dividends through the date of purchase in respect of the Put Shares. Such
election shall be exercised by delivery of written notice thereof to Liberty
Mutual (with a copy to Liberty Financial), accompanied by the certificate
representing such Put Shares duly endorsed for transfer, with signatures
guaranteed by a national bank or member of the New York Stock Exchange, and
all transfer and/or stamp taxes (if any) paid. Liberty Mutual may designate
Liberty Financial (without any further action or approval by Liberty
Financial) or another person or entity as purchaser of the Put Shares;
provided, however, that
166
<PAGE>
no such designation shall relieve Liberty Mutual of its obligations to
purchase such LFC Preferred Stock if the designee fails to do so. Liberty
Mutual (or such designee) shall pay to each holder duly exercising the put
option created by the Stockholders Agreement in cash the Put Price (without
interest) on the 75th day after the fifth anniversary of the closing date of
the Merger (or, if such day is not a business day, the next succeeding
business day).
The restrictions on Transfers and the provisions requiring the purchase of
the Put Shares by Liberty Mutual contained in the Stockholders Agreement do
not apply to any shares of LFC Common Stock acquired upon conversion of LFC
Preferred Stock and nothing contained in the Stockholders Agreement restricts
such conversion.
Transfer Agent and Registrar
The transfer agent and registrar for the LFC Common Stock and the LFC
Preferred Stock is The First National Bank of Boston.
167
<PAGE>
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL INFORMATION
The following pro forma condensed consolidated financial information reflects
the effects of the Merger on the consolidated operating results and
consolidated financial position of Parent as if such operating results and
financial position were that of New LFC, Inc. New LFC, Inc. was formed on
January 26, 1995; the Parent Contribution to New LFC, Inc. (immediately prior
to the Effective Time) of all the assets of Parent (other than Excluded
Assets) and the related assumption by New LFC, Inc. of the Assumed
Liabilities will be recorded at historical cost and will be accounted for as
if it were a pooling- of-interests. The historical consolidated financial
statements of Parent and its subsidiaries will effectively become those of
Liberty Financial and its subsidiaries.
The following unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 1993 and the nine months ended
September 30, 1994 present the consolidated operating results for Liberty
Financial as if the Merger had occurred on January 1, 1993. The accompanying
unaudited pro forma condensed consolidated balance sheet as of September 30,
1994 gives effect to the Merger as if it had occurred on September 30, 1994.
The pro forma per share data has been adjusted to reflect the Parent
Contribution to be effected in connection with the Merger immediately prior
to the Effective Time.
The unaudited pro forma condensed consolidated financial information should
be read in conjunction with the accompanying notes, the historical financial
statements and notes thereto of Liberty Financial included elsewhere herein
and of Colonial incorporated by reference herein.
The unaudited pro forma condensed consolidated financial statements are
provided for informational purposes only and are not necessarily indicative
of the results of operations or financial condition that would have been
achieved had the Merger actually occurred as of the dates indicated, or of
the future results of operations or financial condition of Liberty Financial.
The pro forma adjustments are based upon available information and certain
assumptions that Liberty Financial currently believes are reasonable in the
circumstances. The pro forma condensed consolidated statements of operations
do not reflect the expenses anticipated to be incurred in connection with the
Merger by Colonial or the cost savings anticipated to result from the Merger.
If the Merger is consummated, Liberty Financial's consolidated financial
statements will reflect its effects only from the date such transaction
occurs.
The pro forma adjustments are applied to the historical consolidated
financial statements of Liberty Financial to account for the Merger using the
purchase method of accounting. Pursuant to the Merger Agreement, Liberty
Financial will acquire, for purchase accounting purposes, 83.22% of the
voting ownership interest of Colonial. Under purchase accounting, the
acquisition cost of such ownership interest will be allocated to the assets
and liabilities acquired based on their relative fair values as of the
Closing Date with any excess of the acquisition cost over the fair value of
the assets acquired less the fair value of the liabilities assumed recorded
as excess of cost over book value acquired. The cost allocations will be
based on appraisals or other studies, which are not yet completed.
Accordingly, the final allocations will be different from the amounts
reflected herein. Although the final allocations will differ, management of
Liberty Financial believes that any adjustments will not be material.
Accordingly, the pro forma condensed consolidated financial information
reflects Liberty Financial management's best estimate based on information
currently available.
168
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1993
(in millions, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
Liberty Historical Relating to Liberty
Financial Colonial the Merger Financial
<S> <C> <C> <C> <C>
Revenues:
Net investment income $ 675.3 $ 675.3
Investment management revenues and
other fees 106.0 $104.1 210.1
Securities commissions and other
revenues 88.5 46.7 135.2
Realized investment gains 10.6 -- 10.6
Total revenues 880.4 150.8 1,031.2
Expenses:
Interest credited to policyholders 501.1 501.1
Operating expenses 215.6 93.4 309.0
Option plan compensation expense 22.1 22.1
Amortization of value of insurance in
force and deferred policy acquisition
costs 62.5 62.5
Amortization of intangible assets 15.0 $ 23.3(2) 38.3
Amortization of deferred sales
commissions 20.0 (16.6)(2) 3.4
Guaranty fund expense 3.7 3.7
Interest expense 4.5 10.9(1) 15.4
Total expenses 820.0 117.9 17.6 955.5
Income before income taxes 60.4 32.9 (17.6) 75.7
Provision (benefit) for income taxes 29.1 12.9 (12.9)(3) 29.1
Net income $ 31.3 $ 20.0 $ (4.7) $ 46.6
Weighted average common and common
equivalent shares outstanding 23,653,154 4,130,251(4) 27,783,405
Net income per common share $ 1.32 $ 1.68
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
169
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1994
(in millions, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
Liberty Historical Relating to Liberty
Financial Colonial the Merger Financial
<S> <C> <C> <C> <C>
Revenues:
Net investment income $ 513.0 $ 513.0
Investment management revenues and
other fees 77.6 $ 85.1 162.7
Securities commissions and other
revenues 72.9 37.9 110.8
Realized investment gains 2.9 2.9
Total revenues 666.4 123.0 789.4
Expenses:
Interest credited to policyholders 352.2 352.2
Operating expenses 165.8 69.4 235.2
Option plan compensation expense 6.7 6.7
Amortization of value of insurance in
force and deferred policy acquisition
costs 53.2 53.2
Amortization of intangible assets 4.4 $ 17.5(2) 21.9
Amortization of deferred sales
commissions 23.8 (19.8)(2) 4.0
Guaranty fund expense 5.4 5.4
Interest expense 2.7 5.3 8.2(1) 16.2
Total expenses 590.4 98.5 5.9 694.8
Income before income taxes 76.0 24.5 (5.9) 94.6
Provision (benefit) for income taxes 27.0 10.7 (10.7)(3) 27.0
Net income $ 49.0 $ 13.8 $ 4.8 $ 67.6
Weighted average common shares and
common equivalent shares outstanding 23,592,432 4,130,251(4) 27,722,683
Net income per common share $ 2.08 $ 2.44
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
170
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1994
(in millions)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Pro Forma
Liberty Historical Relating to Liberty
Financial Colonial the Merger Financial
<S> <C> <C> <C> <C>
ASSETS
Assets:
Investments $ 8,804.0 $ 19.8 $ 8,823.8
Cash and cash equivalents 472.4 37.0 $ (4.0)(8) 505.4
Accrued investment income 115.9 115.9
Deferred policy acquisition costs 377.0 377.0
Value of insurance in force 124.0 124.0
Deferred sales commissions, net 149.3 (124.2)(8) 25.1
Intangible assets 30.8 1.3(5) 326.5
0.1(6)
282.9(8)
11.4(9)
Deferred federal income taxes 36.5 2.6 0.6(6) 39.7
Other assets 53.4 30.3 (1.3)(5) 84.2
1.8(8)
Separate account assets 844.3 844.3
$10,858.3 $239.0 $ 168.6 $11,265.9
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities $ 9,169.1 $ 9,169.1
Note payable to affiliate 75.0 $ 100.0(8) 205.0
30.0(7)
Credit facility $100.0 100.0
Payable for investments purchased 36.0 11.1 47.1
Accounts payable and accrued expenses 71.0 34.4 11.4(9) 116.8
Other liabilities 54.0 0.7(6) 28.1
(26.6)(7)
Guaranty association fees 27.2 27.2
Separate account liabilities 778.6 778.6
Total liabilities 10,210.9 145.5 115.5 10,471.9
Redeemable Preferred Stock,
authorized 1,040,000 shares; issued
and outstanding on a pro forma
basis, 1,040,000 shares 43.9(8) 43.9
Stockholders' Equity:
Common stock (Note 8) 0.1 0.8 (0.6)(8) 0.3
Additional paid-in capital 660.0 4.5 98.0(8) 762.5
Net unrealized investment (losses) (39.9) (0.3) 0.3(8) (39.9)
Retained earnings 27.2 100.0 (100.0)(8) 27.2
Treasury stock (11.5) 11.5(8)
Total stockholders' equity 647.4 93.5 9.2 750.1
$10,858.3 $239.0 $ 168.6 $11,265.9
</TABLE>
The accompanying notes are an integral part of the unaudited pro forma
condensed consolidated financial statements.
171
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
PRO FORMA ADJUSTMENTS
Parent, Liberty Financial, Merger Subsidiary and Colonial entered into the
Merger Agreement providing for the merger of Colonial with and into Merger
Subsidiary. The Merger Agreement provides for Colonial stockholders to
receive consideration described above in this Prospectus/Proxy Statement. The
pro forma adjustments assume that the Colonial stockholders will exercise
their right to receive cash and LFC Preferred Stock up to the aggregate
limits specified in the Merger Agreement. Liberty Financial's management
believes that the likelihood is remote that the option to elect cash will not
be oversubscribed. Liberty Financial management also believes that it cannot
accurately predict the extent (if any) to which the option to elect LFC
Preferred Stock will be elected or oversubscribed. Although it is possible
that LFC Preferred Stock will not be elected up to the aggregate limit, any
differences attributable to such possible variations, or any adjustments
attributable to changes in Colonial's assets under management, will not be
material.
Valuation
The valuation of the 7,354,863 shares of Colonial Common Stock outstanding as
of September 30, 1994 and of the 626,037 common stock equivalents which were
deemed to be outstanding shares as of that date for valuation purposes is
depicted below. This valuation was based upon the evaluations of financial
advisers to Colonial (See "BACKGROUND AND REASONS FOR THE MERGER--Opinions of
Colonial Financial Advisers.") and assumes the issuance of cash and LFC
Preferred Stock up to the aggregate limits specified in the Merger Agreement.
<TABLE>
<CAPTION>
Merger Per Share Total Colonial Total
Consideration Value Shares Consideration
(millions)
<S> <C> <C> <C>
LFC Cash $40.00((1)) 2,500,000 $100.00
Preferred Stock $38.50((2)) 1,350,649 52.0
Common Stock $32.50((3)) 4,130,251 134.3
Total valuation of Colonial $286.3
Percent acquired by Liberty
Financial 83.22%
Purchase Price $238.3
</TABLE>
(1) Per share amount payable pursuant to the Merger Agreement.
(2) Value ascribed by financial advisors to Colonial.
(3) Amount represents the average Colonial Class A Common Stock price for the
ten business days before and after the Merger Agreement was announced.
172
<PAGE>
The allocation of the purchase price is summarized as follows (dollars in
millions):
<TABLE>
<CAPTION>
<S> <C> <C>
Portion of Colonial Stockholders' Equity
acquired at September 30, 1994
($93.5 x 83.22%) $ 77.8
Plus adjustments for intangibles (2):
Mutual fund management contracts 115.9
Distribution arrangements 121.4
Excess of cost over fair value 47.0 284.3
Less adjustments for:
Deferred sales commissions (2) (124.2)
Deferred income taxes (6) (0.1)
Imaging software and hardware (8) 1.8
Other assets (5) (1.3) (123.8)
Purchase price $ 238.3
</TABLE>
(Footnotes refer to Merger adjustments below)
Sources and Uses of Funds
The sources and uses of this financing for the portion of Colonial acquired
by Liberty Financial are summarized below (dollars in millions)
<TABLE>
<CAPTION>
<S> <C>
Sources of Funds:
Borrowing from Liberty Mutual $100.0
Issuance of LFC Preferred Stock (1,350,649 shs. $32.50) 43.9
Issuance of LFC Common Stock (3,504,214 shs. $25.80) 90.4
Liberty Financial cash 4.0
Total sources $238.3
Use of Funds:
Purchase of Colonial stock for cash $100.0
Exchange of Colonial stock for LFC Stock 134.3
Direct costs of the Merger 4.0
Total uses $238.3
</TABLE>
Merger Adjustments
Adjustments to give effect to the Merger are summarized as follows:
(1) Interest expense is adjusted to reflect the borrowing of $100.0 million
in connection with the Merger at an assumed annual interest rate of 8.5%.
Interest expense is also adjusted to reflect the issuance of the $30.0
million SSI Note bearing interest rate of 8.0% per annum. No debt issuance
costs are assumed to be incurred on these borrowings.
(2) The acquired identified intangible assets and the excess of cost over
fair value of assets acquired, and their estimated useful lives and related
amortization expense, that are recorded in these pro forma financial
statements are as follows (in millions):
<TABLE>
<CAPTION>
Amortization Expense
Amortization
Amount Period Full Year 9 Months
<S> <C> <C> <C> <C>
Mutual fund management contracts $115.9 20 years $ 5.8 $ 4.3
Distribution arrangements 121.4 8 years 15.2 11.4
Excess of cost over fair value 47.0 20 years 2.3 1.8
$284.3 $23.3 $17.5
</TABLE>
The period used to amortize the value of the mutual fund management contracts
was based on the longevity of the management agreements that Colonial has
entered into with the Colonial Mutual
173
<PAGE>
Funds. The lives of mutual fund management contracts are indeterminate, but
under the Investment Company Act of 1940, management contracts are subject to
review and approval by the respective funds' trustees on an annual basis.
Since Colonial introduced its first mutual fund in 1941, there has been no
instance where a mutual fund management contract has not been renewed. A
review of industry practice, furthermore, revealed that amortization periods
for mutual fund management contracts were as long as 22 years.
The amortization period of the distribution arrangements was based upon the
period during which Colonial receives cash flows attributable to contingent
deferred sales charges and distribution fees from the investors to which
these distribution arrangements relate.
The period used to amortize the excess of cost over fair value was based
primarily on the period used to amortize mutual fund management contracts and
on the profitability of Colonial. Additionally, such period was based on a
review of industry practice followed by other registrants in the financial
services industry in acquisitions accounted for as a purchase.
The portion (83.22%) of Colonial's historical deferred sales commissions
subject to purchase accounting ($124.2 million) and the related amortization
expense ($19.8 million for the nine months ended September 30, 1994 and $16.6
million for the year ended December 31, 1993) were eliminated in recording
the purchase business combination.
(3) All applicable pro forma adjustments to operations are tax effected at
the appropriate rate. Under the Tax Sharing Agreement between Liberty
Financial and Liberty Mutual there were operating loss carryforwards
available for use as of January 1, 1993. The net pro forma adjustments
utilized substantially all of those carryforwards.
(4) Weighted average shares and equivalents outstanding are adjusted to
reflect the issuance of approximately 3.5 million shares and .6 million share
equivalents of LFC Common Stock in connection with the Merger as though they
were outstanding since January 1, 1993. The number of common shares
represents the total number of shares of LFC Common Stock issued for Colonial
Common Stock outstanding at the Effective Time reduced by the number of
Colonial shares surrendered in connection with issuance of $52 million face
value of LFC Preferred Stock and by the payment of $100 million in cash, as
specified in the Merger Agreement. The number of common share equivalents
represents the amount of Colonial options outstanding reduced for the effects
of applying the treasury stock method of determining common share
equivalents.
(5) The carrying value of other assets (deferred loan fees) is adjusted to
reflect their fair values at the Effective Time.
(6) Deferred tax amounts are adjusted to reflect the differences between
assigned values and the corresponding tax bases of assets acquired and
liabilities assumed in the Merger.
(7) The $30 million SSI Note issued by SSI to Parent in January, 1995 and
bearing interest at 8% per annum is recorded. The SSI Note is an Excluded
Asset, and as such, the SSI Note will not be contributed to Parent in the
Parent Contribution. A $26.6 million liability for compensation expense
recorded in connection with Liberty Financial's stock option plan was
reclassified to additional paid-in capital since, at the Effective Time of
the Merger, stock option plan participants will no longer be able to exercise
the cash-out right provision in the plan.
(8) Liberty Financial's accounts are adjusted to reflect the Merger
consideration as follows:
- -- Use of $4.0 million in cash for direct costs of the Merger, which includes
$3.0 million for financial advisor fees and $1.0 million for accounting and
legal fees, and printing and miscellaneous expenses;
- -- Issuance of a $100.0 million promissory note, at an assumed interest rate
of 8.5% per annum, to acquire 2.5 million shares of Colonial common stock;
- -- Issuance of approximately 1,040,000 shares of LFC Preferred Stock with a
fair value of $43.9 million (equivalent to 1,351,000 Colonial Common Stock at
$32.50 per share) and a face value
174
<PAGE>
of $52.0 million. Such fair value will be increased by periodic accretions so
that the carrying amount will equal face value at the redemption date.
- -- Issuance of approximately 3,504,000 shares of LFC Common Stock with a
value of $90.4 million (the net amount remaining of the total Merger
Consideration).
For the purpose of these calculations, the value of Colonial Common Stock
acquired was determined based on the average Colonial stock price for the ten
business days before and after the Merger Agreement was announced ($32.50).
In recording the Merger, the equity accounts of Colonial were eliminated. The
table below illustrates the effect on Liberty Financial's stockholders'
equity resulting from these adjustments which record 83.22% of the voting
ownership interest acquired and the historical cost basis of the remaining
portion.
<TABLE>
<CAPTION>
Liberty Financial Colonial Adjustments Liberty Financial
Historical Historical Dr Cr Pro Forma
<S> <C> <C> <C> <C> <C>
Stockholders' Equity
Common stock (Historical-auth.
10,000,000 shares issued and
outstanding 9,001,000 shares;
Pro Forma -- authorized
100,000,000 shares, issued
and outstanding 26,319,948
shares) $ 0.1 $ 0.8 $ 0.8(b) $ 0.2(a) $ 0.3
Additional paid-in capital 660.0 4.5 4.5(b) 90.2(a) 762.5
30.0(d) 15.7(b)
26.6(c)
Net unrealized investment
(losses) (39.9) (0.3) 0.3(b) (39.9)
Retained earnings 27.2 100.0 100.0(b) 27.2
Treasury stock (11.5) 11.5(b)
Total stockholders' equity $647.4 $ 93.5 $135.3 $144.5 $750.1
Dr Cr
(a)
Issue common stock
Common stock 0.2
Additional paid-in capital 90.2
(b)
Eliminate Colonial historical
equity
Common stock 0.8
Additional paid-in capital 4.5
Retained earnings 100.0
Net unrealized investment losses 0.3
Treasury stock 11.5
Additional paid-in capital
(historical carryover basis) 15.7
(c)
Reclassify option
compensation liability
Additional paid-in capital 26.6
(d)
Record note payable to Parent
Additional paid-in capital 30.0
</TABLE>
175
<PAGE>
These adjustments assume that the Colonial stockholders will exercise their
right to receive cash and LFC Preferred Stock up to the aggregate limits
specified in the Merger Agreement. The Merger Agreement provides for other
possible combinations of Merger consideration the outcomes of which would not
cause significantly different results from that disclosed in these pro forma
financial statements.
(9) Merger costs of $11.4 million to be incurred by Colonial are recorded as
of the date of the pro forma condensed consolidated balance sheet.
LEGAL MATTERS
An opinion as to the validity of the LFC Common Stock and the LFC Preferred
Stock to be issued in connection with the Merger will be given for Liberty
Financial by Choate, Hall & Stewart (a partnership which includes
professional corporations), Boston, Massachusetts. Choate, Hall & Stewart has
in the past acted as legal counsel to Liberty Mutual and certain of its
affiliates in addition to Liberty Financial and expects to do so in the
future. Mayer, Brown & Platt, New York, New York will opine to Liberty
Financial upon certain of the federal income tax consequences of the Merger.
Bingham, Dana & Gould, Boston, Massachusetts, is acting as counsel for
Colonial in connection with certain legal matters relating to the Merger and
the transactions contemplated thereby. Bingham, Dana & Gould will opine to
Colonial upon certain of the federal income tax consequences of the Merger.
Gordon B. Greer, a partner of Bingham, Dana & Gould, is a Director of
Colonial and beneficially owns 4,000 shares, and options to acquire 8,500
shares, of Colonial's Class A Common Stock.
EXPERTS
Liberty Financial
The consolidated financial statements of Liberty Financial Companies, Inc. as
of December 31, 1992 and 1993, and for each of the years in the three-year
period ended December 31, 1993 and the financial statement schedules included
herein and elsewhere in this Prospectus/Proxy Statement, have been included
herein and elsewhere in this Prospectus/Proxy Statement in reliance on the
reports of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The balance sheet of New LFC, Inc. as of January 26, 1995 has been included
in this Prospectus/ Proxy Statement in reliance on the report of KPMG Peat
Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
Colonial
The consolidated financial statements of Colonial as of December 31, 1992 and
1993, and for each of the years in the three-year period ended December 31,
1993 and the financial statement schedules incorporated by reference in this
Prospectus/Proxy Statement, have been so incorporated in this
Prospectus/Proxy Statement in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
accounting and auditing.
BY-LAW AMENDMENT
At a special meeting of the Board of Directors of Colonial held on July 30,
1994, the Colonial Board amended Article VI of Colonial's By-Laws so as to
opt out of the provisions of Chapter 110D of the Massachusetts General Laws.
176
<PAGE>
GLOSSARY OF CERTAIN INSURANCE TERMS
<TABLE>
<CAPTION>
<S> <C>
Actuarial reserves Obligations on outstanding life insurance and
annuity contracts equal to premiums received, plus
interest credited on the premiums, less accumulated
values released as a result of terminations.
A.M. Best Ratings The A.M. Best rating scale includes levels A++ to F
and is divided into nine categories: (i) A++, A+
(superior); (ii) A, A- (excellent); (iii) B++, B+
(very good); (iv) B, B- (good); (v) C++, C+ (fair);
(vi) C, C- (marginal); (vii) D (below minimum
standards); (viii) E (under state supervision); and
(ix) F (in liquidation). Publications of A.M. Best
indicate that "A+" and "A++" ratings are assigned to
those companies which, in A.M. Best's opinion, have
achieved superior overall performance when compared
to the standards established by A.M. Best and
generally have demonstrated a strong ability to meet
their policyholder obligations over a long period of
time. A.M. Best's ratings are directed toward the
protection of policyholders, not investors.
Annuity A policy or contract that provides for a fixed or
variable periodic payment made on one or more
specified Pay-out dates (as defined elsewhere in
this Glossary).
Asset valuation The Asset Valuation Reserve ("AVR") is a
reserve; AVR formula-driven liability under statutory accounting
practices on a life insurance company's statutory
balance sheet designed to provide over time for
potential losses associated with investments.
Cede When a company reinsures its liability with another
company by passing a portion of the risk exposure
and related premium to a reinsurer, it "cedes"
business.
Closed block A defined block of participating single premium
whole life insurance policy business operated for
the benefit of the policies included therein which
contains those SPWLs issued by Keyport prior to
1987; because Keyport no longer issues such
policies, this block is deemed to be closed.
Credited rate; Interest rates applied to annuity and
crediting rates interest-sensitive life insurance policies
(including SPWLs) during the accumulation period,
which may exceed contractually guaranteed minimum
rates.
Deferred policy Policy acquisition costs (as defined elsewhere in
acquisition costs; this Glossary) that are deferred and amortized over
DAC the expected life of the related annuity in
conformity with GAAP.
Deposits The premium or price paid by purchasers of certain
annuity contracts, such as SPDAs, and deposited and
held in the general or separate accounts of the
Company. These amounts are not included in revenues
under GAAP.
Effective Duration The estimated percentage change in present value
which would result from a one percent (1%) change in
interest rates. The estimated present value change
is calculated through fixed income pricing models
which incorporate the value of explicit and embedded
options contained in the assets and liabilities.
While duration's practical meaning is a percentage
change in present value, the term duration "years"
is used in accordance with market convention.
177
<PAGE>
General account Consists of all the assets of an insurance company
except for the assets held in separate accounts. It
is the account to which the insurer allocates assets
to fund various fixed products, and from which it
pays all expenses and satisfies all claims related
to SPDAs and SPWLs.
Insurance Guaranty Funds created in all states, the District of
Funds Columbia and Puerto Rico by law to cover certain
obligations of such funds and insolvent insurance
companies. These funds are maintained through
assessments made on insurance companies operating in
a particular state and generally are based on the
amount of business written in that state.
Insurance in force The sum of face amounts, plus dividend additions, if
any, of the insurance policies outstanding of the
insurance company at a given time. Additional
amounts payable under special provisions are not
included.
Interest maintenance Under statutory accounting practices, the interest
reserve; IMR maintenance reserve ("IMR") is included as a
liability on a life insurer's statutory balance
sheet and applies to all types of fixed maturity
investments (bonds, preferred stocks,
mortgage-backed securities and mortgage loans). The
IMR captures the net gains and losses realized upon
the sale of investments which result from changes in
the overall level of interest rates and amortizes
these net realized gains into income over the
remaining life of each investment sold. The IMR has
no effect on financial statements prepared in
conformity with GAAP.
Interest rate caps A contract between two parties where the buyer pays
an up-front fee for the right to receive periodic
payments from the seller over the cap's contractual
life. The seller makes payments in each period (for
example, each three-month period) based on an amount
by which a specified interest rate index (for
example, three-month London Interbank Offered Rates
("LIBOR")) is above a specified level. The amount of
a payment is based upon an agreed-upon notional
principal amount.
Interest rate swaps An agreement between two parties where one party
agrees to pay a fixed rate in exchange for a
floating rate (for example, three-month LIBOR) which
is reset periodically (for example, every three
months) over the swap's contractual life. The fixed
rate is established at the start of the swap. The
amount of each payment is based on an agreed-upon
notional principal amount.
Investment grade As used with respect to Keyport's general account,
securities that are rated 1 or 2 by the Securities
Valuation Office of the NAIC, or, if not so rated,
securities that are rated "BBB-" or above by S&P, or
"Baa3" or above by Moody's (using the lower of the
S&P or Moody's rating).
Investment spread The difference between interest income earned on
invested assets and interest credited to the related
policyholder accounts.
Life insurance A contract between the owner of a policy and an
insurance company whereby the company agrees, in
return for premium payments, to pay a specified sum
(for example, the face value or maturity value of
the policy) to the designated beneficiary upon the
death of the insured.
Limited Pay Contract Policies that have fixed and guaranteed terms but
are purchased with premiums paid over a period
shorter than the period over which benefits are
provided.
178
<PAGE>
NAIC The National Association of Insurance Commissioners,
an organization composed of the insurance
supervisory authorities (commissioners) of each of
the fifty states.
Net gain from A statutory amount derived from income consisting of
operations income from annuity contracts and insurance
policies, net investment income and miscellaneous
income less costs consisting of contract and policy
benefits, increase in contract and policy reserves,
commissions, expenses and taxes. The result is the
surplus increase or decrease resulting from
insurance operations. (It does not include realized
capital gains and losses on investments.)
Pay-out date The date(s) on which the accumulated value of an
annuity becomes payable. The policyholder may elect
to receive the payment in a lump sum, in a specified
number of payments, over the holder's life or for
the greater of a specified number of payments or the
policyholder's life.
Policy acquisition Commissions and other acquisition costs, such as
costs underwriting, which vary with and are directly
related to the production of new business. See
deferred policy acquisition costs or DAC.
Policy contract
claims Requests for payment under the terms of a policy.
Policy loan An advance made by the insurance company to a
policyowner, on the latter's request, out of the
policy's cash value. The policy loan bears a fixed
rate of interest and may be payable in cash or be
offset against an amount otherwise to be credited to
a policy.
Policyholder Charges to policyholder account balances for early
assessments withdrawal as well as to certain policies to cover
administrative costs and mortality and expense
risks. See Surrender charges.
Policyholder A policy withdrawal provision that grants the
withdrawals policyowner the right to reduce the amount in the
policy's cash value by taking that amount in cash.
Also known as partial surrender provision.
Premium income Income from premium payments made for annuities with
life contingencies which have been accepted and
issued. Deposits are not premium income under GAAP.
Reinsurance The practice whereby an insurer transfers ("cedes")
a portion of the risk insured and a portion of the
related premium to another insurer. Reinsurance can
be effected by a "treaty" whose reinsurance
automatically covers a portion of all risks of a
defined category, amount or type.
Renewal rate The interest crediting rate set periodically
(typically annually) on a fixed annuity policy
beginning after the expiration of a specified period
after the issuance of the annuity.
Separate account Those assets allocated to the separate account by
assets the insurer to fund variable products which are kept
separate from the insurer's general account.
Separate account assets are beneficially owned by
the account purchasers to which realized and
unrealized appreciation as well as investment income
are credited. General account obligations cannot be
satisfied by separate account assets.
179
<PAGE>
Single premium A deferred fixed annuity that requires a one-time
deferred annuity; lump sum premium payment upon issuance of the
SPDA annuity with benefit payments commencing at some
future date following an accumulation period. Each
such annuity has a guaranteed minimum interest
crediting rate.
Single Premium Annuities that require a one-time lump sum premium
Immediate payment upon the issuance of the contract, with
Annuities annuity payments commencing immediately after
issuance.
Single premium whole Life insurance that may be kept in force for a
life insurance; person's entire life through the payment of one lump
SPWL sum amount at the inception of the policy. The
insurance policy accumulates increasing cash value
over time and pays a benefit (a contractual amount
adjusted for items such as policy loans and
dividends, if any) at the death of the insured.
Statutory accounting The accounting practices prescribed or permitted by
practices state insurance regulatory authorities, usually the
domiciliary state of a particular insurer or
reinsurer. Statutory accounting practices generally
emphasizes a liquidating, rather than a going
concern, concept of accounting.
Statutory surplus The amount by which admitted assets exceed
liabilities, as determined in accordance with
Statutory Accounting Practices.
Surrender charge The fee charged to a policyholder when an annuity is
surrendered for its cash value during a specified
term. Such charge is intended to recover unamortized
deferred acquisition costs and act as a deterrent to
premature termination. Surrender charges typically
decline over a set period of time as a percentage of
the account values in relation to the anticipated
amortization of the deferred policy acquisition
costs until there are no more surrender charges.
Variable annuity An annuity which provides for investment of the
premium in one or more separate accounts, the value
of which will vary depending on the investment
results of an underlying mutual fund.
Variable life A contract of life insurance where cash values and
insurance the amount of the death benefit are related to the
performance of the underlying mutual fund into which
separate account assets are placed.
Withdrawal ratio The withdrawal ratio is the percentage of contracts
and policies that is voluntarily terminated by the
contract or policyowner from year to year.
</TABLE>
180
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1992 and 1993 and as of September 30, 1994
(unaudited) F-3
Consolidated Statements of Operations for the Years Ended December 31, 1991, 1992 and 1993
and for the nine months ended September 30, 1993 and 1994 (unaudited) F-4
Consolidated Statements of Stockholder's Equity for the Years Ended December 31, 1991, 1992
and 1993 and for the nine months ended September 30, 1993 and 1994 (unaudited) F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1991, 1992 and 1993
and for the nine months ended September 30, 1993 and 1994 (unaudited) F-6
Notes to Consolidated Financial Statements F-7-28
NEW LFC, INC.
INDEX TO FINANCIAL STATEMENT
Independent Auditors' Report F-29
Balance Sheet as of January 26, 1995 F-30
Notes to Balance Sheet F-31
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Liberty Financial Companies, Inc.
We have audited the accompanying consolidated balance sheets of Liberty
Financial Companies, Inc. as of December 31, 1992 and 1993, and the related
consolidated statements of operations, stockholder's equity, and cash flows
for each of the years in the three-year period ended December 31, 1993. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 financial position of Liberty
Financial Companies, Inc. as of December 31, 1992 and 1993, and the results
of its operations and its cash flows for each of the years in the three-year
period ended December 31, 1993 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
February 22, 1994
F-2
<PAGE>
See accompanying notes to consolidated financial statements.LIBERTY FINANCIAL
COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31 September 30
1992 1993 1994
(unaudited)
<S> <C> <C> <C>
ASSETS
Assets:
Investments (Note 3) $8,151,591 $ 8,411,668 $ 8,804,029
Cash and cash equivalents 660,074 541,963 472,359
Accrued investment income 118,753 108,280 115,931
Deferred policy acquisition costs (Note 5) 211,330 262,646 376,982
Value of insurance in force (Note 5) 115,824 101,036 123,929
Intangible assets (Note 6) 50,186 35,168 30,805
Deferred federal income taxes (Note 7) 19,459 20,767 36,522
Other assets 46,942 48,677 53,389
Separate account assets 424,176 794,789 844,331
$9,798,335 $10,324,994 $10,858,277
LIABILITIES AND STOCKHOLDER'S EQUITY
Liabilities:
Policy liabilities $8,603,455 $ 8,697,635 $ 9,169,059
Note payable to parent (Note 14) -- 75,000 75,000
Guaranty association fees (Note 15) 28,217 24,548 27,227
Payable for investments purchased 22,000 10,129 36,048
Accounts payable and accrued expenses 70,006 73,688 70,963
Other liabilities 37,792 56,659 54,012
Separate account liabilities 424,176 748,507 778,609
Total liabilities 9,185,646 9,686,166 10,210,918
Commitments and contingencies (Note 15)
Stockholder's Equity (Notes 9, 10 and 16):
Common stock, $.01 par value, authorized 10,000,000
shares; issued and outstanding 9,000,000 shares in
1992 and 1993; 9,001,000 shares in 1994 90 90 90
Additional paid-in capital 659,948 659,948 659,982
Net unrealized investment gains (losses) (Note 3) 5,687 546 (39,926)
Retained earnings (accumulated deficit) (53,036) (21,756) 27,213
Total stockholder's equity 612,689 638,828 647,359
$9,798,335 $10,324,994 $10,858,277
</TABLE>
F-3
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31 Ended September 30
1991 1992 1993 1993 1994
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Net investment income (Note 3) $692,920 $710,013 $675,309 $511,671 $512,994
Investment management revenues and
other fees 81,770 94,072 105,962 77,969 77,563
Premium income and policyholder
assessments 27,530 21,495 31,314 23,559 26,175
Securities commissions 35,366 42,394 54,976 39,118 41,521
Other revenues 1,442 3,092 2,279 1,660 5,208
Realized investment gains (Note 3) 8,621 3,444 10,553 11,621 2,910
847,649 874,510 880,393 665,598 666,371
Expenses:
Interest credited to policyholders 568,844 569,563 501,073 381,358 352,237
Operating expenses 117,972 132,249 147,100 105,000 116,598
Policy benefits and claims 11,952 11,771 19,686 15,226 13,877
Commission expense 32,665 37,016 48,769 35,058 38,046
Guaranty fund expense (Note 15) 3,224 35,000 3,714 2,700 5,400
Option plan compensation expense (Note
9) 189 36 22,071 1,495 6,686
Amortization of value of insurance in
force (Note 5) 33,323 32,446 22,310 17,239 12,713
Amortization of deferred policy
acquisition costs (Note 5) 13,823 17,354 40,218 29,460 40,500
Amortization of intangible assets (Note
6) 25,580 42,265 15,018 13,462 4,363
807,572 877,700 819,959 600,998 590,420
Income (loss) before income taxes 40,077 (3,190) 60,434 64,600 75,951
Provision for income taxes (Note 7) 19,172 9,343 29,154 23,252 26,982
Net income (loss) $ 20,905 $(12,533) $ 31,280 $ 41,348 $ 48,969
Net income (loss) per share $ 2.32 $ (1.39) $ 3.33 $ 4.59 $ 5.24
</TABLE>
F-4
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(in thousands)
<TABLE>
<CAPTION>
Net
Unrealized Retained
Additional Investment Earnings Total
Common Paid-In Gains Accumulated Stockholder's
Stock Capital (Losses) Deficit Equity
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1990 $90 $513,354 $ (17) $(61,408) $452,019
Capital contributions 142,450 142,450
Net income 20,905 20,905
Change in net unrealized investment
gains (losses) 4,192 4,192
Balance, December 31, 1991 90 655,804 4,175 (40,503) 619,566
Capital contributions 4,144 4,144
Net loss (12,533) (12,533)
Change in net unrealized investment
gains (losses) 1,512 1,512
Balance, December 31, 1992 90 659,948 5,687 (53,036) 612,689
Net income 31,280 31,280
Change in net unrealized investment
gains (losses) (5,141) (5,141)
Balance, December 31, 1993 90 659,948 546 (21,756) 638,828
Common Stock issued 34 34
Net income 48,969 48,969
Change in net unrealized investment
gains (losses) (40,472) (40,472)
Balance, September 30, 1994
(unaudited) $90 $659,982 $(39,926) $ 27,213 $647,359
</TABLE>
F-5
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31 Ended September 30
1991 1992 1993 1993 1994
<S> <C> <C> <C> <C> <C>
(unaudited)
Cash flows from operating activities:
Net income (loss) $ 20,905 $ (12,533) $ 31,280 $ 41,348 $ 48,969
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 65,646 81,748 43,329 34,916 23,389
Interest credited to policyholders 568,844 569,563 501,073 381,358 352,237
Realized investment gains (8,621) (3,444) (10,553) (11,621) (2,910)
Net accretion of discount on
investments (24,178) (12,043) (4,383) (259) 7,565
Change in deferred policy
acquisition costs (47,845) (57,180) (51,316) (38,914) (28,119)
Change in current and deferred
income taxes 3,124 (11,857) 10,988 5,064 985
Change in guaranty association fees -- 28,860 (3,669) 1,477 2,679
Change in accounts payable and
accrued expenses 10,874 42,144 3,531 (13,530) 2,328
Net change in other assets and
liabilities 10,981 4,582 20,544 (7,881) (21,323)
Net cash provided by operating
activities 599,730 629,840 540,824 391,958 385,800
Cash flows from investing activities:
Investments purchased (2,043,019) (3,669,813) (2,718,598) (2,037,654) (2,176,743)
Investments sold held to maturity 1,042,514 767,124 97,816 60,436 --
Investments sold available for sale -- -- 387,338 334,912 1,061,126
Investments matured held to maturity 681,644 1,660,920 1,219,169 830,972 528,687
Investments matured available for
sale -- -- 758,279 564,742 38,607
Change in policy loans (64,792) (36,456) (38,661) (26,402) (26,302)
Net cash used in investing activities (383,653) (1,278,225) (294,657) (272,994) (574,625)
Cash flows from financing activities:
Withdrawals from policyholder
accounts (491,245) (678,324) (1,295,617) (988,880) (781,070)
Deposits to policyholder accounts 793,122 876,504 856,339 645,699 900,257
Capital contributions 142,450 1,754 -- -- 34
Debt borrowing (repayment) (40,000) -- 75,000 -- --
Net cash provided by (used in)
financing activities 404,327 199,934 (364,278) (343,181) 119,221
Increase (decrease) in cash and cash
equivalents 620,404 (448,451) (118,111) (224,217) (69,604)
Cash and cash equivalents at
beginning of year 488,121 1,108,525 660,074 660,074 541,963
Cash and cash equivalents at end of
year $ 1,108,525 $ 660,074 $ 541,963 $ 435,857 $ 472,359
</TABLE>
F-6
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
1. Organization and Basis of Presentation
2. Summary of Significant Accounting Policies--(Continued)
Liberty Financial Companies, Inc. (the "Company") is a diversified financial
services holding company which was organized by Liberty Mutual Insurance
Company ("Liberty Mutual") to manage the operations of its financial services
subsidiaries. In exchange for contributing to the Company its ownership
interests in these subsidiaries, a direct wholly owned subsidiary of Liberty
Mutual acquired all the outstanding Common Stock of the Company in a
transaction accounted for as if it were a pooling of interests. The Company
commenced operations as of January 1, 1990.
The principal subsidiaries of the Company include: Keyport Life Insurance
Company ("Keyport"), an issuer primarily of single premium annuity contracts;
Stein Roe & Farnham Incorporated, a registered investment adviser and asset
management firm; and Liberty Securities Corporation, a registered securities
broker-dealer, which sells insurance and investment products through banks.
The accompanying consolidated financial statements as of September 30, 1994
and for the nine months ended September 30, 1993 and 1994, and notes thereto,
are unaudited; however, in the opinion of the Company these unaudited
financial statements include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation. The results of
operations for the nine month period are not necessarily indicative of the
results for the full year.
2. Summary of Significant Accounting Policies
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles ("GAAP"). All
material intercompany transactions and balances have been eliminated. A
description of significant accounting policies follows.
Insurance Operations
Revenues from single premium whole life policies and single premium deferred
annuities include mortality charges, surrender charges, policy fees and
contract fees and are recognized when assessed. Policy liabilities
principally include policyholder account balances which consist of deposits
received plus interest credited less accumulated policyholder assessments and
withdrawals. On December 31, 1993, credited interest rates ranged from 3.75%
to 8.90%; on September 30, 1994, credited interest rates ranged from 3.75% to
8.35%.
Policy acquisition costs are the costs of acquiring new business which vary
with, and are primarily related to, the production of new business. These
costs are deferred to the extent they are deemed recoverable from future
gross profits. Such costs include commissions, costs of policy issuance and
underwriting, and variable agency expenses. Costs deferred are amortized in
relation to the present value of estimated gross profits from mortality,
investment, and expense margins. Amortization is adjusted to reflect actual
experience by recomputing amortization expense in the current period.
Asset Management Activities
Fees from asset management and investment advisory services are recognized as
revenues when services are provided. Fees billed in advance of rendering
service are deferred.
Securities Brokerage
Commission revenue and expense on the sale of securities products are
recognized on a trade-date basis.
Investments
Fixed maturity investments that the Company has a positive intent and the
ability to hold to maturity are classified as held to maturity and are
carried at amortized cost. Adjustments to the amortized cost of identified
investments are amortized into income on a constant yield method over the
expected life of the investment.
F-7
<PAGE>
Fixed maturity investments are classified as available for sale if they might
be sold in response to changes in market interest rates, changes in the
security's prepayment risk, general liquidity needs, changes in
asset/liability management strategy, or other factors. Securities available
for sale are carried at the lower of aggregate amortized cost or market.
Unrealized losses, if any, are charged directly to stockholder's equity, net
of applicable deferred income taxes.
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("Statement 115"). Statement 115 changes the accounting
treatment afforded the Company's fixed maturity investments by segregating
fixed maturity securities into three classifications: "held to maturity",
"trading" and "available for sale." Securities may be designated as held to
maturity only if a company has the positive intent and ability to hold these
securities to maturity. An enterprise may not classify a security as held to
maturity if the enterprise has the intent to hold the security only for an
indefinite period. Accounting for securities held to maturity will be
unchanged, as these securities will continue to be carried at amortized cost.
However, trading account and available for sale securities are to be carried
at fair value. Unrealized gains and losses on trading account securities are
recognized in income, while unrealized gains and losses on available for sale
securities and on interest rate swaps and caps (net of adjustments to
deferred policy acquisition costs, value of insurance in force and applicable
deferred income taxes) are recorded directly to stockholder's equity.
Transfers between categories are severely restricted.
Equity securities are carried at fair value.
Mortgage loans with premiums and discounts are amortized using a constant
yield method. Equity securities are carried at fair value. Policy loans are
carried at the unpaid principal balance plus accrued interest.
Realized gains and losses on sales of investments, which are calculated on a
"first-in, first-out" basis, include adjustments for investment valuation
reserves. For each investment security where a decline in value is determined
to be other than temporary the Company's policy is to write down the
investment security to fair value. Unrealized gains or losses on equity
securities are recorded directly to stockholder's equity, net of applicable
deferred income taxes.
Interest rate swaps are used to hedge interest rate risk on certain floating
or fixed rate investments. The net differential to be paid or received on
interest rate swaps, which are classified as a hedge for financial reporting
purposes, is recorded monthly as interest rates change. From time to time,
swap positions may be unwound. If the unwound swap has been effective in
hedging interest rate risk, realized gains or losses are amortized over the
remaining life of the swap. Conversely, if the unwound swap has not been
effective in hedging interest rate risk, or the assets and liabilities which
were hedged no longer exist, the swap position is marked to market, and
realized gains or losses are immediately recognized in income.
The Company has entered into one swap agreement under which it pays the total
return of a seven year swap to receive the total return of a current coupon
FNMA mortgage. The net differential paid or received each reset date is
recorded monthly as a realized gain or loss.
The Company also enters into interest rate cap agreements to minimize
exposure to rising interest rates. The Company receives payments when the
indexed rate exceeds the stated interest rate. The cost of interest rate caps
is amortized on a straight-line basis over the period to maturity.
In October 1994, the Financial Accounting Standards Board issued Statement
119, "Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments." Statement 119 requires specific disclosures about
derivative financial instrument such as forward, swap and option contracts.
It requires distinguishing between financial instruments held or issued for
trading purposes and financial
F-8
<PAGE>
instruments held or issued for purposes other than trading. There are
separate disclosure requirements for each classification. Statement 119 is
effective for fiscal years ending after December 15, 1994. The Company
intends to adopt 119 as of December 31, 1994.
Value of Insurance in Force
The value of insurance in force represents the actuarially-determined present
value of projected future profits from policies in force at the date of
purchase. This amount is amortized in proportion to the projected emergence
of profits over periods not exceeding fifteen years for annuities and
twenty-five years for life insurance.
Intangible Assets
Intangible assets, principally customer lists and the excess of purchase
price over the fair value of net assets acquired, arose from business
combinations accounted for as a purchase. Amortization is provided on a
straight-line basis over the lives of the acquired assets which range from
two to twenty-five years. Continued capitalization of intangible assets is
based primarily on the recoverability of their carrying values.
Recoverability is based on an estimate of the present value of future gross
profits attributable to the intangible assets. The carrying value of the
intangible assets is adjusted when the expected present value of future gross
profits attributable to such assets is less than their carrying value.
Separate Account Assets
Separate account assets, which are carried at fair value, consist principally
of investments in mutual funds and are included as a separate caption in the
accompanying consolidated balance sheets. Investment income and changes in
asset values are allocated to variable annuity and variable life
policyholders and, therefore, do not affect the operating results of the
Company. The Company provides administrative services and bears the mortality
risk related to these contracts. As of December 31, 1993 and September 30,
1994, the Company also classified approximately $46.3 million and $65.7
million, respectively, of its investments in certain mutual funds sponsored
by the Company as separate account assets.
Cash Equivalents
Short-term investments which have an original maturity of three months or
less at the time of purchase are classified as cash equivalents.
Federal Income Taxes
The Company is included in the consolidated federal income tax return filed
by Liberty Mutual and calculates its consolidated income tax liability as if
it filed its own consolidated federal income tax return. Keyport filed its
own federal income tax return through 1993, at which time it became eligible
for inclusion in Liberty Mutual's consolidated tax return. Accordingly,
through December 31, 1993 Keyport's liability for federal income taxes was
computed separately.
In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("Statement 109"). Under the asset and liability method of Statement 109,
deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
Statement 109, the effect of a change in tax rates on deferred tax assets and
liabilities is recognized in income in the period that includes the enactment
date.
F-9
<PAGE>
The Company previously used the asset and liability method under Statement of
Financial Accounting Standards No. 96 ("Statement 96"). Under the asset and
liability method of Statement 96, deferred tax assets and liabilities were
recognized for all events that had been recognized in the financial
statements. Under Statement 96, the future tax consequences of recovering
assets or settling liabilities at their financial statement carrying amounts
were considered in calculating deferred taxes. Generally, Statement 96
prohibited consideration of any other future events in calculating deferred
taxes.
Effective January 1, 1992, the Company adopted Statement 109. The accounting
change had no material effect on the financial statements for any period
presented.
Earnings Per Share
Earnings per share are calculated based on the weighted average number of
shares of Common Stock and common stock equivalents outstanding during each
of the years presented in the amounts of 9,000,000 for 1991 and 1992,
9,379,632 for 1993, and 9,000,000 and 9,352,130 for the nine months ended
September 30, 1993 and 1994, respectively. The options outstanding under the
Company's 1990 Stock Option Plan are excluded from the 1991, 1992, and
September 30, 1993 calculations since their effect was immaterial or
anti-dilutive.
3. Investments
Investments, all of which pertain to Keyport, were comprised of the following
(in thousands):
<TABLE>
<CAPTION>
December 31 September 30,
1992 1993 1994
(unaudited)
<S> <C> <C> <C>
Fixed maturities available for sale $2,823,555 $5,516,905 $6,706,280
Fixed maturities held to maturity 4,699,921 2,276,955 1,471,459
Mortgage loans 159,388 155,972 131,658
Policy loans 375,879 442,150 468,452
Other invested assets 24,912 17,873 12,171
8,083,655 8,409,855 8,790,020
Equity securities at fair value 67,936 1,813 14,009
Total $8,151,591 $8,411,668 $8,804,029
</TABLE>
Equity securities are carried at fair value and had a cost of $59,319, $1,627
and $13,543 at December 31, 1992 and 1993, and September 30, 1994,
respectively. At December 31, 1992, equity securities included $56,860 of
investments in mutual funds sponsored by the Company.
Fixed Maturities (in thousands)
Fair values of publicly-traded securities are as reported by an independent
pricing service. Fair values of conventional mortgage backed securities not
actively traded in a liquid market are obtained through broker-dealer
quotations. Fair values of private placement bonds are determined by
obtaining market indications from various broker-dealers. The amortized cost
and fair values of investments in fixed maturities at December 31, 1992 and
1993 and September 30, 1994 are as follows:
F-10
<PAGE>
<TABLE>
<CAPTION>
December 31, 1992
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held to maturity:
U.S. Treasury securities $ 117,760 $ 3,524 $ (7) $ 121,277
3. Investments--(Continued)
Mortgage backed securities of U.S. government
corporations and agencies 109,614 11,043 -- 120,657
Obligations of states and political subdivisions 72,927 4,905 (1,784) 76,048
Debt securities issued by foreign governments 105,499 5,405 (463) 110,441
Corporate securities 3,290,169 198,910 (18,233) 3,470,846
Other mortgage backed securities 37,355 669 (188) 37,836
Asset backed securities 797,640 21,089 (1,920) 816,809
Senior secured loans 168,957 -- -- 168,957
Total fixed maturities held to maturity $4,699,921 $245,545 $(22,595) $4,922,871
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale:
Mortgage backed securities of U.S.
government corporations and agencies $2,066,754 $65,962 $ (9,405) $2,123,311
Corporate securities 167,587 -- (6,252) 161,335
Other mortgage backed securities 574,214 10,445 (3,622) 581,037
Senior secured loans 15,000 -- -- 15,000
Total fixed maturities available for sale $2,823,555 $76,407 $(19,279) $2,880,683
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Held to maturity:
Mortgage backed securities of U.S.
government corporations and agencies $ 697,473 $ 40,701 $ (211) $ 737,963
Obligations of states and political
subdivisions 20,696 2,088 -- 22,784
Debt securities issued by foreign
governments 20,443 1,503 -- 21,946
Corporate securities 972,789 114,846 (4,304) 1,083,331
Other mortgage backed securities 165,882 3,480 (2,374) 166,988
Asset backed securities 227,888 6,143 (109) 233,922
Senior secured loans 171,784 -- -- 171,784
Total fixed maturities held to maturity $2,276,955 $168,761 $(6,998) $2,438,718
</TABLE>
F-11
<PAGE>
<TABLE>
<CAPTION>
December 31, 1993
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 135,083 $ 7,456 $ (113) $ 142,426
Mortgage backed securities of U.S.
government corporations and agencies 1,326,703 25,452 (7,469) 1,344,686
Obligations of states and political
subdivisions 39,526 3,351 -- 42,877
Debt securities issued by foreign
governments 62,318 5,245 (486) 67,077
Corporate securities 2,481,952 172,683 (13,552) 2,641,083
Other mortgage backed securities 693,629 7,215 (4,706) 696,138
Asset backed securities 777,694 22,398 (1,975) 798,117
Total fixed maturities available for sale $5,516,905 $243,800 $(28,301) $5,732,404
</TABLE>
An investment valuation reserve of $39,666 and $33,516 at December 31, 1992
and 1993, respectively, is deducted from the amortized cost of the Company's
fixed maturity investments held to maturity.
<TABLE>
<CAPTION>
September 30, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(unaudited)
<S> <C> <C> <C> <C>
Held to maturity:
Mortgage backed securities of U.S.
government corporations and agencies $ 232,705 $10,267 $ (36) $ 242,936
Obligations of states and political
subdivisions 17,715 506 -- 18,221
Corporate securities 912,549 25,066 (11,068) 926,547
Other mortgage backed securities 81,949 64 (3,675) 78,338
Asset backed securities 226,541 482 (3,875) 223,148
Total fixed maturities held to maturity $1,471,459 $36,385 $(18,654) $1,489,190
</TABLE>
<TABLE>
<CAPTION>
September 30, 1994
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(unaudited)
<S> <C> <C> <C> <C>
Available for sale:
U.S. Treasury securities $ 257,293 $ 5 $ (3,714) $ 253,584
Mortgage backed securities of U.S.
government corporations and agencies 1,282,052 3,161 (73,935) 1,211,278
Obligations of states and political
subdivisions 37,857 964 -- 38,821
Debt securities issued by foreign
governments 66,078 1,535 (1,547) 66,066
Corporate securities 2,729,949 66,879 (113,242) 2,683,586
Other mortgage backed securities 1,118,338 24,825 (58,391) 1,084,772
Asset backed securities 1,134,265 3,618 (32,261) 1,105,622
Senior secured loans 262,551 -- -- 262,551
Total fixed maturities available for sale $6,888,383 $100,987 $(283,090) $6,706,280
</TABLE>
F-12
<PAGE>
Contractual Maturities (in thousands)
The carrying value and fair value of fixed maturities at December 31, 1992
and 1993 and September 30, 1994, by contractual maturity, are set forth
below. Expected maturities will differ from contractual maturities as
borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties.
<TABLE>
<CAPTION>
December 31, 1992 December 31, 1993 September 30, 1994
Amortized Fair Amortized Fair Amortized
Cost Value Cost Value Cost Fair Value
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Held to maturity:
Due in one year or less $ 45,851 $ 44,013 $ 2,961 $ 3,070 $ 25,000 $ 25,500
Due after one year
through five years 1,041,539 1,074,395 336,699 350,962 218,526 219,244
Due after five years
through ten years 1,562,587 1,639,815 404,369 436,400 489,859 498,680
Due after ten years 1,105,335 1,189,346 441,683 509,413 196,879 201,344
3,755,312 3,947,569 1,185,712 1,299,845 930,264 944,768
Mortgage and asset backed
securities 944,609 975,302 1,091,243 1,138,873 541,195 544,422
Total fixed maturities
held to maturity $4,699,921 $4,922,871 $2,276,955 $2,438,718 $1,471,459 $1,489,190
</TABLE>
<TABLE>
<CAPTION>
December 31, 1992 December 31, 1993 September 30, 1994
Amortized Fair Amortized Fair Amortized
Cost Value Cost Value Cost Fair Value
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Due in one year or less $ 61,935 $ 62,452 $ 228,567 $ 228,736
Due after one year
through five years $ 50,000 $ 46,250 1,069,666 1,118,058 1,249,033 1,235,560
Due after five years
through ten years 76,263 75,116 890,593 951,937 1,484,542 1,441,646
Due after ten years 56,324 54,969 696,685 761,016 391,586 398,666
182,587 176,335 2,718,879 2,893,463 3,353,728 3,304,608
Mortgage and asset backed
securities 2,640,968 2,704,348 2,798,026 2,838,941 3,534,655 3,401,672
Total fixed maturities
available for sale $2,823,555 $2,880,683 $5,516,905 $5,732,404 $6,888,383 $6,706,280
</TABLE>
F-13
<PAGE>
Net Investment Income (in thousands)
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31 Ended September 30
1991 1992 1993 1993 1994
(unaudited)
<S> <C> <C> <C> <C> <C>
Fixed maturities $622,813 $640,338 $619,847 $468,883 $471,271
Equity securities 3,532 4,443 2,368 2,500 1,165
Mortgage loans 13,633 17,116 17,252 13,114 11,942
Policy loans 17,729 20,790 22,766 16,935 19,564
Cash and cash
equivalents 42,493 34,504 18,551 14,746 12,631
Gross investment
income 700,200 717,191 680,784 516,178 516,573
Investment expenses (7,280) (7,178) (5,475) (4,507) (3,579)
Net investment income $692,920 $710,013 $675,309 $511,671 $512,994
</TABLE>
As of December 31, 1992 and 1993, and at September 30, 1994, the carrying
value of fixed maturity investments that were non-income producing for the
preceding twelve months was $51,545, $2,332 and $10,067, respectively.
Net Unrealized Investment Gains (Losses) (in thousands)
Net unrealized investment gains (losses), prior to the adoption of Statement
115, are as follows:
<TABLE>
<CAPTION>
December 31
1992 1993
<S> <C> <C>
Equity Securities:
Gross unrealized gains $ 9,044 $ 962
Gross unrealized losses (427) (123)
8,617 839
Deferred federal income taxes (2,930) (293)
Total $ 5,687 $ 546
</TABLE>
Net unrealized investment gains (losses) with the adoption of Statement 115
are as follows:
<TABLE>
<CAPTION>
September 30,
1994
(unaudited)
<S> <C>
Fixed Maturities:
Gross unrealized gains $ 100,987
Gross unrealized losses (283,090)
(182,103)
Adjustments for:
Deferred acquisition costs 86,217
Value of insurance in force 34,127
Total fixed maturities (61,759)
Equity Securities:
Gross unrealized gains 2,870
Gross unrealized losses (2,404)
Total equity securities 466
(61,293)
Deferred federal income taxes 21,367
Total $ (39,926)
</TABLE>
F-14
<PAGE>
Realized Investment Gains (in thousands)
Realized investment gains are summarized as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31 Ended September 30
1991 1992 1993 1993 1994
(unaudited)
<S> <C> <C> <C> <C> <C>
Fixed maturities held to
maturity
Gross gains $ 57,036 $ 42,174 $ 31,594 $ 20,311 $ 2,077
Gross losses (11,440) (25,943) (3,070) (2,657) (3,389)
Provisions for possible
investment losses, net (37,638) (10,402) (16,609) (11,671) --
Fixed maturities available
for sale
Gross gains -- -- 7,097 6,460 16,665
Gross losses -- -- (6,311) (1,509) (11,932)
Provisions for possible
investment losses, net -- -- 7,487 -- --
Equity securities 662 2,062 11,228 3,696 (854)
Interest rate caps -- (4,447) (6,082) (4,082) --
Interest rate swaps -- -- (16,193) -- 2
Other 1 -- 1,412 1,073 341
Total $ 8,621 $ 3,444 $ 10,553 $ 11,621 $ 2,910
</TABLE>
Proceeds from sales of fixed maturities held to maturity were $1,042,514, and
$721,300 for the years ended December 31, 1991 and 1992, respectively. For
1993, proceeds from sales of fixed maturities held to maturity and available
for sale were $97,816 and $313,568, respectively. For the nine months ended
September 30, 1994, proceeds from sales of fixed maturities held to maturity
and available for sale were $0 and $1,045,707, respectively.
Concentration of Investments (in thousands)
Investments in a single entity (all of which are fully collateralized and
guaranteed by an agency or
agencies of the U.S. Government) in excess of ten percent of total
stockholder's equity as of December
31, 1992 and 1993 and September 30, 1994 are as follows:
<TABLE>
<CAPTION>
Carrying Value at Carrying Value at
December 31 September 30
1992 1993 1994
(unaudited)
<S> <C> <C> <C>
Mortgage backed securities:
Morgan Stanley CMO (33-5) $109,614 $111,619 $104,571
FNMA Pool #050656 133,208 73,370 --
FHLMC Pool #C00193 90,497 -- --
FHLMC Pool #G00143 -- 155,963 129,268
</TABLE>
F-15
<PAGE>
Diversification of Investments (in thousands)
Investments in fixed maturities are diversified among more than one hundred
industries. Concentrations of credit risk are classified in the following
industries as of December 31, 1992 and 1993 and September 30, 1994:
<TABLE>
<CAPTION>
Carrying Value at Carrying Value at
December 31 September 30
1992 1993 1994
(unaudited)
<S> <C> <C> <C>
Financial services $354,512 $500,970 $523,639
Electrical services 549,483 438,669 329,797
Oil and natural gas 307,076 302,958 289,120
Telecommunications 248,143 231,293 246,356
Retail stores 191,674 229,886 238,111
Banks -- -- 232,331
Food and beverage 160,846 170,365 161,067
Transportation equipment 129,517 168,454 204,759
Paper products 149,377 149,490 177,915
Railroads 160,702 142,123 158,788
Credit institutions 211,063 139,107 107,107
</TABLE>
Quality Ratings
At December 31, 1992 and 1993, and September 30, 1994, the distribution of
fixed maturities quality
ratings were as follows:
<TABLE>
<CAPTION>
December 31 September 30
1992 1993 1994
(unaudited)
<S> <C> <C> <C>
Class 1 74.8% 73.5% 71.0%
Class 2 17.2% 19.9% 21.2%
Class 3 5.4% 3.9% 5.3%
Class 4 1.8% 2.3% 2.0%
Class 5 0.1% 0.0% 0.2%
Class 6 0.7% 0.4% 0.3%
</TABLE>
Fixed maturities with a carrying value of $601.2 million, $517.9 million and
$645.2 million, at December 31, 1992 and 1993, and September 30, 1994,
respectively, were classified as below investment grade securities. The
Company classifies its below investment grade securities as those securities
rated "Class 3" or lower, as defined by the Securities Valuation Office of
the National Association of Insurance Commissioners. Securities rated "Class
3" or lower are generally rated "BB+" or "Ba-1"or below by external rating
agencies such as Standard & Poor's or Moody's Investors Service.
Financial Instruments
The Company has entered into various interest rate swap transactions to
reduce the impact of changing interest rates on certain fixed and
floating-rate investments and their potential effect on the credited rates
associated with the Company's policy liabilities. At December 31, 1992 and
1993, and September 30, 1994, a total of 12, 21 and 28 interest rate swap
agreements, respectively, were outstanding, primarily with major brokerage
firms. The Company is exposed to potential credit loss in the event of
nonperformance by the counterparty to the interest rate swap agreements only
with respect to the net differential payments.
F-16
<PAGE>
Under 6 interest rate swap agreements, as of December 31, 1992 and 1993, the
Company receives a fixed interest rate and pays a floating interest rate
based on the prevailing six month LIBOR rate at each reset date. Subject to
the agreements, as of September 30, 1994, the Company receives a floating
rate based on the ten year swap rate and pays a floating rate based on the
prevailing six month LIBOR. The total notional amount of these interest rate
swap agreements is $300 million. The agreements began in 1992 and terminate
in 1999. As of September 30, 1994, the weighted average floating rate the
Company receives is 6.28%, and the weighted average floating rate the Company
pays is 5.11%.
Under 20 interest rate swaps as of September 30, 1994 (6 and 14, as of
December 31, 1992 and 1993) the Company pays a fixed rate of interest and
receives a variable rate of interest based on the prevailing market rate for
five and ten year constant maturity treasury or swap rates at each reset
date. The total notional amount of these interest rate swap agreements at
December 31, 1992, 1993, and September 30, 1994, is $200 million, $475
million, and $775 million, respectively. The effective dates of these
agreements are early 1992 through late 1994 and mature in five years. As of
September 30, 1994, the weighted average floating rate the Company receives
is 7.31%, and the weighted average fixed rate the Company pays is 7.19%.
In March 1994, the Company entered into a one year, $50 million notional
current coupon mortgage swap. Under this agreement, the Company receives the
total return of a current coupon FNMA mortgage and pays the total return of a
7-year interest rate swap every 2 months.
In May 1993, the Company entered into a $150 million notional swap that is
designed to hedge the impact of increases in the seven year swap spread. The
agreement guarantees the value of a 7 year swap in which the Company would
pay 26 basis points over the 7.5% U.S. Treasury Note which matures on
November 15, 2001. The swap agreement terminates in January 1995, and the
gain or loss recognized will be amortized over 7 years.
During 1992, the Company unwound interest rate swap agreements with a total
notional amount of $300 million. The gain of $16.2 million was deferred and
amortized over the original remaining terms of the agreements. The
amortization periods expire in early 1996.
During 1993, the Company unwound interest rate swap agreements with a total
notional amount of $200 million. The swaps were unwound when the hedged
liabilities no longer existed. A loss of $16.2 million was incurred and was
recognized immediately.
The Company also acquires interest rate caps to minimize exposure to interest
rate fluctuations with respect to its liabilities. The Company receives
payments when the indexed rate exceeds the stated fixed rate. At December 31,
1992 and 1993, and at September 30, 1994, the Company had 5, 2 and 2 interest
rate cap agreements, respectively, with a total notional amount of $500
million, $200 million and $200 million, respectively. The interest rate caps
expire in 1997. During 1992, the Company sold 3 interest rate cap agreements
with a total notional amount of $600 million, resulting in a realized loss of
$4.4 million. During 1993, the Company sold 3 interest rate cap agreements
with a total notional amount of $300 million resulting in a realized loss of
$4.1 million and reduced the carrying value of the remaining caps by $2
million as a result of an other than temporary decline in value.
4. Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about Fair
Value of Financial Instruments", requires that the Company disclose estimated
fair values for its financial instruments. Fair value estimates, methods and
assumptions are set forth below. See Note 3 for estimated fair values of the
Company's investments in fixed maturities and equity securities.
(a) Mortgage Loans--For purposes of estimating fair value, mortgage loans are
segregated into commercial real estate loans and residential mortgages. The
fair value of commercial real estate
F-17
<PAGE>
loans is calculated by discounting scheduled cash flows through the stated
maturity using estimated market rates. The estimated market rate is based on
the five year prime mortgage rate. The fair value of the residential
mortgages is estimated by discounting contractual cash flows adjusted for
expected prepayments using an estimated discount rate. The discount rate is
an estimated market rate adjusted to reflect differences in servicing costs,
and the expected prepayments are estimated based upon Company experience.
4. Fair Value of Financial Instruments--(Continued)Mortgage loans are
summarized as follows ($ in thousands):
<TABLE>
<CAPTION>
December 31, 1992
Average Estimated Estimated
Carrying Historical Discount Fair
Value Yield Rate Value
<S> <C> <C> <C> <C>
Commercial real estate loans $100,000 9.4% 8.5% $101,152
Residential mortgages 59,388 12.0% 8.5% 66,531
</TABLE>
<TABLE>
<CAPTION>
December 31, 1993
Average Estimated Estimated
Carrying Historical Discount Fair
Value Yield Rate Value
<S> <C> <C> <C> <C>
Commercial real estate loans $100,000 9.4% 8.0% $102,015
Residential mortgages 55,972 12.0% 8.0% 63,402
</TABLE>
The weighted average maturities for the cash flows used in deriving the
estimated fair values for the commercial and residential mortgages are 2.7
years and 3.5 years, respectively, at December 31, 1992 and 2.3 years and 2.9
years, respectively, at December 31, 1993, and are different from the stated
maturities.
(b) Policy Loans--The carrying value of policy loans approximates fair value
at December 31, 1992 and 1993.
(c) Interest Rate Swap Agreements and Interest Rate Caps--The fair value of
interest rate swap agreements and interest rate caps are obtained from dealer
quotes. These values represent the estimated amounts the Company would
receive or pay to terminate the contracts or agreements, taking into account
current interest rates and, when appropriate, the current credit worthiness
of the counterparties.
The notional amount, carrying amount and fair value for interest rate swaps
and interest rate caps are as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1992 December 31, 1993
Notional Carrying Fair Notional Carrying Fair
Amount Value Value Amount Value Value
<S> <C> <C> <C> <C> <C> <C>
Interest rate swap agreements:
In a net receivable position $300,000 $ 4,104 $ 4,732 $300,000 $ 2,612 $ 3,319
In a net payable position 200,000 (366) (11,461) 475,000 (1,035) (4,078)
Interest rate caps purchased 500,000 10,875 3,740 200,000 2,552 935
</TABLE>
<TABLE>
<CAPTION>
September 30, 1994
Notional Carrying Fair
Amount Value Value
(unaudited)
<S> <C> <C> <C>
Interest rate swap agreements:
In a net receivable position $775,000 $1,422 $17,495
In a net payable position 350,000 (386) 6,302
Interest rate caps purchased 200,000 2,065 1,927
</TABLE>
F-18
<PAGE>
The amounts shown under carrying value represent net amounts due or owed on
the interest rate swap agreements and the amortized cost of the interest rate
caps.
(d) Policy Liabilities--The fair value of deposit liabilities with no stated
maturity is equal to the amount payable on demand. The Company considers its
policy liabilities to be similar to deposit liabilities.
The carrying value and estimated fair value of policy liabilities at December
31, 1992 were $8.6 billion and $8.2 billion, respectively. At December 31,
1993, the carrying value and estimated fair value of policy liabilities were
$8.7 billion and $8.2 billion, respectively.
5. Deferred Policy Acquisition Costs and Value of Insurance in Force
The amounts of policy acquisition costs deferred and amortized are summarized
below (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1991 1992 1993
<S> <C> <C> <C>
Balance, beginning of year $106,305 $154,150 $211,330
Policy acquisition costs deferred:
Commissions 53,329 64,963 81,515
Other 8,339 9,571 10,019
61,668 74,534 91,534
Amortization expense (13,823) (17,354) (40,218)
Balance, end of year $154,150 $211,330 $262,646
</TABLE>
The value of insurance in force is summarized below (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1991 1992 1993
<S> <C> <C> <C>
Balance, beginning of year $181,593 $148,270 $115,824
Amount acquired 7,522
Amortization expense (45,590) (41,118) (28,434)
Interest accrued on unamortized balance 12,267 8,672 6,124
Net amortization expense (33,323) (32,446) (22,310)
Balance, end of year $148,270 $115,824 $101,036
</TABLE>
The amount acquired in 1993 relates to the acquisition of a subsidiary on
October 1, 1993 that was deemed to be insignificant.
Interest is accrued on the unamortized balance at the contract rate of 7.73%,
6.79% and 6.01% for the years ended December 31, 1991, 1992 and 1993,
respectively.
Estimated net amortization expense of the value of insurance in force as of
December 31, 1993, is as follows (in thousands): 1994--$14,397;
1995--$12,363; 1996--$10,341; 1997--$8,908; 1998-- $8,019
thereafter--$47,008.
F-19
<PAGE>
6. Intangible Assets
Intangible assets are categorized as follows (in thousands):
<TABLE>
<CAPTION>
December 31
1992 1993
<S> <C> <C>
Customer lists $ 105,527 $ 105,527
Trade name 5,336 5,336
Excess of cost over net assets acquired 97,394 97,394
208,257 208,257
Less-accumulated amortization (158,071) (173,089)
$ 50,186 $ 35,168
</TABLE>
In 1992, the Company made a change in estimate of the useful lives of certain
intangible assets and recorded a charge in the fourth quarter of $21.0
million, or $2.33 per share. This charge was attributable to a decrease in
profitability of the assets acquired and was determined primarily by
comparing the present value of the expected gross profits attributable to the
intangible assets to the carrying value of the assets.
7. Income Taxes--(Continued)7. Income Taxes
The Company is included in the consolidated federal income tax return filed
by Liberty Mutual and calculates its consolidated income tax liability as if
it filed its own consolidated federal income tax return. (Keyport filed its
own federal income tax return through 1993, at which time it became eligible
for inclusion in Liberty Mutual's consolidated tax return. Accordingly,
through December 31, 1993, Keyport's liability for federal income taxes was
computed separately.)
The provision for incomes taxes, computed under the liability method, is
summarized as follows (in thousands):
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31 Ended September 30
1991 1992 1993 1993 1994
(unaudited)
<S> <C> <C> <C> <C> <C>
Current $21,400 $16,588 $25,322 $18,187 $21,482
Deferred (2,228) (7,245) 3,832 5,065 5,500
$19,172 $ 9,343 $29,154 $23,252 $26,982
</TABLE>
A reconciliation of the provision for income taxes in the accompanying
consolidated statements of operations with expected federal income tax
expense computed at the applicable federal income tax rate of 35% in 1993 and
1994 (34% for 1991 and 1992) is as follows (in thousands):
F-20
<PAGE>
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31 Ended September 30
1991 1992 1993 1993 1994
(unaudited)
<S> <C> <C> <C> <C> <C>
Expected income tax expense
(benefit) $13,626 $(1,085) $21,152 $22,610 $26,583
Increase (reduction) in
income taxes resulting
from:
Nontaxable investment income (2,357) (2,230) (2,189) (1,653) (1,533)
Unrecognized benefit of
future tax deductions 7,036 11,760 9,195 1,658 1,052
Amortization of goodwill 385 385 396 297 297
Other, net 482 513 600 340 583
Income tax expense $19,172 $ 9,343 $29,154 $23,252 $26,982
</TABLE>
In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted.
This law increased the Company's top marginal income tax rate to 35% from 34%
retroactive to January 1, 1993. The effect of this change in tax rates on the
Company's consolidated financial statements was not material.
The components of deferred federal income taxes are as follows (in
thousands):
<TABLE>
<CAPTION>
December 31 September 30
1992 1993 1994
(unaudited)
<S> <C> <C> <C>
Deferred tax assets:
Policy liabilities $ 110,809 $ 120,296 $ 125,547
Excess of tax over book basis of investments -- -- 46,801
Guaranty fund expense 9,594 8,592 9,529
Deferred gain on interest rate swaps 5,118 3,616 2,377
Net operating loss carryforwards relating to
insurance operations -- 3,941 3,573
Other 1,363 -- --
Total deferred tax assets 126,884 136,445 187,827
Deferred tax liabilities:
Deferred policy acquisition costs (63,682) (80,062) (116,938)
Value of insurance in force and intangible
assets (12,204) (14,485) (27,900)
Excess of book over tax basis of investments (31,539) (20,991)
Other -- (140) (6,467)
Total deferred tax liabilities (107,425) (115,678) (151,305)
Net deferred tax asset $ 19,459 $ 20,767 $ 36,522
</TABLE>
As of December 31, 1993, the Company had net operating loss carryforwards of
approximately $59.4 million and other deferred tax assets of $4.1 million
relating to deferred compensation in the Company's non-insurance operations
for which no financial statement benefit has been recognized. Utilization of
these deferred tax assets is limited to use in these non-insurance
operations. Benefit relating to these operating loss carryforwards, which
expire through 2007, has not been reflected in the Company's consolidated
financial statements because of the provisions in the Internal Revenue Code
which limit their utilization.
F-21
<PAGE>
As of December 31, 1993, the Company had purchased net operating loss
carryforwards (relating to an acquisition in its insurance operations on
October 1, 1993) of approximately $11.5 million. Utilization of these net
operating losses, which expire through 2006, is limited to use against future
profits in a segment of the Company's insurance operations.
The Company believes that it is more likely than not that the Company will
realize the benefits of the total deferred tax assets and, accordingly,
believes that a valuation allowance with respect to the realization of the
total deferred tax assets is not necessary. While there are no assurances
that this benefit will be realized, the Company expects that the net
deductible amount will be recoverable through the reversal of taxable
temporary differences, taxes paid in the carryback period, tax planning
strategies and future expectations of taxable income.
Income taxes paid were $18.6 million, $21.2 million, $18.3 million and $22.5
million in 1991, 1992, 1993, and for the nine months ended September 30,
1994, respectively. These tax payments are primarily attributable to Keyport.
8. Retirement Plans
On March 11, 1992, the Company's Board of Directors approved the adoption of
a noncontributory defined benefit plan covering substantially all of its and
its subsidiaries' employees (except employees of Stein Roe & Farnham
Incorporated, who participate in Stein Roe's separate defined contribution
plan). Effective July 1, 1992, the Retirement Plan for Employees of Keyport
Life Insurance Company was amended and restated to reflect a new formula and
to comply with the Tax Reform Act of 1986. In addition, the restated plan
extended participation to certain employees of Liberty Financial Companies,
Inc. and was renamed the Liberty Financial Companies, Inc. Pension Plan (the
"Plan").
Under the Plan, all employees are vested after five years of service.
Benefits are based on years of service, the employee's average pay for the
highest five consecutive years during the last ten years of employment and
the employee's estimated social security retirement benefit. The Company's
funding policy is to contribute the minimum amount required under the
Employee Retirement Income Security Act of 1974. The Company may, from time
to time, increase its employer contributions beyond the minimum amount, but
within IRS guidelines. Changes in prior service costs are amortized over the
expected future service periods of active participants expected to receive
benefits under the Plan as of the date such costs are first recognized.
Cumulative net actuarial gains and losses in excess of a corridor amount are
amortized over the expected future service periods of active participants
expected to receive benefits under the Plan.
The following table sets forth the Plan's funded status and the amounts
recorded in the Company's consolidated balance sheets. Substantially all the
Plan's assets are invested in mutual funds sponsored by the Company.
<TABLE>
<CAPTION>
December 31
1992 1993
<S> <C> <C>
Actuarial present value of benefit obligations (in
thousands):
Accumulated benefit obligation, including vested benefits
of $5,395 and $8,623 $ 7,666 $11,090
Projected benefit obligation for service to date $10,759 $15,080
Plan assets at fair value (3,586) (5,951)
Projected benefit obligation in excess of Plan assets 7,173 9,129
Unrecognized net actuarial loss (541) (2,815)
Prior service cost not yet recognized in net periodic
pension cost (5,018) (4,535)
Adjustment for minimum liability 2,466 3,360
Accrued pension cost $ 4,080 $ 5,139
</TABLE>
F-22
<PAGE>
8. Retirement Plans--(Continued)Pension cost includes the following
components (in thousands):
<TABLE>
<CAPTION>
Year Ended December 31
1991 1992 1993
<S> <C> <C> <C>
Service-cost benefits earned during the period $ 483 $ 939 $1,272
Interest cost on projected benefit obligation 321 578 987
Actual return on Plan assets (155) (117) (222)
Net amortization and deferred amounts (45) 108 368
Net periodic pension cost $ 604 $1,508 $2,405
</TABLE>
The assumptions used to develop the actuarial present value of the
projected benefit obligation, and the expected long-term rate of return on
Plan assets are as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1991 1992 1993
<S> <C> <C> <C>
Discount rate 8.5% 8.0% 7.25%
Rate of increase in compensation level 5.5% 5.5% 5.25%
Expected long-term rate of return on assets 8.5% 8.5% 8.50%
</TABLE>
Certain subsidiaries of the Company have defined contribution plans which
cover substantially all their full-time employees. Contributions are
generally based on employee compensation. Employees vest over periods of four
to seven years following employee eligibility. Contributions to these plans
(in thousands), which are funded currently, amounted to $2,434, $2,952 and
$3,018 in 1991, 1992, and 1993, respectively.
9. Stock Option Plan
The Company adopted the Liberty Financial Companies, Inc. 1990 Stock Option
Plan (the "Option Plan") on November 15, 1990 under which either qualified or
non-qualified options may be granted to officers or key employees to purchase
up to 1,000,000 shares of Common Stock. The options are granted at a price
not less than the fair market value of the stock as of the most recent
valuation date. The fair market value of such Common Stock is determined
annually as of December 31 in accordance with a formula contained in the
plan. For 1993, the Board of Directors revised the method of calculating such
formula value from an earnings-based formula to one based upon the book value
per share of the Company's common stock, as adjusted for prior stock option
plan compensation expense.
Options granted under the Option Plan become exercisable one year after date
of grant, vest over four years and expire ten years after the grant date. In
addition, the Option Plan provides that the optionholders may surrender the
option and receive in cash an amount equal to the difference between the then
applicable formula value of the underlying stock and the option grant price.
The Company recognizes compensation expense for changes in option value since
the grant date over the vesting period of the optionholders. Compensation
expense was $189,000, $36,000 and $22.1 million in 1991, 1992 and 1993,
respectively. The increased charge in 1993 was attributable to the change in
the method of determination of formula value of the Company's common stock.
The grant or exercise of options does not result in a charge to earnings.
However, earnings are charged for the total annual increase in formula value
attributable to all outstanding options. When non- qualified options are
exercised, the Company derives a tax deduction in the amount of the excess of
the fair value over the option price of the underlying stock.
F-23
<PAGE>
9. Stock Option Plan--(Continued)
Options under the Company's Option Plan are summarized below:
<TABLE>
<CAPTION>
December 31 September 30,
1991 1992 1993 1994
(unaudited)
<S> <C> <C> <C> <C>
Outstanding, beginning of year 395,952 387,110 582,543 685,656
Granted 38,826 199,900 180,500 92,000
Canceled (47,668) (4,467) (77,387) (84,451)
Outstanding, end of year 387,110 582,543 685,656 693,205
Available for grant 612,890 417,457 314,344 305,795
Exercisable 88,021 201,565 304,912 323,890
</TABLE>
Options were granted at $34.68, $34.56 and $34.46 per share, respectively in
1991, 1992 and 1993. At December 31, 1991, 1992 and 1993, the weighted
average price per share of outstanding options was $33.68, $33.98 and $34.09,
respectively.
10. Stockholder's Equity
Dividend payments to the Company from Keyport are governed by insurance laws
which restrict the maximum amount of dividends that may be paid without prior
approval of the Insurance Commissioner of the State of Rhode Island. As of
December 31, 1993, the maximum amount of dividends (based on statutory
surplus and statutory net gains from operations) which may be paid by Keyport
was approximately $51.7 million.
11. Industry Segment Information
The Company's operations are classified in two business segments: insurance
operations and asset management. Insurance operations relate principally to
the issuance of fixed and variable annuity products and investment-oriented
life insurance products. Asset management includes investment counseling,
institutional asset management and mutual fund management services.
Information by industry segment for 1991, 1992 and 1993 is shown below (in
thousands).
<TABLE>
<CAPTION>
Year Ended December 31
1991 1992 1993
<S> <C> <C> <C>
Statement of Operations Data
Revenues:
Insurance operations $747,164 $752,028 $743,093
Asset management:
Unaffiliated 94,585 114,878 130,157
Intersegment 18,361 22,480 22,986
Total asset management 112,946 137,358 153,143
Other operations and corporate 840 2,063 1,501
Intercompany eliminations (13,301) (16,939) (17,344)
Total $847,649 $874,510 $880,393
F-24
<PAGE>
Year Ended December 31
1991 1992 1993
Income (loss) before income taxes:
Insurance operations:
Income before amortization of intangible assets
and guaranty fund provision $ 64,891 $ 60,402 $ 84,839
Amortization of intangible assets (4,820) (2,130) (1,406)
Guaranty fund provision -- (28,217) --
Subtotal insurance operations 60,071 30,055 83,433
Asset management:
Income before amortization of intangible assets 7,777 14,281 22,636
Amortization of intangible assets (20,524) (39,899) (13,376)
Subtotal asset management (12,747) (25,618) 9,260
Other operations and corporate:
Income before amortization of intangible assets (7,011) (7,391) (32,023)
Amortization of intangible assets (236) (236) (236)
Subtotal other operations (7,247) (7,627) (32,259)
Total $ 40,077 $ (3,190) $ 60,434
</TABLE>
11. Industry Segment Information--(Continued)
<TABLE>
<CAPTION>
Year Ended December 31
1991 1992 1993
<S> <C> <C> <C>
Identifiable Assets
Insurance operations $8,839,110 $9,708,145 $10,227,327
Asset management 111,841 76,812 86,295
Other operations and corporate 14,119 21,985 19,850
Intercompany eliminations (10,659) (8,607) (8,478)
Total $8,954,411 $9,798,335 $10,324,994
</TABLE>
12. Quarterly Financial Data, in thousands, except per share amounts
(unaudited)
<TABLE>
<CAPTION>
Quarter Ended
1991 March 31 June 30 September 30 December 31
<S> <C> <C> <C> <C>
Revenues, including realized investment gains
(losses) $200,514 $205,455 $213,595 $228,085
Realized investment gains (losses) (953) (4,619) (1,646) 15,839
Income before income taxes 7,412 3,598 4,896 24,171
Net income 3,617 1,248 2,074 13,966
Net income per share .40 .14 .23 1.55
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
September
1992 March 31 June 30 30((1)) December 31((2))
<S> <C> <C> <C> <C>
Revenues, including realized investment gains
(losses) $215,833 $212,592 $211,015 $235,070
Realized investment gains (losses) (1,476) 1,605 (10,277) 13,592
Income (loss) before income taxes 6,208 7,104 (21,625) 5,123
Net income (loss) 3,683 3,867 (14,577) (5,506)
Net income (loss) per share .41 .43 (1.62) (.61)
</TABLE>
F-25
<PAGE>
12. Quarterly Financial Data, in thousands, except per share amounts
(unaudited)--(Continued)
<TABLE>
<CAPTION>
Quarter Ended
1993 March 31 June 30 September 30 December 31((3))
<S> <C> <C> <C> <C>
Revenues, including realized investment gains
(losses) $217,461 $230,042 $218,095 $214,795
Realized investment gains (losses) 3,317 14,080 (5,776) (1,068)
Income (loss) before income taxes 22,664 28,756 13,180 (4,166)
Net income (loss) 14,597 18,526 8,225 (10,068)
Net income (loss) per share 1.56 1.98 .88 (1.08)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
1994 March 31 June 30 September 30
<S> <C> <C> <C>
Revenues, including realized investment gains
(losses) $227,334 $220,298 $218,739
Realized investment gains (losses) 4,700 (3,318) 1,528
Income before income taxes 30,482 23,653 21,816
Net income 21,115 14,755 13,099
Net income per share 2.25 1.58 1.40
</TABLE>
12. Quarterly Financial Data, in thousands, except per share amounts
(unaudited)
((1)) Includes a provision for anticipated guaranty fund assessments of $28.2
million in the Company's insurance operations.
((2)) Includes a $21.0 million charge in the Company's asset management
operations arising from a change in estimate of the carrying value of certain
intangible assets.
((3)) Includes an $18.8 million charge for compensation expense relating to
the Company's Stock Option Plan arising from a change in estimate of the
underlying fair value of the Company's common sock.
13. Statutory Information
Accounting practices used to prepare statutory financial statements for
regulatory filings of stock life insurance companies differ from GAAP. In
converting to GAAP, adjustments to Keyport's statutory amounts include: the
deferral and amortization of the costs of acquiring new policies, such as
commissions and other issue costs; the deferral of federal income taxes; the
recognition as revenues of premiums for investment-type products for
statutory purposes but as deposits to policyholders' accounts under GAAP. In
addition, different assumptions are used in calculating future policyholders'
benefits; different methods are used for calculating valuation allowances for
statutory and GAAP purposes; and, realized gains and losses on fixed income
investments due to interest rate changes are not deferred for GAAP.
<TABLE>
<CAPTION>
Year Ended December 31
1991 1992 1993
<S> <C> <C> <C>
Statutory surplus $323,818 $377,654 $517,181
Statutory net income 69,054 59,623 65,312
</TABLE>
F-26
<PAGE>
14. Transactions with Affiliated Companies
Liberty Mutual from time to time provides management, legal, audit and
financial services to the Company. Reimbursements to Liberty Mutual for these
services totaled approximately $1.4 million, $1.6 million, and $1.6 million
in 1991, 1992, and 1993, respectively. These reimbursements are based on
direct and indirect costs incurred by Liberty Mutual and are allocated to the
Company primarily based upon the amount of time spent by Liberty Mutual's
employees on the Company's behalf. The Company believes that this allocation
methodology is reasonable, and that such amounts do not differ materially
from the amounts which would have been incurred on a stand-alone basis.
The Company provides asset management services to real estate limited
partnerships for which an affiliate of Liberty Mutual serves as the general
partner. An affiliate of Liberty Mutual paid the Company fees for such
services which totaled approximately $6.3 million, $6.1 million, and $6.1
million in 1991, 1992 and 1993, respectively.
Liberty Mutual contributed to the Company a total of $144.2 million in cash
during 1991 and 1992 which was applied primarily to increase Keyport's
capital and to acquire the remaining interests in Stein Roe which the Company
did not previously own.
In 1991 and 1992, Keyport acquired mortgage notes in the aggregate principal
amount of approximately $95.7 million and $4.3 million, respectively, on
properties owned by certain indirect subsidiaries of Liberty Mutual. The
notes were purchased for their face value. Liberty Mutual has agreed to
provide credit support to the obligors under these notes with respect to
certain payments of principal and interest thereon. As of September 30, 1994,
the amount outstanding was $87.0 million.
On December 29, 1993, the Company issued a promissory note in the amount of
$75.0 million to an affiliate of Liberty Mutual. This note bears interest at
a variable rate of interest based upon Liberty Mutual's short-term borrowing
rate which, at December 31, 1993, was 4.17%. This borrowing, whose proceeds
were contributed to the capital of Keyport, was due and payable on March 31,
1994. At that date, the note was extended to December 30, 1994.
15. Commitments and Contingencies
The Company leases data processing equipment, furniture and certain office
facilities from others under operating leases expiring in various years
through 2008. Rental expense (in thousands) amounted to $8,760, $9,615 and
$10,238 for the years ended December 31, 1991, 1992 and 1993, respectively.
For each of the next five years, and in the aggregate, as of December 31,
1993, the following are the minimum future rental payments under
noncancellable operating leases having remaining terms in excess of one year
(in thousands):
<TABLE>
<CAPTION>
Year Payments
<S> <C>
1994 $ 8,319
1995 8,336
1996 7,946
1997 7,408
1998 7,181
Thereafter 35,087
</TABLE>
Under existing guaranty fund laws in all states, insurers licensed to do
business in those states can be assessed for certain obligations of insolvent
insurance companies to policyholders and claimants. The actual amount of such
assessments will depend upon the final outcome of rehabilitation proceedings
and will be paid over several years. In 1991, 1992 and 1993, Keyport was
assessed $2.1 million, $6.2 million, and $7.3 million, respectively. However,
based in part on information provided by an industry association, Keyport
increased its reserves in 1992 by $28.2 million, reflecting Keyport's
estimate of the
F-27
<PAGE>
future assessments with respect to known insolvencies. During 1991, 1992 and
1993, Keyport recorded $3.2 million, $35 million (which includes the $28.2
million reserve referred to above), and $3.7 million, respectively, of
provisions for state guaranty fund association expenses.
Based on information recently provided by the industry association with
respect to aggregate assessments related to known insolvencies, the range of
future assessments with respect to known insolvencies is estimated by Keyport
to be between $19.0 million and $28.0 million, taking into account the
industry association information as well as Keyport's own estimate of its
potential share of such aggregate assessments. At September 30, 1994, the
reserve for such assessments was $27.2 million.
The Company is involved, from to time to time, in litigation incidental to
its business. In the opinion of management, the resolution of such litigation
is not expected to have a material adverse effect on the Company.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New LFC, Inc.
We have audited the accompanying balance sheet of New LFC, Inc. as of January
26, 1995. This balance sheet is the responsibility of the Company's
management. Our responsibility is to express an opinion on this balance sheet
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit of a balance sheet includes examining, on a
test basis, evidence supporting the amounts and disclosures in that balance
sheet. An audit of a balance sheet also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall balance sheet presentation. We believe that our audit
of the balance sheet provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly in all
material respects, the financial position of New LFC, Inc. as of January 26,
1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Boston, Massachusetts
January 27, 1995
F-29
<PAGE>
See accompanying notes to balance sheet.NEW LFC, INC.
BALANCE SHEET
January 26, 1995
<TABLE>
<CAPTION>
<S> <C>
Assets:
Cash $1,000
$1,000
Stockholder's Equity:
Common stock, $.01 par value, 200,000 shares authorized; 1,000 shares
issued and outstanding $ 10
Additional paid-in capital 990
$1,000
</TABLE>
F-30
<PAGE>
NEW LFC, INC.
NOTES TO BALANCE SHEET
1. Organization and Basis of Presentation
New LFC, Inc. ("New LFC") was incorporated under the laws of the Commonwealth
of Massachusetts on January 26, 1995 for the purpose of effectuating the
merger of Liberty Financial Companies, Inc. (the "Company") and The Colonial
Group, Inc. in accordance with the terms of the Agreement and Plan of Merger,
dated October 12, 1994, as amended and restated.
New LFC is a wholly-owned subsidiary of the Company and will remain inactive
until immediately prior to the Effective Time of the Merger. Immediately
prior to such Effective Time, the Company will contribute to New LFC all of
its assets (other than certain excluded assets) in exchange for additional
New LFC Common Stock and the assumption by New LFC of certain liabilities of
the Company. This transfer of assets and liabilities will be recorded at
historical cost and will be accounted for as if it were a
pooling-of-interests. The accompanying balance sheet was prepared in
accordance with generally accepted accounting principles.
2. Stockholder's Equity
The authorized capital stock of New LFC consists of 200,000 shares of Common
Stock, $.01 par value.
F-31
<PAGE>
APPENDIX I
FORM OF
AMENDMENT AND RESTATEMENT
dated February 8, 1995
OF THE
AGREEMENT AND PLAN OF MERGER
dated as of October 12, 1994
Among
LIBERTY FINANCIAL COMPANIES, INC.
(to be renamed "LFC HOLDINGS, INC."),
NEW LFC, INC.
(to be renamed "LIBERTY FINANCIAL COMPANIES, INC."),
APPLE MERGER CORPORATION
AND
THE COLONIAL GROUP, INC.
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AMENDMENT AND RESTATEMENT
DATED FEBRUARY 8, 1995
OF THE
AGREEMENT AND PLAN OF MERGER
DATED AS OF OCTOBER 12, 1994
AMONG
LIBERTY FINANCIAL COMPANIES, INC.,
A MASSACHUSETTS CORPORATION ("PARENT"),
(to be renamed "LFC HOLDINGS, INC.")
NEW LFC INC.
A MASSACHUSETTS CORPORATION AND
A WHOLLY-OWNED SUBSIDIARY OF
PARENT ("LFC")
(to be renamed "LIBERTY FINANCIAL COMPANIES, INC."),
APPLE MERGER CORPORATION,
A MASSACHUSETTS CORPORATION AND A WHOLLY OWNED SUBSIDIARY OF
LFC ("SUB"),
AND
THE COLONIAL GROUP, INC.,
A MASSACHUSETTS CORPORATION (THE "COMPANY").
WHEREAS, as of October 12, 1994 Parent, Liberty Apple Corporation (under its
former name "Apple Merger Corporation") ("LAC") and the Company executed and
delivered an Agreement and Plan of Merger (as amended by Amendment No. 1
thereto dated October 24, 1994, the "Original Agreement"), pursuant to which
the Company was to be merged with and into LAC and LAC was to remain a
wholly- owned direct subsidiary of Parent;
WHEREAS, Parent and the Company desire to revise the structure of the
transactions contemplated by the Original Agreement (such revised structure
to include that LAC shall cease to be a party to this Agreement and that each
of LFC and Sub shall become a party to this Agreement) so that Sub shall be
merged with and into the Company and the Company shall become and remain a
wholly owned direct subsidiary of LFC (the "Merger");
WHEREAS, immediately prior to the Merger, Parent will contribute to LFC all
of its assets (other than the Excluded Assets, as such term is defined in
this Agreement) and LFC will assume the Assumed Liabilities (as such term is
defined in this Agreement);
WHEREAS, immediately prior to the Merger, Parent will change its name to "LFC
Holdings, Inc.," and LFC will change its name to "Liberty Financial
Companies, Inc";
WHEREAS, in connection with the foregoing, Parent, LFC, Sub and the Company
desire that the Original Agreement be amended and, as so amended, restated in
its entirety in the form of this Agreement; and
WHEREAS, Parent, LFC, Sub and the Company desire to make certain
representations, warranties, covenants and agreements in connection with the
Merger and also to prescribe various conditions to the Merger;
NOW, THEREFORE, in consideration of the representations, warranties,
covenants and agreements contained in this Agreement, the parties agree as
follows:
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ARTICLE I
THE MERGER
Section 1.1. The Merger. Upon the terms and subject to the conditions set
forth in this Agreement, and in accordance with the Massachusetts Business
Corporation Law (the "MBCL"), Sub shall be merged with and into the Company
at the Effective Time (as hereinafter defined). Upon the Effective Time, the
separate existence of Sub shall cease, and Company shall continue as the
surviving corporation (the "Surviving Corporation"). The purposes of the
Surviving Corporation are to conduct the businesses theretofore conducted by
the Company, and to conduct such other lawful business activities which from
time to time may be carried on by a corporation organized under the MBCL
(whether not related to those referred to above), all as specified in the
articles of organization of the Surviving Corporation.
Section 1.2. Closing. Unless this Agreement shall have been terminated and
the transactions herein contemplated shall have been abandoned pursuant to
Section 7.1, and subject to the satisfaction or waiver of the conditions set
forth in Article VI, the closing of the Merger (the "Closing") will take
place at 1:00 p.m. on the fourth business day following the date on which the
last to be fulfilled or waived of the conditions set forth in Section 6.1,
subsection (c) of Section 6.2 and subsections (c) through (e) of Section 6.3
shall be fulfilled or waived in accordance with this Agreement (the "Closing
Date"), at the offices of Choate, Hall & Stewart, 53 State Street, Boston,
Massachusetts, unless another date, time or place is agreed to in writing by
the parties hereto.
Section 1.3. Effective Time.
(a) Filings. The parties hereto will file with the Secretary of State of
the Commonwealth of Massachusetts (the "Massachusetts Secretary of State") on
the date of the Closing (or on such other date as LFC and the Company may
agree) duly prepared and executed articles of merger in accordance with the
relevant provisions of the MBCL. The Merger shall become effective upon the
filing of the articles of merger with the Massachusetts Secretary of State or
at such later time as is specified in the articles of merger (the "Effective
Time").
(b) Capital Structure. As of the date hereof, the authorized capital
stock of Parent consists of 10,000,000 shares of Class A Common Stock, par
value $.01 per share ("Parent Class A Common Stock"), 1,000,000 shares of
Class B Common Stock, par value $.01 per share ("Parent Class B Common
Stock;" together with the Parent Class A Common Stock, the "Parent Common
Stock"), and 1,000,000 shares of preferred stock, $.01 par value ("Parent
Preferred Stock"). Nine million shares of Parent Class A Common Stock held by
Liberty Mutual Equity Corporation ("LMEC"), a wholly owned subsidiary of
Liberty Mutual Insurance Company ("Liberty Mutual"), an aggregate of 1,300
shares of Parent Class B Common Stock held by two individuals and no shares
of Parent Preferred Stock are issued and outstanding as of the date hereof.
As of the date hereof, the authorized capital stock of LFC consists of
200,000 shares of common stock, $.01 par value. One thousand of such shares
are issued and outstanding, all of which are held by Parent. Immediately
prior to the Effective Time, LFC will amend and restate its Articles of
Organization by filing and causing to become effective with the Massachusetts
Secretary of State Amended and Restated Articles of Organization
substantially in the form of Exhibit A hereto. The effects of the amendments
to LFC's Articles of Organization made thereby will include, inter alia, that
the authorized capital stock of LFC shall be changed to become 100,000,000
shares of Common Stock, $.01 par value ("New Common Stock"), and 10,000,000
shares of preferred stock, $.01 par value. Thereafter, but prior to the
Effective Time, LFC will file and cause to become effective with the
Massachusetts Secretary of State pursuant to Section 26 of the MBCL a
certificate of designation in substantially the form of Exhibit B hereto
providing the preferences, voting powers, qualifications, special and
relative rights and privileges and other terms of the LFC's Series A
Convertible Preferred Stock, $.01 par value ("New Preferred Stock").
(c) Parent Contribution. Immediately prior to the Effective Time, Parent
shall contribute all of its assets (other than the Excluded Assets, as
defined below) to LFC in return for 22,812,200 additional shares of New
Common Stock and the assumption by LFC of all of Parent's liabilities
(including, without limitation, all unknown, contingent or otherwise inchoate
liabilities) in existence immediately prior to such contribution (the
"Assumed Liabilities"). "Excluded Assets" shall mean (i) the SSI Note and
(ii)
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the 1,000 shares of LFC's issued and outstanding common stock held by Parent
on the date hereof. "SSI Note" shall mean the promissory note of SteinRoe
Services, Inc., a Massachusetts corporation and a direct wholly-owned
subsidiary of Parent, in the principal amount of $30,000,000, bearing
interest, payable semi-annually, at 8.0% per annum and due (without scheduled
mandatory prepayments) on March 31, 2000. Such contribution, and the
assumption by LFC in connection therewith of the Assumed Liabilities
(including, without limitation, the liabilities and obligations of Parent
pertaining to Parent's stock option and other benefit plans), is hereinafter
referred to as the "Parent Contribution." It is intended that the Parent
Contribution, together with the exchange of stock by stockholders of the
Company pursuant to the Merger shall constitute an integrated transaction
consisting of a transfer of property in exchange for stock described in
Section 351 of the Internal Revenue Code of 1986, as amended (the "Code"). At
the Effective Time, LFC shall exchange with each holder of Parent Class B
Common Stock as of the date hereof, as part of such integrated transaction,
2.5348 shares of New Common Stock for each share of Parent Class B Common
Stock held by such holder (with any fractional share otherwise issuable in
such exchange being eliminated for cash at a rate of $40.00 per share of New
Common Stock).
Section 1.4. Effects of the Merger. The Merger shall have the effects set
forth in Section 80 of the MBCL. Without limiting the generality of the
foregoing, and subject to the MBCL, at the Effective Time, all the
properties, rights, privileges, powers and franchises of the Company and Sub
shall vest in the Surviving Corporation, and all debts, liabilities and
duties of the Company and Sub shall become the debts, liabilities and duties
of the Surviving Corporation.
Section 1.5. Articles of Organization; By-laws.
(a) A complete and correct copy of the Articles of Organization of Sub,
as in effect on the date of this Agreement, have been delivered to the
Company, and the same (except for retention of the Company's existing name,
"The Colonial Group, Inc.," to be effected by the filing of the articles of
merger) shall be the Articles of Organization of the Surviving Corporation
from and after the Effective Time until thereafter changed or amended as
provided therein or by applicable law.
(b) A complete and correct copy of the By-laws of Sub, as in effect on
the date of this Agreement, have been delivered to the Company, and the same
(reflecting the retention of the Company's existing name) shall be the
By-Laws of the Surviving Corporation from and after the Effective Time until
thereafter changed or amended as provided therein or by applicable law.
Section 1.6. Directors. The directors of the Surviving Corporation from and
after the Effective Time shall be seven individuals, consisting of John A.
McNeice, Jr., C. Herbert Emilson, Harold W. Cogger and four other individuals
designated by LFC prior to the Closing Date, each of whom shall serve until
the earlier of his resignation or removal or until his successor is duly
elected and qualified, as the case may be.
Section 1.7. Officers. The officers of the Surviving Corporation from and
after the Effective Time shall be those individuals who are the officers of
the Company immediately prior to the Effective Time, who shall hold the
respective offices of the Surviving Corporation as such individuals
immediately theretofore held of the Company (except that Harold W. Cogger
shall thereupon become President and Chief Executive Officer of the Surviving
Corporation in lieu of John A. McNeice, Jr., and that Davey S. Scoon shall
thereupon become Executive Vice President and Chief Operating Officer, and
Arthur O. Stern shall become Executive Vice President--Legal and Compliance,
of the Surviving Corporation), and who shall serve until the earlier of their
resignation or removal or until their respective successors are duly elected
and qualified, as the case may be.
ARTICLE II
EFFECT OF THE MERGER ON THE SECURITIES
OF THE CONSTITUENT CORPORATIONS
Section 2.1. Effect on Capital Stock. As of the Effective Time, by virtue of
the Merger and without any action on the part of (i) the holders of any
shares of the Company's Class A Common Stock, par
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value $.10 per share ("Company Class A Common Stock"), and the Company's
Class B Common Stock par value $.10 per share ("Company Class B Common
Stock;" together with the Company Class A Common Stock, the "Common Stock"),
or any other shares of capital stock of the Company, or (ii) the holders of
any shares of capital stock of Sub, all issued and outstanding shares of
capital stock of the Company and Sub shall be converted or canceled, as the
case may be, as follows:
(a) Authorized Stock of Surviving Corporation; Exchange of Common Stock
of Sub. The total number of shares which the Surviving Corporation shall be
authorized to issue is 1,000 shares of common stock, $.01 par value. Each
share of common stock of Sub issued and outstanding immediately prior to the
Effective Time shall be converted into and become one validly issued, fully
paid and nonassessable share of common stock, par value $.01 per share, of
the Surviving Corporation.
(b) Cancellation of Treasury Stock and Parent-Owned Common Stock. Each
share of Common Stock issued and outstanding immediately prior to the
Effective Time that is owned by the Company or by any subsidiary of the
Company or by Parent, LFC, Sub or any other subsidiary of Parent (other than
shares in trust accounts (including, but not limited to, an employee stock
ownership trust or plan), managed accounts, custodial accounts and the like
that are beneficially owned by third parties and shares held in the ordinary
course of business by subsidiaries of the Company or Parent that are
insurance companies or broker-dealers) shall automatically be canceled and
retired and shall cease to exist, and no cash or other consideration shall be
delivered or deliverable in exchange therefor.
(c) Conversion of Common Stock.
(I) Subject to the next following sentence, each share of Common
Stock issued and outstanding immediately prior to the Effective Time (other
than shares to be canceled in accordance with Section 2.1(b) and other than
Dissenting Common Shares (as defined in Section 2.1(d)) shall be converted
into the right to receive one validly issued, fully paid and non-assessable
share of New Common Stock. Each holder of shares of Common Stock will receive
shares of New Common Stock, as set forth above, unless and to the extent such
shareholder affirmatively elects in accordance with the procedures set forth
below, instead of New Common Stock, the right to receive either:
(i) $40.00 in cash for each share of Common Stock held by such
shareholder (the aggregate amount of all such cash paid, the "Cash
Consideration"); or
(ii) 0.77 validly issued, fully paid and non-assessable shares of New
Preferred Stock, for each share of Common Stock held by such shareholder.
In the event that no holder of Common Stock elects either option set forth
above, then the maximum number of shares of New Common Stock issuable to
holders of Common Stock would be an amount equal to the sum of (i) 7,354,863
plus (i) the amount of shares of Common Stock issued from and after the date
of the Original Agreement in accordance with Section 4.1(a)(ii).
(II) The Company will send to each holder of Common Stock on the record
date for the Stockholders Meeting (as hereinafter defined) a letter of
transmittal and an election form (collectively, the "Election Form") and
other appropriate materials which shall offer to the holder the opportunity
to make the election to receive Cash Consideration or New Preferred Stock. An
election by a holder of shares of Common Stock to receive the Cash
Consideration or the New Preferred Stock shall have been duly made only if
the Paying Agent (as hereinafter defined) shall have received by 5:00 p.m.,
New York City time, on the day which is two business days prior to the
Stockholders Meeting (the "Election Deadline"), an Election Form properly
completed and duly executed by such holder (with the signature or signatures
thereon guaranteed if required by the Election Form) accompanied either by
the certificate or certificates representing all of the Common Stock covered
by such Election Form, duly endorsed or otherwise acceptable for transfer on
the books of the Company, or by an appropriate guaranty of delivery of such
certificate or certificates in the form customarily used in transactions of
this nature from a member of a registered national securities exchange or a
member of the National Association of Securities Dealers, Inc. or a
commercial bank or trust company in the United States (provided such
certificate is or certificates are in fact delivered by the time set forth in
such guaranty of delivery). Reference is made to paragraph VII of this
Section 2.1(c), pertaining to an additional election available to holders who
elect
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to receive New Preferred Stock. LFC shall have the right to make reasonable
determinations and to establish reasonable procedures (not inconsistent with
the terms of this Agreement) in guiding the Paying Agent in its determination
as to the validity of Election Forms and of any revisions, revocation or
withdrawal thereof.
(III) Two or more holders of Common Stock who are determined to own
constructively the Common Stock owned by each other by virtue of Section
318(a) of the Code and who so certify to the LFC's satisfaction, and any
single holder of Common Stock who holds his or her Common Stock in two or
more different names and who so certifies to the Parent's satisfaction, may
submit a joint Election Form covering the aggregate Common Stock owned by all
such holders or by such single holder, as the case may be. For all purposes
of this Agreement, each such group of holders which, and each such single
holder who, submits a joint Election Form shall be treated as a single holder
of Common Stock.
(IV) Record holders of Common Stock who are nominees only may submit a
separate Election Form for each beneficial owner for whom such record holder
is a nominee; provided, however, that at the request of the LFC, such record
holder shall certify to the satisfaction of the LFC that such record holder
holds such Common Stock as nominee for the beneficial owner thereof. For
purposes of this Agreement, each beneficial owner for which an Election Form
is submitted will be treated as a separate holder of Common Stock, subject,
however, to the immediately preceding paragraph (III) dealing with joint
Election Forms.
(V) Any holder of Common Stock who has made an election by submitting
an Election Form to the Paying Agent may at any time prior to the Election
Deadline change such holder's election by submitting a revised Election Form,
properly completed and duly executed, that is received by the Paying Agent
prior to the Election Deadline. Any holder of Common Stock may at any time
prior to the Election Deadline revoke his or her election and withdraw his or
her certificates deposited with the Paying Agent by written notice to the
Paying Agent received at any time prior to the Election Deadline.
(VI) A Shareholder who elects to receive Cash Consideration pursuant to
clause (i) of the second sentence of Section 2.1(c)(I) may not also elect to
receive New Preferred Stock pursuant to clause (ii) thereof, and vice versa.
Subject to the foregoing, shareholders may elect the right to receive the
consideration set forth in either said clause (i) or clause (ii) for all or a
specified whole number of the total shares of Common Stock held by them;
provided, however, that, in the event that the number of shares of Common
Stock for which the election set forth (A) in said clause (i) would result in
an aggregate Cash Consideration being paid in excess of $100 million or (B)
in said clause (ii) would result in the issuance of more than 1,040,000
shares of New Preferred Stock, then, in either such case, the number of
shares of Common Stock subject to an election to receive the right to such
consideration shall be reduced ratably, based on the number of shares of
Common Stock elected to be so treated by each holder making such election and
on a whole Common Stock share basis, until the aggregate Cash Consideration
being paid no longer exceeds $100 million and/or the number of shares of New
Preferred Stock to be issued no longer exceeds 1,040,000, respectively. Each
share of Common Stock not receiving the consideration for which an election
was made as a result of any such reduction shall be converted into the right
to receive one share of New Common Stock pursuant to the provisions of this
Section 2.1(c).
(VII) Each holder of Common Stock who duly elects to receive New
Preferred Stock in accordance with the preceding provisions of this Section
2.1(c) shall also be entitled, but shall not be obligated to become a party
to the Stockholders Agreement among LFC, Liberty Mutual and those other
holders making this election in substantially the form attached as Exhibit C
hereto (the "Stockholders Agreement"). The Election Form shall contain
provisions for such election, which shall have been duly made only if such
provisions of the Election Form are properly completed by such holder. The
Election Form (or the other materials referred to in this first sentence of
Section 2.1(c)(II)) will provide for an appropriate mechanism for holders
making such election to become a party to the Stockholders Agreement.
(VIII) The number of shares of New Common Stock issuable in exchange
for each share of Common Stock as set forth in the first sentence of Section
2.1(c)(I), the amount of cash payable
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for each share of Common Stock as set forth in clause (i) of the second
sentence of said Section 2.1(c)(I) and the number of shares of New Preferred
Stock issuable in exchange for each share of Common Stock as set forth in
clause (ii) of the second sentence of said Section 2.1(c)(I) (collectively,
the "Consideration") shall each be subject to reduction by an identical
proportion, in accordance with the formula set forth below, if the Company's
Specified Assets Under Management (as hereinafter defined) as of 4:00 p.m.
Boston time (the "Close of Business") on the date which is two business days
prior to the Closing Date (the "Adjustment Date") do not exceed 85% of such
Specified Assets Under Management at the Close of Business on the date of the
Original Agreement, after factoring out market fluctuations of the values of
portfolio assets (positive or negative) between such dates. If such Specified
Assets Under Management at the Close of Business on the Adjustment Date do
not exceed 85% of the Specified Assets Under Management at the Close of
Business on the date of the Original Agreement, after factoring out market
fluctuations of portfolio assets (positive or negative) between such times,
then each of the three elements of the Consideration shall be reduced
pursuant to this Section 2.1(c)(VIII) by multiplying the applicable exchange
ratio or dollar amount by a fraction (x) the numerator of which equals the
lesser of (A) 17.5 or (B) the difference between (i) 92.5 and (ii) the number
representing the ratio, expressed as a percentage, of such Specified Assets
Under Management as of the Close of Business on the Adjustment Date to such
Specified Assets Under Management as of the Close of Business on the date of
the Original Agreement, after factoring out market fluctuations of the values
of portfolio assets (positive or negative) between such times (such
percentage being referred to hereinafter as the "Adjustment Percentage") and
(y) the denominator of which is 92.5; provided, however, that if the
Adjustment Percentage is less than 75%, then this Agreement may be terminated
pursuant to Section 7.1(c) at the election of Parent. "Specified Assets Under
Management" means, as of each time at which the amount thereof is to be
determined, the sum of (i) the aggregate of the net assets of the open-end
investment companies registered as such under the 1940 Act to which the
Company or any of its subsidiaries serves as an investment adviser or
sub-adviser, calculated in accordance with the 1940 Act (as defined below)
and the Rules and Regulations of the Securities and Exchange Commission
promulgated thereunder, plus (ii) the aggregate of the net assets of other
investment management clients for which the Company or any of its
subsidiaries serves as investment adviser, determined in substantially the
same manner, plus (iii) without duplication, the aggregate of the net assets
of the open-end investment companies registered as such under the 1940 Act to
which the Company or any of its subsidiaries serves as an investment adviser
or sub-adviser and which are underlying funding vehicles of the variable
annuity or variable life insurance products offered by Keyport Life Insurance
Company ("Keyport"), Keyport America Life Insurance Company ("Keyport
America") or Liberty Life Assurance Company of Boston (collectively "Parent
Variable Funds"), determined in substantially the same manner, without giving
effect to any action taken by Parent or any of its affiliates which results
in those assets described in this clause (iii) no longer being included in
Specified Assets Under Management; provided, further; that the effects on
Specified Assets Under Management occasioned by changes (positive or
negative) in the market value of portfolio assets constituting Specified
Assets Under Management between the Close of Business on the date of the
Original Agreement and the Close of Business on the Adjustment Date shall be
entirely factored out of Specified Assets Under Management as of the Close of
Business on the Adjustment Date, as shall be set forth in a certificate,
prepared in a manner consistent with past practices of the Company and
practices prevailing generally in the mutual fund industry, to be delivered
by the Company to Parent not later than the Close of Business on the date
following the Adjustment Date (which certificate shall be subject to review
by, and the concurrence of, the Parent, such concurrence not to be
unreasonably withheld). Notwithstanding the foregoing, Specified Assets Under
Management shall not include (i) assets which are controlled by Parent or any
of its affiliates (other than net assets in the Parent Variable Funds, which
are specifically dealt with above), and (ii) the assets managed on behalf of
Massachusetts General Hospital. Set forth on Exhibit D attached hereto are
five examples illustrating the application of the foregoing formula.
(IX) The aggregate consideration to be received by holders of Common
Stock pursuant to this Section 2.1(c), and any cash to be paid in accordance
with Section 2.3 in lieu of fractional shares of New Common Stock, are
referred to collectively as the "Merger Consideration" and the aggregate
number of shares of New Common Stock and New Preferred Stock to be received
by holders of Common Stock pursuant to this Section 2.1(c) are referred to
collectively as the "Stock Consideration."
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(d) Dissenting Shares. Notwithstanding anything in this Agreement to the
contrary, shares of Common Stock issued and outstanding immediately prior to
the Effective Time held by a holder (if any) who has the right to demand, and
who properly demands, an appraisal of such shares in accordance with Sections
85 through 98 of the MBCL (or any successor provision) ("Dissenting Common
Shares") shall not be converted into a right to receive Merger Consideration
unless such holder fails to perfect or otherwise loses such holder's right to
such appraisal, if any. If, after the Effective Time, such holder fails to
perfect or loses any such right to appraisal, each such share of such holder
shall be treated as a share that had been converted as of the Effective Time
into the right to receive New Common Stock in accordance with this Section
2.1. Dissenting Common Shares shall be converted into the right to receive
from LFC such consideration as is determined to be due with respect to such
Dissenting Common Shares under the MBCL. The Company shall give prompt notice
to LFC of any demands received by the Company for appraisal of shares of
Common Stock, and LFC shall have the right to participate in and direct all
negotiations and proceedings with respect to such demands. The Company shall
not, except with the prior written consent of LFC, make any payment with
respect to, or settle or offer to settle, any such demands.
(e) Cancellation and Retirement of Common Stock. As of the Effective
Time, all certificates representing shares of Common Stock, other than
certificates representing shares to be canceled in accordance with Section
2.1(b) or Dissenting Common Shares, issued and outstanding immediately prior
to the Effective Time, shall no longer be outstanding and shall automatically
be canceled and retired and shall cease to exist, and each holder of a
certificate representing any such shares of Common Stock shall cease to have
any rights with respect thereto, except the right to receive the Merger
Consideration upon surrender of such certificate in accordance with Section
2.3.
Section 2.2. Company Stock Option Plans.
(a) As of the date one business day prior to the Closing Date, the
unexercisable portion of each outstanding option to purchase shares of Common
Stock (a "Company Stock Option") issued under the Company's 1986 Stock Option
Plan or Director Stock Option Plan (collectively, the "Company Stock Option
Plans") shall, unless such acceleration is waived in whole or in part by the
holder thereof, become immediately exercisable in full, subject to all
expiration, lapse and other terms and conditions thereof.
(b) The Company Stock Options set forth on Section 2.2 of the disclosure
schedule to the Original Agreement (such disclosure schedule, as originally
delivered and as supplemented by the disclosure schedule supplement delivered
by Parent and LFC to the Company at the time of execution of this Agreement,
the "Disclosure Schedule") are the only Company Stock Options which were
outstanding as of the date of the Original Agreement and (unless such options
shall have been exercised, canceled or expired in accordance with their terms
prior to the Effective Time) shall be assumed by LFC at the Effective Time
(an "Assumed Option"). Each Assumed Option shall be exercisable for one share
of New Common Stock and shall otherwise have the same terms as the
corresponding Company Stock Option (or, if an adjustment has been made
pursuant to Section 2.1(c)(VIII), a correspondingly calculated fraction of a
share of New Common Stock).
Section 2.3. Exchange of Certificates.
(a) Paying Agent. As of the Effective Time, Parent shall deposit, or
shall cause to be deposited, with or for the account of The First National
Bank of Boston (the "Paying Agent"), for the benefit of the holders of shares
of Common Stock, cash in an aggregate amount sufficient to pay the aggregate
Cash Consideration (plus any payment for fractional shares of New Common
Stock pursuant to this Section 2.3) and certificates representing the shares
of New Common Stock and New Preferred Stock representing the aggregate Stock
Consideration (such amount and certificates, together with any dividends or
distributions with respect to the shares represented by such certificates,
being hereinafter referred to as the "Payment Fund"). As soon as practicable
after the Effective Time, LFC will cause the Paying Agent to mail transmittal
instructions and a form of letter of transmittal in a customary form to each
person who was a holder of Common Stock immediately prior to the Effective
Time who did not properly complete and return an Election Form prior to the
Election Deadline.
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(b) Exchange Procedures. As soon as practicable after the Effective Time,
each holder of an outstanding certificate or certificates which prior thereto
represented shares of Common Stock shall, upon surrender to the Paying Agent
of such certificate or certificates and acceptance thereof by the Paying
Agent, be entitled to, unless and to the extent such holder has made an
election described in Section 2.1(c)(I), a certificate representing that
number of whole shares of New Common Stock (and cash in lieu of fractional
shares of New Common Stock as contemplated by this Section 2.3) which the
aggregate number of shares of Common Stock previously represented by such
certificate or certificates surrendered shall have been converted into the
right to receive pursuant to Section 2.1(c) of this Agreement.
In the event such holder has made the election set forth in clause (i) of the
second sentence of Section 2.1(c)(I), such holder shall, upon surrender to
the Paying Agent of the certificate or certificates representing such
holder's Common Stock and acceptance thereof by the Paying Agent, be entitled
to the amount of cash (and, if applicable pursuant to Section 2.1(c)(VI), New
Common Stock) (subject to any reduction provided for in Section 2.1(c)(VIII))
which the aggregate number of shares of Common Stock previously represented
by such certificate or certificates surrendered shall have been converted
into the right to receive pursuant to said clause (i).
In the event such holder has made the election set forth in clause (ii) of
the second sentence of Section 2.1(c)(I), such holder shall, upon surrender
to the Paying Agent of the certificate or certificates representing such
holder's Common Stock and acceptance thereof by the Paying Agent, be entitled
to a certificate representing that number of shares of New Preferred Stock
(and, if applicable pursuant to Section 2.1(c)(VI), New Common Stock)
(subject to any reduction provided for in Section 2.1(c)(VIII)) which the
aggregate number of shares of Common Stock previously represented by such
certificate or certificates surrendered shall have been converted into the
right to receive pursuant to said clause (ii).
The Paying Agent shall accept certificates previously representing Common
Stock upon compliance with such reasonable terms and conditions as the Paying
Agent may impose to effect an orderly exchange thereof in accordance with
normal exchange practices.
If the consideration to be paid in the Merger (or any portion thereof) is to
be delivered to any person other than the person in whose name the
certificate representing shares of Common Stock surrendered in exchange
therefor is registered, it shall be a condition to such exchange that the
certificate so surrendered shall be properly endorsed or otherwise be in
proper form for transfer and that the person requesting such exchange shall
pay to the Paying Agent any transfer or other taxes required by reason of the
payment of such consideration to a person other than the registered holder of
the certificate surrendered, or shall establish to the satisfaction of the
Paying Agent that such tax has been paid or is not applicable.
After the Effective Time, there shall be no further transfer on the records
of the Company or its transfer agent of certificates representing shares of
Common Stock and if such certificates are presented to the Company for
transfer, they shall be canceled against delivery of the Merger Consideration
as hereinabove provided. Until surrendered as contemplated by this Section
2.3(b), each certificate representing shares of Common Stock (other than
certificates representing shares to be canceled in accordance with Section
2.1(b) or Dissenting Common Shares), shall be deemed at any time after the
Effective Time to represent only the right to receive upon such surrender the
Merger Consideration, without any interest thereon, as contemplated by
Section 2.1. No interest will be paid or will accrue on any cash payable as
Merger Consideration.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions with respect to either New Common Stock or New Preferred
Stock (if an election is made pursuant to clause (ii) of the second sentence
of Section 2.1(c)(I)) with a record date after the Effective Time shall be
paid to the holder of any certificate that immediately prior to the Effective
Time represented shares of Common Stock which have been converted pursuant to
Section 2.1, until the surrender for exchange of such certificate in
accordance with this Article II. Following surrender for exchange of any such
certificate, there shall be paid to the holder of such certificate, without
interest, (i) at the time of such surrender, the amount of dividends or other
distributions with a record date after the Effective Time
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theretofore paid with respect to the number of shares of either New Common
Stock or New Preferred Stock (if an election is made pursuant to clause (ii)
of the second sentence of Section 2.1(c)(I)) into which the shares of Common
Stock represented by such certificate immediately prior to the Effective Time
were converted pursuant to Section 2.1, and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date after
the Effective Time, but prior to such surrender, and with a payment date
subsequent to such surrender, payable with respect to such shares of either
New Common Stock or New Preferred Stock (if an election is made pursuant to
clause (ii) of the second sentence of Section 2.1(c)(I)).
(d) No Further Ownership Rights in Common Stock. The Merger Consideration
paid upon the surrender for exchange of certificates representing shares of
Common Stock in accordance with the terms of this Article II shall be deemed
to have been issued and paid in full satisfaction of all rights pertaining to
the shares of Common Stock theretofore represented by such certificates,
subject, however, to the Surviving Corporation's obligation (if any) to pay
any dividends or make any other distributions with a record date prior to the
Effective Time which may have been declared by the Company on such shares of
Common Stock in accordance with the terms of the Original Agreement or prior
to the date of this Agreement and which remain unpaid at the Effective Time.
(e) Fractional Shares.
(i) No certificates or scrip representing fractional shares of New
Common Stock shall be issued upon the surrender for exchange of certificates
that immediately prior to the Effective Time represented shares of Common
Stock which have been converted pursuant to Section 2.1, and such fractional
share interests will not entitle the owner thereof to vote or to any rights
of a stockholder of the Surviving Corporation.
(ii) Notwithstanding any other provisions of this Agreement, each holder of
shares of Common Stock who would otherwise have been entitled to receive a
fraction of a share of New Common Stock (after taking into account all
certificates delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to such fractional part of a share of
New Common Stock multiplied by $40.00.
(iii) Certificates or scrip representing fractional shares of New Preferred
Stock may be issued hereunder.
(f) Termination of Payment Fund. Any portion of the Payment Fund which
remains undistributed to the holders of the certificates representing shares
of Common Stock for 120 days after the Effective Time shall be delivered to
LFC, upon demand, and any holders of shares of Common Stock who have not
theretofore complied with this Article II shall thereafter look only to LFC
and only as general creditors thereof for payment of their claim for any
Merger Consideration and any dividends or distributions with respect to
either New Common Stock or New Preferred Stock (if an election is made
pursuant to clause (ii) of the second sentence of Section 2.1(c)(I)).
(g) No Liability. None of Parent, LFC, the Surviving Corporation or the
Paying Agent shall be liable to any person in respect of any cash, shares,
dividends or distributions payable from the Payment Fund delivered to a
public official pursuant to any applicable abandoned property, escheat or
similar law. If any certificates representing shares of Common Stock shall
not have been surrendered prior to five years after the Effective Time (or
immediately prior to such earlier date on which any Merger Consideration in
respect of such certificate would otherwise escheat to or become the property
of any Governmental Entity (as defined in Section 3.1(c)), any such cash,
shares, dividends or distributions payable in respect of such certificate
shall, to the extent permitted by applicable law, become the property of LFC,
free and clear of all claims or interest of any person previously entitled
thereto.
(h) Investment of Payment Fund. The Paying Agent shall invest the Payment
Fund, as directed by LFC, in (i) direct obligations of the United States of
America, (ii) obligations for which the full faith and credit of the United
States of America is pledged to provide for the payment of principal and
interest or (iii) commercial paper rated, at the time of purchase, in either
of the two highest quality categories by both Moody's Investors Service, Inc.
and Standard & Poor's Corporation, and any net
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earnings with respect thereto shall be paid to LFC as and when requested by
LFC; provided that any such investment or any such payment of earnings shall
not delay the receipt by holders of shares of Common Stock of the Merger
Consideration or otherwise impair such holders' respective rights hereunder.
In the event the Payment Fund shall realize a loss on any such investment,
LFC shall promptly thereafter deposit in such Payment Fund cash in an amount
sufficient to enable such Payment Fund to satisfy all remaining obligations
originally contemplated to be paid out of such Payment Fund.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
Section 3.1 Representations and Warranties of the Company. The Company
represents and warrants to Parent, LFC and Sub as follows:
(a) Organization, Standing and Corporate Power. The Company and each of
its subsidiaries is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction in which it is incorporated
and has the requisite corporate power and authority to carry on its business
as now being conducted. The Company and each of its subsidiaries is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing
of its properties makes such qualification or licensing necessary, other than
in such jurisdictions where the failure to be so qualified or licensed
(individually or in the aggregate) would not have a material adverse effect
on the business, financial condition or results of operations of the Company
and its subsidiaries taken as a whole. The Company and each of its
subsidiaries have delivered or otherwise made available to Parent complete
and correct copies of its articles of organization or other organizational
documents and by-laws, in each case as amended to the date of this Agreement.
(b) Capital Structure. The authorized capital stock of the Company
consists of 15,000,000 shares of Company Class A Common Stock and 1,000,000
shares of Company Class B Common Stock. As of the date hereof, 7,236,953
shares of Company Class A Common Stock and 187,967 shares of Company Class B
Common Stock, were issued and outstanding. Except as set forth above, as of
the date hereof, no shares of capital stock or other equity securities of the
Company were issued (except for shares held in treasury), reserved for
issuance or outstanding. All outstanding shares of capital stock of the
Company are, and all shares which may be issued pursuant to the Company Stock
Option Plans or purchased pursuant to the Company's Employee Stock Ownership
Plan (the "ESOP") will be, when issued or purchased, respectively, duly
authorized, validly issued, fully paid and nonassessable and not subject to
preemptive rights. No bonds, debentures, notes or other indebtedness of the
Company or any of its subsidiaries are issued or outstanding which are
convertible into, or exchangeable for, securities having the right to vote on
any matters on which the stockholders of the Company are entitled to vote.
All the outstanding shares of capital stock of each of the Company's
subsidiaries have been validly issued and are fully paid and nonassessable,
free and clear of all pledges, claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever (collectively, "Liens").
Except as set forth above, in Section 2.2 or in Section 3.1(b) of the
Disclosure Schedule, none of the Company or any of its subsidiaries has any
outstanding option, warrant, subscription or other right, agreement or
commitment which either (i) obligates the Company or any of its subsidiaries
to issue, sell or transfer, repurchase, redeem or otherwise acquire or vote
any shares of the capital stock of the Company or any of its subsidiaries or
(ii) restricts the transfer of Common Stock. Except as disclosed in Section
3.1(b) of the Disclosure Schedule, all the outstanding shares of capital
stock of each of the Company's subsidiaries are owned by the Company or by
one or more of its subsidiaries.
(c) Authority; Noncontravention. The Company has the requisite corporate
power and authority to enter into this Agreement and, subject to the approval
of its stockholders as set forth in Section 6.1(a) with respect to this
Agreement and the Merger, to consummate the transactions contemplated by this
Agreement. The execution and delivery of this Agreement by the Company and
the consummation by the Company of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on the part of the
Company, subject to the approval of its stockholders
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as set forth in Section 6.1(a). This Agreement has been duly executed and
delivered by the Company and, assuming this Agreement constitutes the valid
and binding agreement of Parent, LFC and Sub, constitutes a valid and binding
obligation of the Company, enforceable against the Company in accordance with
its terms. Except as disclosed in Section 3.1(c) of the Disclosure Schedule,
the execution and delivery of this Agreement do not, and the consummation of
the transactions contemplated by this Agreement and compliance with the
provisions hereof will not, (i) conflict with any of the provisions of the
articles of organization or other organizational documents or by-laws of the
Company or any of its subsidiaries, (ii) subject to the governmental filings
and other matters referred to in the following paragraph, conflict with,
result in a breach of or default (with or without notice or lapse of time, or
both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a material benefit under, or
require the consent of any person under, any indenture or other agreement,
permit, concession, franchise, license or similar instrument or undertaking
to which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries or any of their assets is bound or
affected, or (iii) subject to the governmental filings and other matters
referred to in the following paragraph, contravene any law, rule or
regulation of any state or of the United States or any political subdivision
thereof or therein, or any order, writ, judgment, injunction, decree,
determination or award currently in effect, which, in the case of clauses
(ii) and (iii) above, singly or in the aggregate, would have a material
adverse effect on the business, financial condition or results of operations
of the Company and its subsidiaries taken as a whole.
No consent, approval or authorization of, or declaration or filing with, or
notice to, any governmental agency or regulatory authority (a "Governmental
Entity") which has not been received or made, is required by or with respect
to the Company or any of its subsidiaries in connection with the execution
and delivery of this Agreement by the Company or the consummation by the
Company of the transactions contemplated hereby, except for (i) the filing of
premerger notification and report forms under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act"), with respect to the
transactions contemplated by this Agreement, (ii) the filing with the SEC of
(x) a proxy statement relating to the approval by the stockholders of the
Company of this Agreement and the Merger (such proxy statement, as amended or
supplemented from time to time, the "Proxy Statement"), and (y) such reports
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
as may be required in connection with this Agreement and the transactions
contemplated by this Agreement, (iii) the filing of the certificate of merger
with the Massachusetts Secretary of State and appropriate documents with the
relevant authorities of other states in which the Company is qualified to do
business, (iv) the consents, approvals and notices as are set forth in
Sections 5.11 and 5.12 of this Agreement required under the Investment
Company Act of 1940, as amended (the "1940 Act"), and the Investment Advisers
Act of 1940, as amended (the "Advisers Act"), (v) such other consents,
approvals, authorizations, filings or notices as are set forth in Section
3.1(c) of the Disclosure Schedule and (vi) any other filings, authorizations,
consents or approvals the failure to make or obtain which, in the aggregate,
would not have a material adverse effect on the business, financial condition
or results of operations of the Company and its subsidiaries taken as a
whole. The Company is not required to make any filings or take any other
action not taken prior to the execution of the Original Agreement in order
for the restrictions imposed by Chapters 110C, 110D or 110F of the General
Laws of the Commonwealth of Massachusetts not to apply to the Merger, this
Agreement or any of the transactions contemplated hereunder.
(d) SEC Documents. (i) The Company has filed all required reports,
schedules, forms, statements and other documents with the SEC since January
1, 1994 (such reports, schedules, forms, statements and other documents are
hereinafter referred to as the "SEC Documents"); (ii) as of their respective
dates, the SEC Documents complied in all material respects with the
requirements of the Securities Act of 1933, as amended (the "Securities
Act"), or the Exchange Act, as the case may be, and the rules and regulations
of the SEC promulgated thereunder applicable to such SEC Documents, and none
of the SEC Documents as of such dates contained any untrue statement of a
material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading; and (iii) the
consolidated financial statements of the Company included in the SEC
Documents comply as to form
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in all material respects with applicable accounting requirements and the
published rules and regulations of the SEC with respect thereto, have been
prepared in accordance with generally accepted accounting principles (except,
in the case of unaudited consolidated quarterly statements, as permitted by
Form 10-Q of the SEC) applied on a consistent basis during the periods
involved (except as may be indicated in the notes thereto) and fairly present
in all material respects the consolidated financial position of the Company
and its consolidated subsidiaries as of the dates thereof and the
consolidated results of their operations and cash flows for the periods then
ended (subject, in the case of unaudited quarterly statements, to normal
year-end audit adjustments).
(e) Information Supplied. None of the information supplied or to be
supplied by the Company specifically for inclusion or incorporation by
reference in (i) the registration statement on Form S-4 filed with the SEC by
LFC in connection with the issuance of New Common Stock and the New Preferred
Stock in the Merger (the "Form S-4") will, at the time the Form S-4 is filed
with the SEC, at any time it is amended or supplemented or at the time it
becomes effective under the Securities Act, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading or (ii)
the Proxy Statement will, at the date it is first mailed to the Company's
stockholders or at the time of the Stockholders Meeting contain any untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary in order to make the statements therein, in
light of the circumstances under which they are made, not misleading. The
Proxy Statement will comply as to form in all material respects with the
requirements of the Exchange Act and the rules and regulations thereunder,
except that no representation or warranty is made by the Company with respect
to statements made or incorporated by reference therein based on information
supplied by Parent, LFC or Sub specifically for inclusion or incorporation by
reference in the Proxy Statement.
(f) Absence of Certain Changes or Events. Except as disclosed in the SEC
Documents filed and publicly available prior to the date of the Original
Agreement (the "Filed SEC Documents") or in Section 3.1(f) of the Disclosure
Schedule, since the date of the most recent audited financial statements
included in the Filed SEC Documents, the Company and its subsidiaries have
conducted their business only in the ordinary course, and there has not been
(i) any change which would have a material adverse effect on the business,
financial condition or results of operations of the Company and its
subsidiaries taken as a whole, (ii) any declaration, setting aside or payment
of any dividend or other distribution (whether in cash, stock or property)
with respect to any of the Company's outstanding capital stock (other than
the Company's regular quarterly cash dividends in the amount of $.15 per
share of Common Stock, in accordance with usual record and payment dates and
in accordance with the Company's present dividend practice, except as
contemplated by Section 3.1(q)), (iii) any split, combination or
reclassification of any of its outstanding capital stock or any issuance or
the authorization of any issuance of any other securities in respect of, in
lieu of or in substitution for shares of its outstanding capital stock, (iv)
(x) any granting by the Company or any of its subsidiaries to any executive
officer or other employee of the Company or any of its subsidiaries of any
increase in compensation, except in the ordinary course of business
consistent with prior practice or as was required under employment agreements
in effect as of the date of the most recent audited financial statements
included in the Filed SEC Documents, (y) any granting by the Company or any
of its subsidiaries to any such executive officer of any increase in
severance or termination pay, except in the ordinary course of business
consistent with prior practice or as was required under any employment,
severance or termination agreements in effect as of the date of the most
recent audited financial statements included in the Filed SEC Documents or
(z) any entry by the Company or any of its subsidiaries into any employment,
severance or termination agreement with any such executive officer except in
the ordinary course of business consistent with prior practice (it being
understood that, as used in this clause (iv), "prior practice" shall mean the
practice of the Company and its subsidiaries prior to 1994) or (v) any change
in accounting methods, principles or practices by the Company or any of its
subsidiaries materially affecting its assets, liabilities or business, except
insofar as may have been required by a change in generally accepted
accounting principles.
(g) Absence of Changes in Benefit Plans. Except as disclosed in the Filed
SEC Documents or in Section 3.1(g) of the Disclosure Schedule, since the date
of the most recent audited financial statements included in the Filed SEC
Documents, there has not been any adoption or
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amendment in any material respect by the Company or any of its subsidiaries
of any Benefit Plan (as defined in Section 3.1(h)). Except as disclosed in
the Filed SEC Documents or in Section 3.1(g) of the Disclosure Schedule,
there exist no employment, consulting, severance, termination or
indemnification agreements, arrangements or understandings between the
Company or any of its subsidiaries and (i) any current or former officer or
director of the Company or any of its subsidiaries or (ii) any current or
former non-officer/director employee which, in any such case, (x) pertains
to an individual having (or formerly having) an annual base salary in excess
of $50,000 or (y) is not terminable at will by the Company or such
subsidiary.
(h) Benefit Plans.
(i) Each "employee pension benefit plan" (as defined in Section 3(2) of
the Employee Retirement Income Security Act of 1974, as amended ("ERISA"))
(hereinafter a "Pension Plan"), "employee welfare benefit plan" (as defined
in Section 3(1) of ERISA) (hereinafter a "Welfare Plan"), and each other
plan, arrangement or policy (written or oral) relating to stock options,
stock purchases, compensation, deferred compensation, severance, fringe
benefits or other employee benefits, in each case maintained or contributed
to, or required to be maintained or contributed to, by the Company and its
subsidiaries for the benefit of any present or former officers, employees,
agents, directors or independent contractors of the Company or any of its
subsidiaries (all the foregoing being herein called "Benefit Plans") has been
administered in accordance with its terms except where failure to administer
in accordance with such terms would not have a material adverse effect on the
business, financial condition or results of operations of the Company and its
subsidiaries taken as a whole. The Company, its subsidiaries and all the
Benefit Plans are in compliance with the applicable provisions of ERISA, the
Code, all other applicable laws and all applicable collective bargaining
agreements except where failure to comply would not have a material adverse
effect on the business, financial condition or results of operations of the
Company and its subsidiaries taken as a whole.
(ii) None of the Company or any other person or entity that together with
the Company is treated as a single employer under Section 414 (b), (c), (m)
or (o) of the Code (each a "Commonly Controlled Entity") (a) has incurred any
liability to a Pension Plan covered by Title IV of ERISA (other than for
contributions not yet due) or to the Pension Benefit Guaranty Corporation
(other than for the payment of premiums not yet due) that, when aggregated
with other such liabilities, would result in a material liability to the
Company, which liability has not been fully paid as of the date of the
Original Agreement.
(iii) No Commonly Controlled Entity is required to contribute to any
"multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) or has
withdrawn from any multiemployer plan where such withdrawal has resulted or
would result in any "withdrawal liability" (within the meaning of Section
4201 of ERISA) that has not been fully paid.
(i) Taxes.
(i) Each of the Company and its subsidiaries has filed all tax returns
and reports required to be filed by it or requests for extensions to file
such returns or reports have been timely filed, granted and have not expired,
except to the extent that such failures to file or to have extensions granted
that remain in effect individually and in the aggregate would not have a
material adverse effect on the business, financial condition or results of
operations of the Company and its subsidiaries taken as a whole. Except as
disclosed in Section 3.1(i) of the Disclosure Schedule, all tax returns filed
by the Company and each of its subsidiaries are complete and accurate except
to the extent that such failure to be complete and accurate would not have a
material adverse effect on the business, financial condition or results of
operations of the Company and its subsidiaries taken as a whole. The Company
and each of its subsidiaries has paid (or the Company has paid on the
subsidiaries' behalf) all taxes shown as due on such returns, and the most
recent financial statements contained in the Filed SEC Documents reflect an
adequate reserve for all taxes
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payable by the Company and its subsidiaries for all taxable periods and
portions thereof accrued through the date of such financial statements.
(ii) Except as set forth on Section 3.1(i) of the Disclosure Schedule, no
deficiencies for any taxes have been proposed, asserted or assessed against
the Company or any of its subsidiaries that remain unpaid or are not
adequately reserved for, except for deficiencies that individually or in the
aggregate would not have a material adverse effect on the business, financial
condition or results of operations of the Company and its subsidiaries taken
as a whole, and, except as set forth on Section 3.1(i) of the Disclosure
Schedule, no requests for waivers of the time to assess any such taxes have
been granted or are pending. The federal, Massachusetts and Colorado income
tax returns of each of the Company and each of its subsidiaries consolidated
in such returns have been examined by and settled with the United States
Internal Revenue Service, or applicable Massachusetts and Colorado tax
authorities, as the case may be, or the statute of limitations on assessment
or collection of any Federal, Massachusetts or Colorado income taxes due from
the Company or any of its subsidiaries has expired, for all taxable years of
the Company or any of its subsidiaries through the taxable year ended
December 31, 1989.
(ii) As used in this Agreement, "taxes" shall include all Federal, state,
local and foreign income, property, sales, excise, employment, payroll,
withholding and other taxes, tariffs or governmental charges of any nature
whatsoever.
(j) No Excess Parachute Payments; Section 162(m) of the Code.
(i) Except as disclosed in Section 3.1(j) of the Disclosure Schedule, any
amount that could be received (whether in cash or property or the vesting of
property) as a result of any of the transactions contemplated by this
Agreement by any employee, officer or director of the Company or any of its
affiliates who is a "disqualified individual" (as such term is defined in
proposed Treasury Regulation Section 1.280G-1) under any employment,
severance or termination agreement, other compensation arrangement or Benefit
Plan in effect as of the date of the Original Agreement would not be
characterized as an "excess parachute payment" (as such term is defined in
Section 280G(b)(1) of the Code).
(ii) Except as disclosed in Section 3.1(j) of the Disclosure Schedule, the
disallowance of a deduction under Section 162(m) of the Code for employee
remuneration will not apply to any amount paid or payable by the Company or
any subsidiary of the Company under any contract, Benefit Plan, program,
arrangement or understanding in effect as of the date of the Original
Agreement.
(k) Voting Requirements. The affirmative vote of two-thirds of the votes
cast by the holders of each of the shares of Company Class A Common Stock and
Company Class B Common Stock, in each case entitled to vote thereon at the
Stockholders Meeting, voting as separate classes, with respect to the
approval of the Merger and this Agreement are the only votes of the holders
of any class or series of the Company's capital stock necessary to approve
this Agreement and the transactions contemplated by this Agreement.
(l) Compliance with Applicable Laws. Each of the Company and its
subsidiaries and the Company Funds (as hereinafter defined) has in effect all
Federal, state, local and foreign governmental approvals, authorizations,
certificates, filings, franchises, licenses, notices, permits and rights
("Permits") necessary for it to own, lease or operate its properties and
assets and to carry on its business as now conducted, and there has occurred
no default under any such Permit, except for the lack of Permits and for
defaults under Permits, which lack or default individually or in the
aggregate would not have a material adverse effect on the business, financial
condition or results of operations of the Company and its subsidiaries taken
as a whole. Except as disclosed in the Filed SEC Documents, the Company and
its subsidiaries and the Company Funds are in compliance with all applicable
statutes, laws, ordinances, rules, orders and regulations of any Governmental
Entity, except for possible noncompliance which individually or in the
aggregate would not have a material adverse effect on the
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business, financial condition or results of operations of the Company and its
subsidiaries taken as a whole. Except as disclosed in the Filed SEC
Documents, as of the date of the Original Agreement, to the knowledge of the
Company, no investigation by any Governmental Entity with respect to the
Company or any of its subsidiaries or any of the Company Funds was pending or
threatened, other than, in each case, those the outcome of which, as far as
reasonably can be foreseen, will not have a material adverse effect on the
business, financial condition or results of operations of the Company and its
subsidiaries taken as a whole.
(m) Opinion of Financial Advisor. The Company has received the opinion of
each of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Berkshire
Capital Corporation, dated the date of the Original Agreement, to the effect
that, as of such date, the consideration to be received in the Merger by the
Company's stockholders was fair from a financial point of view to the
Company's stockholders.
(n) Brokers. No broker, investment banker, financial advisor or other
person, other than Merrill Lynch, Pierce, Fenner & Smith Incorporated and
Berkshire Capital Corporation, the fees and expenses of which will be paid by
the Company, is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf
of the Company.
(o) Ineligible Persons. None of the Company or any "affiliated person"
(as defined in the 1940 Act) thereof (i) is ineligible pursuant to Section
9(a) of the 1940 Act to serve as an investment adviser (or in any other
capacity contemplated by the 1940 Act) to a registered investment company or
(ii) to the best knowledge of the senior officers of the Company as of the
date of the Original Agreement, has engaged in any of the conduct specified
in Section 9(b) of the 1940 Act or Section 203(e) of the Advisers Act prior
to the date of the Original Agreement that would be reasonably likely to
result in SEC action to disqualify the Company or any of its affiliates as an
investment adviser.
(p) Voting Agreement. Each of John A. McNeice, Jr., C. Herbert Emilson,
Harold W. Cogger, Davey S. Scoon and Arthur O. Stern, has duly executed and
delivered to Parent a Voting Agreement in substantially the form of Exhibit E
hereto with respect to the voting of his shares of Common Stock in favor of
the Merger and this Agreement.
(q) Dividends. The Company intends to declare a cash dividend at an
annual rate of $.60 per share for the period from the Company's final regular
quarter dividend payment date prior to the Closing Date and through the
Closing Date, payable to holders of record of the Common Stock as of
immediately prior to the Effective Time, the payment of which shall become an
obligation of the Surviving Corporation. Such payment shall be made as soon
as practicable following the Closing Date.
Section 3.2. Representations and Warranties of Parent, LFC and Sub. Parent,
LFC and Sub represent and warrant to the Company as follows:
(a) Organization, Standing and Corporate Power. Each of Parent, LFC and
Sub, and each of Parent's other subsidiaries, is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction in which it is incorporated and has the requisite corporate
power and authority to carry on its business as now being conducted. Each of
Parent, LFC and Sub, and each of Parent's other subsidiaries, is duly
qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership or leasing
of its properties makes such qualification or licensing necessary, other than
in such jurisdictions where the failure to be so qualified or licensed
(individually or in the aggregate) would not have a material adverse effect
on the business, financial condition or results of operations of Parent and
its subsidiaries taken as a whole. Parent, LFC and Sub and each of Parent's
other subsidiaries have delivered or otherwise made available to the Company
complete and correct copies of its articles of organization (or other
organizational documents) and by-laws, as amended to the date of this
Agreement.
(b) The authorized and issued outstanding capital stock of each of Parent
and LFC as of the date hereof is as set forth in Section 1.3(b). Immediately
prior to the Effective Time, the Parent will effect the Parent Contribution.
As of the date hereof, there are outstanding options to purchase 637,460
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shares of Parent Class B Common Stock issued by Parent to present or former
employees of Parent or its subsidiaries (the "Parent Stock Options"). As of
the Effective Time, the then outstanding Parent Stock Options (x) shall be
adjusted in the manner specified in Item 2(i) of Section 3.2(b) of the
Disclosure Schedule and (y) as so adjusted, shall be assumed by LFC pursuant
to the Parent Contribution and thereby shall become options to purchase
shares of New Common Stock. Following the Effective Time and on or before the
30th day following the Closing Date (the "Additional Parent Options
Adjustment Date"), LFC shall be permitted to make the additional adjustment
to such stock options contemplated by described in Item 2(ii) of Section
3.2(b) of the Disclosure Schedule. Except as set forth above, as of the date
hereof, no shares of capital stock or other voting securities of Parent or
LFC were issued, reserved for issuance or outstanding. All outstanding shares
of capital stock of each of Parent and LFC are, and all shares of the capital
stock of LFC which may be issued pursuant to this Agreement will be, when
issued, duly authorized, validly issued, fully paid and nonassessable and not
subject to preemptive rights. No bonds, debentures, notes or other
indebtedness of Parent or LFC or any of Parent's other subsidiaries are
convertible into, or exchangeable for, securities having the right to vote on
any matters on which the stockholders of the issuing corporation may vote.
All the outstanding shares of capital stock of each of Parent's subsidiaries
other than LFC have been validly issued and are fully paid and nonassessable.
Except (i) as set forth above or (ii) pursuant to the terms of the Parent's
1990 Stock Option Plan, as amended (which will be assumed by LFC pursuant to
the Parent Contribution), none of Parent, LFC, Sub or any of Parent's other
subsidiaries has any outstanding option, warrant, subscription or other
right, agreement or commitment which either (i) obligates Parent, LFC, Sub or
any of Parent's other subsidiaries to issue, sell or transfer, repurchase,
redeem or otherwise acquire or vote any shares of the capital stock of Parent
or LFC or any of Parent's other subsidiaries or (ii) restricts the transfer
of Parent Common Stock or any capital stock of LFC. Except as disclosed in
Section 3.2(b) of the Disclosure Schedule, all the outstanding shares of
capital stock of each of Parent's subsidiaries are owned by Parent or by
Parent or one or more of its subsidiaries, free and clear of all Liens.
(c) Authority; Noncontravention. Parent, LFC and Sub have all requisite
corporate power and authority to enter into this Agreement and to consummate
the transactions contemplated by this Agreement. The execution and delivery
of this Agreement by Parent, LFC and Sub and the consummation by Parent, LFC
and Sub of the transactions contemplated by this Agreement have been duly
authorized by all necessary corporate action on the part of Parent, LFC and
Sub, subject, in the case of Parent, to approvals of its stockholders
required by the MBCL with respect to the Parent Contribution (the "Parent
Stockholder Approval"). The Parent shall obtain the Parent Stockholder
Approval as soon as is reasonably practicable following the execution and
delivery of this Agreement; provided, however, that no failure of the Parent
to obtain such approval shall in any way excuse Parent, LFC or Sub from any
of their respective obligations hereunder. This Agreement has been duly
executed and delivered by Parent, LFC and Sub, and, assuming this Agreement
constitutes the valid and binding agreement of the Company, constitutes a
valid and binding obligation of each of Parent, LFC and Sub, enforceable
against such parties in accordance with its terms. The execution and delivery
of this Agreement do not, and the consummation of the transactions
contemplated by this Agreement and compliance with the provisions of this
Agreement will not (i) conflict with any of the provisions of the articles of
organization (or similar organizational documents) or by-laws of Parent, LFC,
Sub or any of Parent's other subsidiaries, (ii) subject to the governmental
filings and other matters referred to in the following paragraph, conflict
with, result in a breach of or default (with or without notice or lapse of
time, or both) under, or give rise to a right of termination, cancellation or
acceleration of any obligation or loss of a material benefit under, or
require the consent of any person under, any indenture, or other agreement,
permit, concession, franchise, license or similar instrument or undertaking
to which Parent or any of its subsidiaries is a party or by which Parent or
any of its subsidiaries or any of their assets is bound or affected, or (iii)
subject to the governmental filings and other matters referred to in the
following paragraph, contravene any law, rule or regulation of any state or
of the United States or any political subdivision thereof or therein, or any
order, writ, judgment, injunction, decree, determination or award currently
in effect, which, in the case of clauses (ii) and (iii) above, singly or in
the aggregate, would have a material adverse effect on the business,
financial condition or results of operations of Parent and its subsidiaries
taken as a whole.
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No consent, approval or authorization of, or declaration or filing with, or
notice to, any Governmental Entity which has not been received or made is
required by or with respect to Parent, LFC or Sub in connection with the
execution and delivery of this Agreement by Parent, LFC or Sub or the
consummation by Parent, LFC or Sub, as the case may be, of any of the
transactions contemplated by this Agreement, except for (i) the filing of
premerger notification and report forms under the HSR Act with respect to the
transactions contemplated by this Agreement, (ii) the filings and/or notices
required under the insurance laws of the jurisdictions set forth in Section
3.2(c)(ii) of the Disclosure Schedule, (iii) the filing with the SEC of the
Form S-4, and such registrations under the Exchange Act or state securities
laws as may be required in connection with this Agreement and the
transactions contemplated hereby, (iv) the filing of the articles of merger
with the Massachusetts Secretary of State and of appropriate documents with
the relevant authorities of other states in which the Company is qualified to
do business, (v) such other consents, approvals, authorizations, filings or
notices as are set forth in Section 3.2(c)(v) of the Disclosure Schedule and
(vi) any other filings, authorizations, consents or approvals the failure to
make or obtain which, in the aggregate, would not have a material adverse
effect on the business, financial condition or results of operations of
Parent and its subsidiaries taken as a whole.
(d) Financial Statements and Information Supplied.
(i) The (i) audited financial statements of Parent (consisting of the
consolidated balance sheets of Parent as of December 31, 1992 and 1993, and
its consolidated statements of operations, stockholder's equity and cash
flows for each year in the three- year period ended December 31, 1993) and
(ii) unaudited financial statements of Parent (consisting of the balance
sheet as of June 30, 1994 and the consolidated statement of operations,
stockholders' equity and cash flows for the six months ended June 30, 1994)
(the "1994 Interim Financial Statements") which have been delivered to the
Company were prepared in accordance with generally accepted accounting
principles (except for the absence of notes, in the case of the 1994 Interim
Financial Statements), applied on a consistent basis during the periods
involved (except as may be indicated in the notes to such audited financial
statements), and fairly present in all material respects the consolidated
financial position of Parent and its subsidiaries as of the dates thereof and
the consolidated results of their operations and cash flows for the periods
then ended (subject, in the case of the 1994 Interim Financial Statements, to
normal year-end audit adjustments).
(ii) None of the information supplied or to be supplied by Parent, LFC or
Sub specifically for inclusion or incorporation by reference in (i) the Form
S-4 will, at the time the Form S-4 is filed with the SEC, at any time it is
amended or supplemented or at the time it becomes effective under the
Securities Act, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading, or (ii) the Proxy Statement will, at
the date the Proxy Statement is first mailed to the Company's stockholders or
at the time of the Stockholders Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they are made, not misleading. The Form S-4 will
comply as to form in all material respects with the requirements of the
Securities Act and the rules and regulations promulgated thereunder, except
that no representation or warranty is made by Parent, LFC or Sub with respect
to statements made or incorporated by reference in the Form S-4 based on
information supplied by the Company specifically for inclusion or
incorporation by reference therein.
(e) Absence of Certain Changes or Events. Except as disclosed in Section
3.2(e) of the Disclosure Schedule, since December 31, 1993, Parent and its
subsidiaries have conducted their businesses only in the ordinary course, and
there has not been (i) any change which would have a material adverse effect
on the business, financial condition or results of operations of Parent and
its subsidiaries, taken as a whole, (ii) except as permitted by Section
4.1(b), any declaration, setting aside or payment of any dividend or
distribution (whether in cash, stock or property) with respect to any of
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Parent's or LFC's outstanding capital stock, (iii) except with respect to the
Parent Contribution, any split, combination or reclassification of any of its
outstanding capital stock or any issuance or the authorization of any
issuance of any other securities in respect of, in lieu of or in substitution
for shares of its capital stock, or (iv) any change in accounting methods,
principles or practices by Parent materially affecting its assets,
liabilities or business, except insofar as required by a change in generally
accepted accounting principles.
(f) Voting Requirements. The Parent Stockholder Approval with respect to
the Parent Contribution is the only vote of the holders of any class or
series of Parent's capital stock necessary to approve this Agreement and the
transactions contemplated by this Agreement.
(g) Opinion of Financial Advisor. Parent has received the opinion of
Goldman, Sachs & Co., to the effect that, as of the date of the Original
Agreement, the consideration to be paid to the Company's stockholders in the
Merger was fair to Parent.
(h) Benefit Plans. Parent and its subsidiaries are in compliance in all
material respects with the applicable provisions of ERISA and the Code with
respect to each material "employee benefit plan" (as defined in Section 3(3)
of ERISA) maintained, contributed to or required to be maintained or
contributed to by Parent or its subsidiaries for the benefit of any present
officers, employees or directors of Parent or any of its subsidiaries in the
United States.
(i) Taxes.
(i) Commencing with the tax year begun January 1, 1990 (or, in the case
of Stein Roe & Farnham Incorporated and The PAMCO Group, Inc., commencing
with the time of their direct or indirect acquisition by Liberty Mutual),
each of the Parent and its subsidiaries (other than Keyport and its
subsidiaries), since the later of its incorporation or the time of its direct
or indirect acquisition by Liberty Mutual have been included in the
consolidated federal income tax returns filed by Liberty Mutual with respect
to periods ending on or before December 31, 1993. Since the later of such
times, Keyport and its subsidiary Keyport America have been included in
separate consolidated federal income tax returns filed by Keyport, and
Keyport's other subsidiaries (Keyport Advisory Services Corp. and Keyport
Financial Services Corp.) each have filed a separate federal income tax
returns. Commencing January 1, 1994, Keyport and its subsidiaries have become
eligible for inclusion in the consolidated federal income tax return of
Liberty Mutual for periods commencing on or after that date. All such federal
income tax returns, and all other tax returns and reports required to be
filed by the Parent and its subsidiaries have been timely filed, or requests
for extensions to file such returns or reports have been timely filed,
granted and have not expired, except to the extent that such failures to file
or to have extensions granted that remain in effect individually and in the
aggregate would not have a material adverse effect on the business, financial
condition or results of operations of the Parent and its subsidiaries taken
as a whole. All such federal income tax returns, and all other tax returns
filed by the Parent and its subsidiaries are complete and accurate, except to
the extent that such failure to be complete and accurate would not have a
material adverse effect on the business, financial condition or results of
operations of the Parent and its subsidiaries taken as a whole. All taxes
shown as due on such federal income tax and other tax returns have been paid,
and the Parent's June 30, 1994 consolidated balance sheet included in the
1994 Interim Financial Statements reflects an adequate reserve for all taxes
payable by Parent or any of its subsidiaries for all taxable periods and
portions thereof accrued or assessable through the date thereof.
(ii) No deficiencies for any taxes have been proposed, asserted or assessed
against the Parent or any of its subsidiaries (whether individually or as
part of a consolidated group) that remain unpaid or are not adequately
reserved for, except for deficiencies that individually or in the aggregate
would not have a material adverse effect on the business, financial condition
or results of operations of the Parent and its subsidiaries taken as a whole,
and, except as set forth on Section 3.2(i) of the Disclosure Schedule, no
requests
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for waivers of the time to assess any such taxes have been granted or are
pending. The federal consolidated and separate income tax returns referred to
in (i) above, and the Massachusetts, Rhode Island and Illinois consolidated
or separate income tax returns of each of Parent and its subsidiaries
included in any such state consolidated returns, have been examined by and
settled with the United States Internal Revenue Service or applicable
Massachusetts, Rhode Island or Illinois tax authorities, as the case may be,
or the statute of limitations on assessment or collection of any federal or
Massachusetts, Rhode Island or Illinois income taxes due from the
participants in such returns has expired, for all taxable years of the group
submitting such returns or of Parent or such subsidiaries, as the case may
be, through the taxable year ended December 31, 1989, except as otherwise
indicated on Section 3.2(i) of the Disclosure Schedule.
(j) Compliance with Applicable Laws.
(i) Each of Parent, LFC, Parent's other subsidiaries, each Parent Fund
(as hereinafter defined) and any other entity controlled by or under common
control with Parent the business, financial condition or results of
operations of which is material to Parent and its subsidiaries, taken as a
whole (a "Material Parent Entity"), has in effect all Permits necessary for
it to own, lease or operate its properties and assets and to carry on its
business as now conducted, and there has occurred no default under any such
Permit, except for the lack of Permits and for defaults under Permits which
lack or default individually or in the aggregate would not have a material
adverse effect on the business, financial condition or results of operations
of Parent and its subsidiaries taken as a whole. Except as disclosed in
Section 3.2(j) of the Disclosure Schedule, Parent, LFC, Parent's other
subsidiaries, the Parent Funds and the Material Parent Entities are in
compliance with all applicable statutes, laws, ordinances, rules, orders and
regulations of any Governmental Entity, except for possible noncompliance
which individually or in the aggregate would not have a material adverse
effect on the business, financial condition or results of operations of
Parent and its subsidiaries taken as a whole. The term "Parent Fund" shall
mean each investment company registered under the 1940 Act for which Parent
or any of its subsidiaries acts as an adviser or sub-adviser. Except as
disclosed in Section 3.2(j) of the Disclosure Schedule and except for routine
examinations by state Governmental Entities charged with supervision of
insurance companies ("Insurance Regulators"), as of the date of the Original
Agreement, to the knowledge of Parent or LFC, no investigation by any
Governmental Entity with respect to Parent or any of its subsidiaries was
pending or threatened, other than, in each case, those the outcome of which,
as far as reasonably can be foreseen, will not have a material adverse effect
on the business, financial condition or results of operations of Parent and
its subsidiaries taken as a whole.
(ii) The annual statements (including without limitation the annual
statements of any separate accounts) for the year ended December 31, 1993,
together with all exhibits and schedules thereto, and financial statements
relating thereto, and any actuarial opinion, affirmation or certification
filed in connection therewith, and the quarterly statements for the periods
ended after January 1, 1994, together with all exhibits and schedules
thereto, with respect to each subsidiary of the Parent that is a regulated
insurance company (an "Insurance Company"), in each case as filed with the
applicable Insurance Regulator of its jurisdiction of domicile, were prepared
in conformity with statutory accounting practices prescribed or permitted by
such Insurance Regulator applied on a consistent basis ("SAP"), present
fairly, to the extent required by and in conformity with SAP, the statutory
financial condition of such Insurance Company at their respective dates and
the results of operations, changes in capital and surplus and cash flow of
such Insurance Company for each of the periods then ended, and were correct
in all material respects when filed and there were no material omissions
therefrom when filed. No deficiencies or violations material to the financial
condition or operations of any Insurance Company have been asserted in
writing by any Insurance Regulator which have not been cured or otherwise
resolved to the satisfaction of such Insurance Regulator and which have not
been disclosed in writing to Company prior to the date of the Original
Agreement.
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(k) No Prior Activities of LFC or Sub. Neither LFC nor Sub has incurred,
and neither LFC nor Sub will, prior to the Effective Time, incur, directly or
through any subsidiary, any liabilities or obligations for borrowed money or
otherwise, except (i) incidental liabilities or obligations not for borrowed
money incurred in connection with its organization and (ii) liabilities and
obligations of Parent assumed by LFC immediately prior to the Effective Time
pursuant to the Parent Contribution. Except as contemplated by this
Agreement, neither LFC nor Sub (i) has engaged, directly or through any
subsidiary, in any business activities of any type or kind whatsoever, (ii)
has entered into any agreements or arrangements with any person or entity, or
(iii) is subject to or bound by any obligation or undertaking.
(l) Ineligible Persons. None of Parent or LFC or any "affiliated person"
(as defined in the 1940 Act) of Parent or LFC (i) is ineligible pursuant to
Section 9(a) of the 1940 Act to serve as an investment adviser (or in any
other capacity contemplated by the 1940 Act) to a registered investment
company or (ii) to the best knowledge of the senior officers of Parent or LFC
as of the date of the Original Agreement, has engaged in any of the conduct
specified in Section 9(b) of the 1940 Act or Section 203(e) of the Advisers
Act prior to the date of the Original Agreement that would be reasonably
likely to result in SEC action to disqualify Parent or any of its affiliates
as an investment adviser.
(m) Brokers. No broker, investment banker, financial advisor or other
person, other than Goldman, Sachs & Co., the fees and expenses of which will
be paid by LFC, is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on behalf
of Parent or any of its subsidiaries.
(n) New LFC Directors. LFC shall cause each of John A. McNeice, Jr., C.
Herbert Emilson and Harold W. Cogger to be elected as directors of LFC as of
the Effective Time. LFC also shall cause John A. McNeice, Jr. to be elected
Chairman of LFC's Executive Committee and Harold W. Cogger to be elected
Executive Vice President of LFC, in each case as of the Effective Time.
(o) Dividend Reinvestment Plan. The Board of Directors of LFC currently
intends to establish, from and after the Effective Time, an optional dividend
reinvestment plan for all holders of New Common Stock; provided, however,
that, prior to the time at which LFC is eligible to register under the
Securities Act the offer and sale of shares pursuant to such dividend
reinvestment plan on a Form S-3 Registration Statement, participation in such
dividend reinvestment plan will be conditioned upon ownership of at least
2,500,000 shares of New Common Stock and the execution by the participant of
an agreement containing representations and warranties which are customary in
connection with the private sale of securities.
(p) Tax Basis of Parent Assets. The adjusted tax basis of Parent's assets
(other than the Excluded Assets) as of the time of the Parent Contribution
will exceed the sum of (i) the amount of the Assumed Liabilities plus (ii)
the amount of any liabilities to which the contributed assets are subject.
(q) SSI Note. Parent has delivered to the Company a true, correct and
complete copy of the SSI Note.
ARTICLE IV
COVENANTS RELATING TO
CONDUCT OF BUSINESS PRIOR TO MERGER
Section 4.1. Conduct of Business of the Company.
(a) Except as contemplated by the Original Agreement or as set forth in
Section 4.1(a) of the Disclosure Schedule, during the period from the date of
this Agreement to the Effective Time, the Company shall, and shall cause its
subsidiaries to, act and carry on their respective businesses in the ordinary
course of business and, to the extent consistent therewith, use reasonable
efforts to preserve intact their business organizations, keep available the
services of their key officers and employees and preserve the goodwill of
those engaged in material business relationships with them. Without limiting
the generality of the foregoing, during the period from the date of the
Original Agreement to the Effective
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Time, the Company shall not, and shall not permit any of its subsidiaries to,
without the prior consent of Parent:
(i) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any of the
Company's outstanding capital stock (other than the Company's ordinary
quarterly cash dividend in the amount of $.15 per share of Common Stock, in
accordance with usual record and payment dates and in accordance with the
Company's present dividend practice; provided, however, that the Company may
declare, and the Surviving Corporation shall pay, the dividend contemplated
by Section 3.1(q)), (y) split, combine or reclassify any of its outstanding
capital stock or issue or authorize the issuance of any other securities in
respect of, in lieu of or in substitution for shares of its outstanding
capital stock, or (z) purchase, redeem or otherwise acquire any shares of
outstanding capital stock or any rights, warrants or options to acquire any
such shares except, in the case of clause (z), for the acquisition of shares
of Common Stock (i) in accordance with the Amended and Restated Stock
Purchase Agreement dated November 19, 1982 among the Company and certain
individuals party thereto, as amended and in effect on the date hereof (the
"Company Stock Purchase Agreement"), and (ii) from holders of Company Stock
Options in full or partial payment of the exercise price payable by such
holder upon exercise of Company Stock Options outstanding on the date of the
Original Agreement;
(ii) issue, sell, grant, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities, except for the issuance of shares of
Common Stock (i) in accordance with the Company Stock Purchase Agreement or
(ii) upon exercise of Company Stock Options outstanding on the date of the
Original Agreement (and without limiting the generality of the foregoing, and
notwithstanding Section 3.1(f), the Company shall not issue any stock options
or similar securities or interests from and after the date of the Original
Agreement);
(iii) amend its articles of organization, by-laws or other comparable
charter or organizational documents;
(iv) acquire any business or any corporation, partnership, joint venture,
association or other business organization or division thereof, except as
disclosed in Section 4.1(a)(iv) of the Disclosure Schedule;
(v) sell, mortgage or otherwise encumber or subject to any Lien or
otherwise dispose of any of its properties or assets that are material to the
Company and its subsidiaries taken as a whole, except in the ordinary course
of business or as disclosed in Section 4.1(a)(v) of the Disclosure Schedule;
(vi) except as disclosed in Section 4.1(a)(vi) of the Disclosure Schedule,
(x) incur any indebtedness for borrowed money or guarantee any such
indebtedness of another person, other than pursuant to the Company's Credit
Agreement dated as of May 5, 1993, as amended and restated as of December 17,
1993, as amended through the date hereof, with certain Lenders named therein
and The First National Bank of Boston, as Agent, in an aggregate principal
amount not to exceed $120 million at any time outstanding, and pursuant to
the Company's Promissory Note dated May 1, 1994 in favor of The First
National Bank of Boston, in an aggregate principal not to exceed $10 million
at any time outstanding or (y) make any loans or advances to any other
person, other than to any direct or indirect wholly- owned subsidiary of the
Company and other than routine advances to employees;
(vii) except as disclosed in Section 4.1(a)(vii) of the Disclosure
Schedule, make any tax election (other than elections required by law and
made in the ordinary course of business not giving rise to additional
material tax liabilities) or settle or compromise any tax liability that
could reasonably be expected to be material to the Company and its
subsidiaries taken as a whole;
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(viii) except as disclosed in Section 4.1(a)(viii) of the Disclosure
Schedule, pay, discharge, settle or satisfy any claims, liabilities or
obligations (absolute, accrued, asserted or unasserted, contingent or
otherwise), other than the payment, discharge or satisfaction, in the
ordinary course of business consistent with past practice or in accordance
with their terms (or on terms more favorable to the Company), of liabilities
reflected or reserved against in, or contemplated by, the most recent
consolidated financial statements (or the notes thereto) of the Company
included in the Filed SEC Documents or incurred since the date of such
financial statements in the ordinary course of business consistent with past
practice;
(ix) except in the ordinary course of business, modify, amend or terminate
any material agreement, permit, concession, franchise, license or similar
instrument to which the Company or any subsidiary is a party or waive,
release or assign any material rights or claims thereunder; or
(ix) authorize any of, or commit or agree to take any of, the foregoing
actions.
(b) Conduct of Business by Parent. During the period from the date of the
Original Agreement to the Effective Time, Parent shall, and shall cause its
subsidiaries to, carry on their respective businesses in the usual, regular
and ordinary course in substantially the same manner as theretofore conducted
and, to the extent consistent therewith, use all reasonable efforts to
preserve intact their business organizations, keep available the services of
their officers and employees and preserve their relationships with customers,
suppliers, licensors, licensees, distributors and others having business
dealings with them to the end that their goodwill and ongoing businesses
shall be unimpaired at the Effective Time. Without limiting the generality of
the foregoing, during the period from the date of the Original Agreement to
the Effective Time, neither Parent nor LFC shall, and Parent shall not permit
any of its other subsidiaries to:
(i) (x) declare, set aside or pay any dividends on, or make any other
distributions (whether in cash, stock or property) in respect of, any
outstanding capital stock of Parent or LFC (except that Parent may distribute
the SSI Note to LMEC) or (y) split, combine or reclassify any outstanding
capital stock of Parent or LFC or issue or authorize the issuance of any
other securities in respect of, in lieu of or in substitution for shares of
outstanding capital stock of Parent or LFC;
(ii) issue, sell, grant, pledge or otherwise encumber any shares of its
capital stock, any other voting securities or any securities convertible
into, or any rights, warrants or options to acquire, any such shares, voting
securities or convertible securities, except for effecting the Parent
Contribution and any adjustments to Parent stock options (including the
assumption thereof by LFC pursuant to the Parent Contribution) contemplated
by Section 3.2(b);
(iii) acquire any business or any corporation, partnership, joint venture,
association or other business organization or division thereof, in each case
if any such action could reasonably be expected to (A) delay materially the
date of mailing of the Proxy Statement or, (B) if it were to occur after such
date of mailing, require an amendment of the Proxy Statement; or
(iv) authorize any of, or commit or agree to take any of, the foregoing
actions.
Notwithstanding the foregoing, each of Parent and LFC may (i) effect the
Parent Contribution and (ii) engage in the transactions contemplated by
Section 4.1(b) of the Disclosure Schedule.
Section 4.2. Other Actions. The Company and Parent shall not, and shall not
permit any of their respective subsidiaries to, take any action that would,
or that could reasonably be expected to, result in (i) any of the
representations and warranties of such party set forth in this Agreement that
are qualified as to materiality becoming untrue, (ii) any of such
representations and warranties that are not so qualified becoming untrue in
any material respect or (iii) any of the conditions of the Merger set forth
in Article VI not being satisfied.
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ARTICLE V
ADDITIONAL AGREEMENTS
Section 5.1. Preparation of Form S-4 and the Proxy Statement. As soon as
practicable following the date of this Agreement, the Company shall complete
and file with the SEC the Proxy Statement and LFC shall complete and file
with the SEC the Form S-4, in which the Proxy Statement will be included as a
prospectus. Each of the Company, Parent and LFC shall use its best efforts to
have the Form S-4 declared effective under the Securities Act as promptly as
practicable after such filing. The Company will use its best efforts to cause
the Proxy Statement to be mailed to the Company's stockholders, as promptly
as practicable after the Form S-4 is declared effective under the Securities
Act. LFC shall also take any action (other than qualifying to do business in
any jurisdiction in which it is not now so qualified) required to be taken
under any applicable state securities laws in connection with the issuance of
the Stock Consideration in the Merger and the Company shall furnish all
information concerning the Company and the holders of the Common Stock as may
be reasonably requested in connection with any such action.
Section 5.2. Meeting of Stockholders. The Company will take all action
necessary in accordance with applicable law and its articles of organization
and by-laws to convene a meeting of its stockholders (the "Stockholders
Meeting") to consider and vote upon the approval of the Merger and this
Agreement. Subject to Section 5.9, the Company will, through its Board of
Directors, recommend to its stockholders approval of the foregoing matters.
Without limiting the generality of the foregoing, the Company agrees that,
subject to its right to terminate this Agreement pursuant to Section 5.9, its
obligations pursuant to the first sentence of this Section 5.2 shall not be
affected by (i) the commencement, public proposal, public disclosure or
communication to the Company of any Acquisition Proposal (as defined in
Section 5.8) or (ii) the withdrawal or modification by the Board of Directors
of the Company of its approval or recommendation of this Agreement or the
Merger. The Company will use its best efforts to hold the Stockholders
Meeting as soon as practicable after the date hereof.
Section 5.3. Letters of the Company's Accountants. The Company shall use its
best efforts to cause to be delivered to LFC a letter of Price Waterhouse,
LLP, the Company's independent accountants, dated a date within two business
days before the date on which the Form S-4 shall become effective and a
letter of Price Waterhouse, LLP, dated a date within two business days before
the Closing Date, each addressed to LFC, in form and substance reasonably
satisfactory to LFC and customary in scope and substance for letters
delivered by independent accountants in connection with registration
statements similar to the Form S-4.
Section 5.4. Letters of Parent's Accountants. Each of Parent and LFC shall
use its best efforts to cause to be delivered to the Company a letter of KPMG
Peat Marwick, Parent's independent accountants, dated a date within two
business days before the date on which the Form S-4 shall become effective
and a letter of KPMG Peat Marwick, dated a date within two business days
before the Closing Date, each addressed to the Company, in form and substance
reasonably satisfactory to the Company and customary in scope and substance
for letters delivered by independent accountants in connection with
registration statements similar to the Form S-4.
Section 5.5. Access to Information; Confidentiality. Each of the Company and
Parent shall, and shall cause each of its respective subsidiaries to, afford
to the other party and to the officers, employees, counsel, financial
advisors and other representatives of such other party reasonable access
during normal business hours during the period prior to the Effective Time to
all its properties, books, contracts, commitments, personnel and records and,
during such period, each of the Company and Parent shall, and shall cause
each of its respective subsidiaries to, furnish as promptly as practicable to
the other party such information concerning its business, properties,
financial condition, operations and personnel as such other party may from
time to time reasonably request. Except as required by law, Parent will hold,
and will cause its respective directors, officers, employees, accountants,
counsel, financial advisors and other representatives and affiliates to hold,
any nonpublic information obtained from the Company in confidence to the
extent required by, and in accordance with, the provisions of the letter
dated August 17, 1994, between Parent and the Company (the "Confidentiality
Agreement") and will otherwise comply with the Confidentiality Agreement.
Except as required by law, the Company will
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hold, and will cause its directors, officers, employees, accountants,
counsel, financial advisors and other representatives and affiliates to hold,
any nonpublic information obtained from Parent in confidence to the extent
required by, and in accordance with, the provisions of the Confidentiality
Agreement and will otherwise comply with the Confidentiality Agreement.
Section 5.6. Best Efforts. Upon the terms and subject to the conditions and
other agreements set forth in this Agreement, each of the parties agrees to
use its best efforts to take, or cause to be taken, all actions, and to do,
or cause to be done, and to assist and cooperate with the other parties in
doing, all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable, the Merger and the
other transactions contemplated by this Agreement.
Section 5.7. Public Announcements. Parent and LFC, on the one hand, and the
Company, on the other hand, will consult with each other before issuing, and
provide each other the opportunity to review and comment upon, any press
release or other public statements with respect to the transactions
contemplated by this Agreement, including the Merger, and shall not issue any
such press release or make any such public statement prior to such
consultation, except as may be required by applicable law, court process or
by obligations pursuant to any listing agreement with any national securities
exchange.
Section 5.8. Acquisition Proposals. The Company shall not, nor shall it
permit any of its subsidiaries to, nor shall it authorize or permit any
officer, director, employee, or any investment banker, attorney or other
advisor or representative, of the Company or any of its subsidiaries to,
directly or indirectly, (i) solicit, initiate or encourage the submission of
any Acquisition Proposal (as hereinafter defined) or (ii) participate in any
discussions or negotiations regarding, or furnish to any person any
information with respect to, or take any other action to facilitate any
inquiries or the making of any proposal that constitutes, or may reasonably
be expected to lead to, any Acquisition Proposal; provided, however, that on
or after the date of the Original Agreement, the Company, any of its
subsidiaries or any officer, director or employee of, or any investment
banker, attorney or other advisor or representative of, the Company or any of
its subsidiaries may, following the receipt of an Acquisition Proposal by the
Company that the Board of Directors of the Company determines in good faith,
following consultation with outside counsel, would permit the Board of
Directors to take any of the actions referred to in the first sentence of
Section 5.9, participate in negotiations regarding such Acquisition Proposal.
The Company shall promptly advise Parent and LFC orally and in writing of the
receipt by it (or any of the other entities or persons referred to above)
after the date of the Original Agreement of any Acquisition Proposal, or any
inquiry which could lead to any Acquisition Proposal, the material terms and
conditions of such Acquisition Proposal or inquiry, and the identity of the
person making any such Acquisition Proposal or inquiry. The Company will keep
Parent and LFC fully informed of the status and details of any such
Acquisition Proposal or inquiry. Without limiting the foregoing, it is
understood that any violation of the restrictions set forth in the first
sentence of this Section 5.8 by any officer, director or employee of the
Company or any of its subsidiaries or any investment banker, attorney or
other advisor or representative of the Company or any of its subsidiaries,
whether or not such person is purporting to act on behalf of the Company or
any of its subsidiaries or otherwise, shall be deemed to be a breach of this
Section 5.8 by the Company. For purposes of this Agreement, "Acquisition
Proposal" means any proposal with respect to a merger, consolidation, share
exchange or similar transaction involving the Company or any subsidiary of
the Company, or any purchase of all or any significant portion of the assets
of the Company or any subsidiary of the Company, or any equity interest in
the Company or any subsidiary of the Company, other than the transactions
contemplated hereby.
Section 5.9. Fiduciary Duties. The Board of Directors of the Company shall
not (i) withdraw or modify, or propose to withdraw or modify, in a manner
adverse to Parent, LFC or Sub, the approval or recommendation by such Board
of Directors of this Agreement or the Merger, (ii) approve or recommend, or
propose to approve or recommend, any Acquisition Proposal or (iii) enter into
any agreement with respect to any Acquisition Proposal, unless the Company
receives an Acquisition Proposal and the Board of Directors of the Company
determines in good faith, following consultation with outside counsel, that
in order to comply with its fiduciary duties to stockholders under applicable
law it is necessary for the Board of Directors to withdraw or modify its
approval or recommendation of this Agreement or the Merger,
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approve or recommend such Acquisition Proposal, enter into an agreement with
respect to such Acquisition Proposal or terminate this Agreement. In the
event the Board of Directors of the Company takes any of the foregoing
actions, the Company shall, concurrently with the taking of any such action,
pay to Parent the Section 5.13(a) Fee, plus all Expenses pursuant to Section
5.13. Nothing contained in this Section 5.9 shall prohibit the Company from
taking and disclosing to its stockholders a position contemplated by Rule
14d-9 or Rule 14e-2(a) promulgated under the Exchange Act or from making any
disclosure to the Company's stockholders which, in the good faith judgment of
the Board of Directors of the Company based on the advice of outside counsel,
is required under applicable law; provided that, in the event that in so
doing the Company withdraws or modifies, or proposes to withdraw or modify,
its position with respect to the Merger or approves or recommends, or
proposes to approve or recommend, an Acquisition Proposal, the Company shall
pay to the Parent, to the extent provided in Section 5.13, the Section
5.13(a) Fee, plus all Expenses payable pursuant to Section 5.13.
Notwithstanding anything contained in this Agreement to the contrary, any
action by the Board of Directors permitted by this Section 5.9 shall not
constitute a breach of this Agreement by the Company.
Section 5.10. Consents, Approvals and Filings.
(a) The Company and Parent will make and cause their respective
subsidiaries to make all necessary filings, as soon as practicable,
including, without limitation, those required under the HSR Act, the
Securities Act, the Exchange Act, the 1940 Act, the Advisers Act and
applicable state insurance and securities laws in order to facilitate prompt
consummation of the Merger and the other transactions contemplated by this
Agreement. In addition, the Company, Parent and LFC will each use their best
efforts, and will cooperate fully with each other (i) to comply as promptly
as practicable with all governmental requirements applicable to the Merger
and the other transactions contemplated by this Agreement and (ii) to obtain
as promptly as practicable all necessary permits, orders or other consents of
Governmental Entities and consents of all third parties necessary for the
consummation of the Merger and the other transactions contemplated by this
Agreement. Each of the Company, Parent and LFC shall use reasonable efforts
to provide such information and communications to Governmental Entities as
such Governmental Entities may reasonably request.
(b) Each of the parties shall provide to the other party copies of all
applications in advance of filing or submission of such applications to
Governmental Entities in connection with this Agreement.
Section 5.11. Company Satisfaction of the Conditions of Section 15 of the
1940 Act.
(a) The Company shall use, and shall cause its wholly owned subsidiary
Colonial Management Associates, Inc. ("CMA") to use, its best efforts to
cause the boards of trustees of the Company Funds to approve, and to solicit
their respective shareholders as promptly as practicable with regard to the
approval of, new investment advisory agreements with CMA acting as investment
adviser for such funds, to be effective on or as promptly as practicable
after the Effective Time, pursuant to the provisions of Section 15 of the
1940 Act, and consistent with all requirements of the 1940 Act applicable
thereto, provided that such agreements are identical in all respects to the
existing agreements other than the term of the agreement. For purposes of
this Agreement, "Company Funds" shall mean the registered investment
companies for which the Company or any subsidiary acts as investment adviser.
Each Company Fund is identified in Section 5.11 of the Disclosure Schedule.
The Company and its subsidiaries also shall take any similar action required
under the 1940 Act to continue any underwriting or distribution agreements of
the Company Funds.
(b) The Company shall use, and shall cause CMA to use, its best efforts
to ensure the satisfaction of the conditions set forth in Section 15(f) of
the 1940 Act with respect to each of the Company Funds.
Section 5.12. Advisory Contract Consents. As promptly as practicable, the
Company shall cause the non-investment company advisory clients of its wholly
owned subsidiary Colonial Advisory Services, Inc. ("CSA") to be informed of
the transactions contemplated by this Agreement and shall give such clients
an opportunity to terminate their advisory contracts with CSA. Parent and LFC
agree that the Company may satisfy this obligation insofar as it relates to
non-investment company advisory clients
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by providing them with the notice contemplated by the first sentence of this
Section 5.12 and obtaining such clients' consent in the form of actual or
implied consent by way of informing such clients of CSA's intention to
continue the advisory services, pursuant to the CSA's existing contracts with
such clients, subject to such clients' right to terminate such contracts
within 60 days of receipt of such notice, and that each such client's consent
will be implied if it continues to accept the services without rejection
during such specified 60 day period.
Section 5.13. Certain Fees and Expenses.
(a) The Company shall pay to Parent upon demand $8,000,000 (the "Section
5.13(a) Fee"), payable in same-day funds, plus all Expenses (as defined
below), if an Acquisition Proposal is commenced, publicly proposed, publicly
disclosed or communicated to the Company (or the willingness of any person to
make an Acquisition Proposal is publicly disclosed or communicated to the
Company) and (i) the Board of Directors of the Company withdraws or modifies
its approval or recommendation of this Agreement or the Merger, approves or
recommends such Acquisition Proposal, enters into an agreement with respect
to such Acquisition Proposal or terminates this Agreement, or (ii) the
requisite approval of the Company's stockholders for the Merger is not
obtained at the Stockholders' Meeting. Notwithstanding the foregoing, the
amount of Expenses subject to reimbursement under this Section 5.13(a) shall
not exceed $1,000,000.
(b) For purposes of this Section, "Expenses" shall mean all documented
out-of-pocket fees and expenses incurred or paid by or on behalf of Parent
in connection with the Merger or the consummation of any of the transactions
contemplated by this Agreement, including all printing costs and fees and
expenses of counsel, investment banking firms, accountants, experts and
consultants to Parent.
Section 5.14. Compliance with Section 15(f) of the 1940 Act by Parent, LFC
and Sub. Parent, LFC and Sub shall use their best efforts to assure the
satisfaction of the conditions of Section 15(f) of the 1940 Act with respect
to each of the Company Funds.
Section 5.15. Affiliates and Certain Stockholders. Prior to the Closing Date,
the Company shall deliver to LFC a letter identifying all persons who are, at
the time the Merger is submitted for approval to the stockholders of the
Company, "affiliates" of the Company for purposes of Rule 145 under the
Securities Act. The Company shall use its best efforts to cause each such
person to deliver to LFC on or prior to the Closing Date a written agreement
in customary form. LFC shall not be required to maintain the effectiveness of
the Form S-4 or any other registration statement under the Securities Act for
the purposes of resale of LFC Common Stock by such affiliates and the
certificates representing New Common Stock received by such affiliates in the
Merger shall bear a customary legend regarding applicable Securities Act
restrictions and the provisions of this Section 5.15.
Section 5.16. Stockholder Litigation. The Company shall give Parent and LFC
the opportunity to participate in the defense or settlement of any
stockholder litigation against the Company and its directors relating to the
transactions contemplated by this Agreement; provided, however, that no such
settlement shall be agreed to without Parent's and LFC's consent, which
consent shall not be unreasonably withheld.
Section 5.17. Board Action Relating to Stock Option Plans. As soon as
practicable following the date of the Original Agreement, the Board of
Directors of the Company (or, if appropriate, any committee administering a
Company Stock Option Plan) shall adopt such resolutions or take such actions
as may be required to adjust the terms of outstanding Company Stock Options
in accordance with Section 2.2 and shall make such other changes to the
Company Stock Option Plans as it deems appropriate to give effect to the
Merger (subject to the approval of Parent and LFC, which shall not be
unreasonably withheld).
Section 5.18. Benefits Plans.
(a) Stock Option Plans. The treatment of Company Stock Options granted
under the Company Stock Option Plans shall be governed by Section 2.2. LFC
shall assume and perform each
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Assumed Option in accordance with Section 2.2 and the terms and provisions of
the applicable Company Stock Option Plan and option agreements. From and
after the date of the Original Agreement, no additional options or other
awards shall be granted under either Company Stock Option Plan.
(b) ESOP. Reference is made to the Company's Employee Stock Ownership
Plan, as in effect on the date of the Original Agreement (the "Company
ESOP"). The Company ESOP, as a holder of Common Stock, shall be entitled to
make all applicable elections pertaining to the exchange of shares of Common
Stock held by it for Merger Consideration in accordance with Section 2.1(c).
From and after the date of the Original Agreement, no additional
contributions (except as may be required by law) shall be made to the Company
ESOP. Subject to the foregoing, the Surviving Corporation shall assume the
obligations of the Company in respect of the Company ESOP.
(c) Profit Sharing Plan. Reference is made to the Company's Profit,
Sharing Plan, as in effect on the date of the Original Agreement (the
"Company Profit Sharing Plan"). The Surviving Corporation shall assume and
continue the Company Profit Sharing Plan from and after the Effective Time;
provided that calculations of earning and similar matters pertaining to
financial performance from and after the Effective Time shall be based upon
the results of operations of the Surviving Corporation and its subsidiaries;
and, provided, further, that in any event LFC shall cause the Surviving
Corporation and its subsidiaries and affiliates, as appropriate, to
contribute to the Company Profit Sharing Plan all salary-based contributions
for periods prior to the Effective Time, and discretionary contributions with
respect to 1994, consistent with the accruals of the Company and its past
contribution practices, to the extent not otherwise made on or prior to the
Effective Time.
(d) Retention Program. The Surviving Corporation shall establish and
maintain the retention program described in Section 5.18(d) of the Disclosure
Schedule.
(e) Employee Contracts. The Surviving Corporation shall enter into and
perform the employment contracts described in Section 5.18(e) of the
Disclosure Schedule.
(f) Other Benefit Plans. The Company and its subsidiaries currently
maintain other employee benefit plans and related employee programs
(including bonus arrangements and arrangements for independent contractors)
other than those described in paragraphs (a) through (e) of this Section 5.18
(collectively, and as in effect on the date of the Original Agreement, the
"Other Company Plans"). Except as otherwise agreed by LFC and the Company
prior to the Closing Date, the Surviving Corporation and its subsidiaries
shall continue to maintain the Other Company Plans from and after the
Effective Time.
(g) Parent Plans. Except as otherwise provided by LFC from and after the
date of the Original Agreement, the employees of the Surviving Corporation
and its subsidiaries shall not be entitled to participate in, or otherwise
receive benefits under, any employee benefit plans or programs maintained by
the Parent, LFC or any of their respective subsidiaries.
Section 5.19. Indemnification and Insurance. (a) Upon consummation of the
Merger and for a period of six years after the Effective Time, except to the
extent prohibited by law, LFC and the Surviving Corporation jointly and
severally shall indemnify, defend and hold harmless each person who is now,
or has been at any time prior to the date hereof or who becomes prior to the
Effective Time, a director (whether elected or appointed), of the Company
against any and all claims, damages, liabilities, losses, costs, charges,
expenses (including, without limitation, reasonable costs of investigation,
and the reasonable fees and disbursements of legal counsel and other advisers
and experts as incurred), judgments, fines, penalties and amounts paid in
settlement, asserted against, incurred by or imposed upon any such director,
(i) in connection with, arising out of or relating to any threatened, pending
or completed claim, action, suit or proceeding (whether civil, criminal,
administrative or investigative, including, without limitation any and all
claims, actions, suits, proceedings or investigations by or on behalf of or
in the right of or against the Company or any subsidiary of the Company or
their affiliates, or by any present or former shareholder of the Company
(collectively, "Claims"), including, without limitation, any claim which is
based upon, arises out of or in any way relates to the Merger, the Form S-4,
the solicitation of the approval of the Funds contemplated by Section 5.11,
any of the transactions
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contemplated by this Agreement (including, without limitation, any schedule
or appendix hereto), the director's service as a member of the Company's
Board of Directors or any committee of the Company's Board of Directors, the
events leading up to the execution of the Original Agreement or this
Agreement or related thereto and any breach of any duty in connection with
any of the foregoing, and (ii) in connection with, arising out of or relating
to the enforcement of the obligations of LFC or the Surviving Corporation set
forth in this Section 5.19. LFC and the Surviving Corporation shall also,
jointly and severally, advance expenses as incurred in connection with any
Claim by any such director except to the extent prohibited by law.
(b) Upon the consummation of the Merger, and from and after the Effective
Time, to the fullest extent permitted by law, the Surviving Corporation shall
assume and honor any obligation of the Company immediately prior to the
Effective Time, to the fullest extent permitted by law, with respect to the
indemnification of any director (whether elected or appointed), officer or
employee of the Company or any subsidiary of the Company (including such
persons who serve or who have served at the request of the Company or any
subsidiary of the Company in any capacity with any other person
(collectively, the "indemnities") arising out of the Company's Articles of
Organization or By-Laws as if such obligations were pursuant to a contract or
arrangement between the Surviving Corporation and such indemnities.
(c) In the event either of LFC or the Surviving Corporation or any of
their respective successors or assigns (i) reorganizes or consolidates with
or merges into or enters into another business combination transaction with
any other person or entity and is not the resulting, continuing or surviving
corporation or entity of such consolidation, merger or transaction, or (ii)
liquidates, dissolves or transfers all or substantially all of its properties
and assets to any person or entity, then, and in each such case, proper
provision shall be made so that the successors and assigns of LFC or the
Surviving Corporation, as the case may be, assume the respective obligations
of LFC or the Surviving Corporation, as the case may be, set forth above in
this Section 5.19.
(d) LFC shall cause the Company's current officers' and directors'
liability insurance to be continuously maintained in full force and effect
without reduction of coverage for a period of six years after the Effective
Time (provided that LFC may substitute therefor policies of at least the same
coverage and amounts containing terms and conditions which are not materially
less advantageous).
(e) This Section 5.19 shall be construed as an agreement between LFC
and/or the Surviving Corporation (as applicable) and the directors of the
Company and the other indemnities described in this Section 5.19 as
unaffiliated third parties, as to which agreement such persons are intended
to be third-party beneficiaries of the respective benefits conferred upon
such persons by this Section 5.19, and is not subject to any limitations to
which LFC or the Surviving Corporation may be subject in indemnifying its own
directors, officers, employees, agents and other persons who serve at the
request of LFC or the Surviving Corporation. All rights to indemnification in
respect of any Claim asserted or made within the six-year period described in
the first sentence of Section 5.19(a) shall continue until the final
disposition of such Claim.
ARTICLE VI
CONDITIONS PRECEDENT
Section 6.1. Conditions to Each Party's Obligation to Effect the Merger. The
respective obligation of each party to effect the Merger is subject to the
satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) Stockholder Approval. This Agreement and the Merger shall have been
approved and adopted by the stockholders of the Company in the manner
contemplated by Section 3.1(k) and in compliance with the MBCL and other
applicable law.
(b) Governmental and Regulatory Consents. All filings required to be made
prior to the Effective Time with, and all consents, approvals, permits and
authorizations required to be obtained prior to the Effective Time from,
Governmental Entities, including, without limitation, those set forth in
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Section 3.1(c) of the Disclosure Schedule, in connection with the execution
and delivery of this Agreement and the consummation of the transactions
contemplated hereby by the Company, Parent, LFC and Sub will have been made
or obtained (as the case may be); provided, however, that such consents,
approvals, permits and authorizations may be subject to (i) conditions
customarily imposed by Insurance Regulators or (ii) other conditions that
would not reasonably be expected to have a material adverse effect on the
business, financial condition or results of operations of LFC and its
subsidiaries taken as a whole (after giving effect to the consummation of the
Merger).
(c) HSR Act. The waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have been terminated or shall have
otherwise expired.
(d) No Injunctions or Restraints. No temporary restraining order,
preliminary or permanent injunction or other order issued by any court of
competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Merger shall be in effect; provided, however, that the
parties invoking this condition shall use reasonable efforts to have any such
order or injunction vacated.
(e) Company Fund Approvals. In accordance with Section 15 of the 1940
Act, the respective boards of trustees of the Company Funds, including in
each case a majority of trustees who are not parties to the investment
advisory contracts of such Company Funds or "interested persons" (as such
term is defined in the 1940 Act) of any such party (the "Non- Interested
Trustees"), and holders of a majority of the outstanding voting securities
(as such term is defined in the 1940 Act) of Company Funds which, as of
September 30, 1994, represented at least 90% of all of the net assets of all
of the Company Funds as of such date, shall have approved new investment
advisory contracts with the CMA acting as investment advisers of such funds
upon terms identical with those of each such Company Fund (other than changes
in the term of the contract); and the board of trustees, including a majority
of the Non-Interested Trustees, of each of the Company Funds which has
approved a new investment advisory contract shall have approved new
underwriting and distribution contracts, if any, with the applicable
subsidiaries of the Company that are parties to such agreements pursuant to
Section 15 of the 1940 Act and any other requirements applicable thereto
contained in the 1940 Act. Except for waivers or modifications that are not
material to the business, financial condition or results of operations of the
Company and its subsidiaries taken as a whole, the respective boards of
trustees of the Company Funds shall have taken no action to terminate the
Rule 12b-1 plans, if any, in effect for the Company Funds on September 30,
1994, or to terminate or waive any contingent deferred sales charges in
effect on said date, for any of the Company Funds, and the Company shall not
have received from said boards of trustees any notice or information that
would lead the Company to believe that said boards are currently
contemplating any such action.
(f) Compliance with Section 15(f) of the 1940 Act. At the time of the
Closing: (i) at least 75% of the members of the board of trustees of each
Company Fund which has approved a new investment advisory contract shall not
be "interested persons" (as such term is defined in the 1940 Act) of Parent
(or such other entity which will act as adviser to such Company Funds
following the Effective Time), of the Company or of any affiliate of the
Company that was the investment adviser of any such Company Fund immediately
preceding the Effective Time; and (ii) the requirements of Section
15(f)(1)(B) of the 1940 Act shall have been complied with in that no "unfair
burden" shall have been imposed on any of the Company Funds as a result of
this Agreement, the transactions contemplated hereunder, new investment
advisory contracts or otherwise.
(g) Form S-4. The Form S-4 shall have become effective under the
Securities Act and under any similar registration or qualification
requirements of applicable state securities laws and shall not be the subject
of any stop order or proceedings seeking a stop order.
(h) Tax Opinions. The Company and the Company's stockholders, on the one
hand, and LFC and Parent, on the other hand, shall have received from their
respective tax counsel opinions dated the Closing Date substantially to the
effect that, on the basis of certain facts and representations set forth
therein, or set forth in writing elsewhere and referred to therein, for
federal income tax purposes the Parent Contribution and the transfer of stock
of the Company by its stockholders pursuant to the Merger, taken together,
constitute an integrated exchange of property for stock described in Section
351 of the Code as to which no gain or loss shall be recognized to holders of
Common Stock, except, in the
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case of holders of Common Stock (including, without limitation, holders of
Dissenting Common Shares), with respect to cash received by such holders in
accordance with this Agreement: and that the Parent Contribution and the
transactions pertaining to the Merger result in no recognition of income or
gain to LFC, Sub or the Company, and in respect of such other substantial
federal income tax effects of the Merger as the Company, on the one hand, or
LFC and Parent, on the other hand, may reasonably require. In rendering any
such opinion such counsel may rely, to the extent they reasonably deem
necessary or appropriate, upon opinions of other counsel or other persons and
upon representations of an officer or officers of Parent, LFC, Sub and the
Company or any of their respective affiliates.
Section 6.2. Conditions to Obligations of Parent and Sub. The obligations of
Parent, LFC and Sub to effect the Merger are further subject to the following
conditions:
(a) Representations and Warranties. The representations and warranties of
the Company set forth in Section 3.1 that are qualified as to materiality
shall be true and correct and the representations and warranties of the
Company set forth in Section 3.1 that are not so qualified shall be true and
correct in all material respects, in each case as of the date of the Original
Agreement (or, solely in the case of Section 3.1(b), to the extent explicitly
stated therein, as of the date of this Agreement) and as of the Closing Date
as though made on and as of the Closing Date, except to the extent such
representations and warranties speak as of an earlier date or except for
transactions explicitly permitted by this Agreement, and LFC shall have
received a certificate signed on behalf of the Company by the chief executive
officer and the chief financial officer of the Company to the effect set
forth in this paragraph.
(b) Performance of Obligations of the Company. The Company shall have
performed in all material respects all obligations required to be performed
by it under the Original Agreement or Agreement at or prior to the Closing
Date, and LFC shall have received a certificate signed on behalf of the
Company by the chief executive officer and the chief financial officer of the
Company to such effect.
(c) Affiliates. LFC shall have received from each affiliate named in the
letter referred to in Section 5.15 an executed copy of an agreement in the
form described in Section 5.15.
Section 6.3. Conditions to Obligation of the Company. The obligation of the
Company to effect the Merger is further subject to the following conditions:
(a) Representations and Warranties. The representations and warranties of
Parent, LFC and Sub set forth in Section 3.2 that are qualified as to
materiality shall be true and correct and the representations and warranties
of Parent, LFC and Sub set forth in Section 3.2 that are not so qualified
shall be true and correct in all material respects, in each case as of the
date of the Original Agreement (or, where explicitly stated herein, as of the
date of this Agreement) and as of the Closing Date as though made on and as
of the Closing Date, except to the extent such representations and warranties
speak as of an earlier date or except for transactions explicitly permitted
by this Agreement, and the Company shall have received a certificate signed
on behalf of each of Parent and LFC by the chief executive officer and the
chief financial officer of such entity to the effect set forth in this
paragraph.
(b) Performance of Obligations of Parent and Sub. Parent, LFC and Sub
shall have performed in all material respects all obligations required to be
performed by them under the Original Agreement or this Agreement at or prior
to the Closing Date, and the Company shall have received a certificate signed
on behalf of each of Parent and LFC by the chief executive officer and the
chief financial officer of such entity to such effect.
(c) Stockholders Agreement. Each of LFC and Liberty Mutual shall have
duly executed and delivered the Stockholders Agreement.
(d) Listing of New Common Stock. The New Common Stock shall have been (i)
approved for listing, from and after the Effective Time, on the New York
Stock Exchange or (ii) approved for inclusion, from and after the Effective
Time, in the NASDAQ National Market System and for listing, from and after
the Effective Time, on the Boston Stock Exchange.
30
<PAGE>
(e) Other Agreements. Each of LFC and Liberty Mutual shall have duly
executed and delivered an Intercompany Agreement, a Registration Rights
Agreement and a Tax Sharing Agreement in substantially the form of Exhibits
10.1, 10.2 and 10.3, respectively, to Pre-Effective Amendment No. 2, filed
March 17, 1994, to the Parent's Registration Statement on Form S-1
(Registration No. 33-71982).
(f) Funding of Cash Consideration. LFC shall have received from Liberty
Mutual or an affiliate thereof immediately available funds in an amount
adequate to finance the amount of the Cash Consideration, and such funds
shall have been delivered to the Paying Agent in accordance with Section
2.3(a). Such funds shall constitute the proceeds of the indebtedness
described in the last paragraph of Section 4.1(b) of the Disclosure Schedule.
(g) Parent Contribution. Parent and LFC shall have effected the Parent
Contribution in accordance with Section 1.3(c), pursuant to which all of the
assets of Parent (other than the Excluded Assets) shall have been contributed
to LFC, and the Company shall have received a certificate signed on behalf of
each Parent and LFC by the chief executive officer and the chief financial
officer of such entity to such effect. The documentation pursuant to which
the Parent Contribution is effected shall be reasonably satisfactory to the
Company and its counsel.
ARTICLE VII
TERMINATION, AMENDMENT AND WAIVER
Section 7.1. Termination. This Agreement may be terminated and abandoned at
any time prior to the Effective Time, whether before or after approval of
matters presented in connection with the Merger by the stockholders of the
Company:
(a) by mutual written consent of Parent and the Company; or
(b) by either Parent or the Company (by notice to the other):
(i) if any required approval of the stockholders of the Company, upon a
vote at a duly held Stockholders Meeting or any adjournment thereof, shall
not have been obtained; or
(ii) if the Merger shall not have been consummated on or before June 30,
1995, unless the failure to consummate the Merger is the result of a willful
and material breach of this Agreement by the party seeking to terminate this
Agreement; or
(iii) if any Governmental Entity shall have issued an order, decree or
ruling or taken any other action permanently enjoining, restraining or
otherwise prohibiting the Merger and such order, decree, ruling or other
action shall have become final and nonappealable; or
(iv) if the Board of Directors of the Company shall have taken any action
specified in clauses (i) through (iii) of the first sentence of Section 5.9;
or
(c) by Parent (by notice to the Company), in the circumstances specified
in Section 2.1(c)(VIII).
Section 7.2. Effect of Termination. In the event of termination of this
Agreement by either the Company or Parent as provided in Section 7.1, this
Agreement shall forthwith become void and have no effect, without any
liability or obligation on the part of Parent, LFC, Sub or the Company, other
than the last two sentences of Section 5.5 and Sections 3.1(n), 3.2(m), 5.13
and 7.2 and Sections 8.2 through 8.13. Nothing contained in this Section
shall relieve any party from any liability resulting from any wilful and
material breach of the representations, warranties, covenants or agreements
set forth in this Agreement.
Section 7.3. Amendment. Subject to the applicable provisions of the MBCL, at
any time prior to the Effective Time, the parties hereto may modify or amend
this Agreement, by written agreement executed and delivered by duly
authorized officers of the respective parties; provided, however, that after
approval of the Merger by the stockholders of the Company, no amendment shall
be made which reduces the consideration payable in the Merger or adversely
affects the rights of the Company's stockholders hereunder without the
approval of such stockholders. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties.
31
<PAGE>
Section 7.4. Extension; Waiver. At any time prior to the Effective Time, the
parties may (a) extend the time for the performance of any of the obligations
or other acts of the other parties, (b) waive any inaccuracies in the
representations and warranties of the other parties contained in this
Agreement or in any document delivered pursuant to this Agreement or (c)
subject to Section 7.3, waive compliance with any of the agreements or
conditions of the other parties contained in this Agreement. Any agreement on
the part of a party to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed on behalf of such party. The
failure of any party to this Agreement to assert any of its rights under this
Agreement or otherwise shall not constitute a waiver of such rights.
Section 7.5. Procedure for Termination, Amendment, Extension or Waiver. A
termination of this Agreement pursuant to Section 7.1, an amendment of this
Agreement pursuant to Section 7.3 or an extension or waiver pursuant to
Section 7.4 shall, in order to be effective, require in the case of Parent,
LFC, Sub or the Company, action by its Board of Directors or the duly
authorized designee of its Board of Directors.
ARTICLE VII
GENERAL PROVISIONS
Section 8.1. Non-Survival of Representations and Warranties. None of the
representations and warranties in this Agreement or in any instrument
delivered pursuant to this Agreement shall survive the Effective Time. This
Section 8.1 shall not limit any covenant or agreement of the parties which by
its terms contemplates performance after the Effective Time, including,
without limitation, Section 5.14.
Section 8.2. Fees and Expenses. Except as provided otherwise in Section 5.13,
whether or not the Merger shall be consummated, each party hereto shall pay
its own expenses incident to preparing for, entering into and carrying out
this Agreement and the consummation of the transactions contemplated hereby,
except that expenses incurred in connection with printing and mailing the
Proxy Statement and the S-4, and the costs of preparing and distributing
proxy materials to and of holding the meetings of the Company Funds'
shareholders will be shared equally by Parent and LFC, on the one hand, and
the Company, on the other hand.
Section 8.3. Definitions. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such first person;
(b) "person" means an individual, corporation, partnership, joint
venture, association, trust, unincorporated organization or other entity; and
(c) a "subsidiary" of any person means another person 50% of the equity
securities of which are owned directly or indirectly by such first person;
provided, however, that joint ventures or partnerships engaged in the
business of real estate development, management or ownership shall not be
deemed to be subsidiaries unless such first person owns directly or
indirectly 80% of the equity securities of such joint venture or partnership.
Section 8.4. Notices. All notices, requests, claims, demands and other
communications under this Agreement shall be in writing and shall be deemed
given (i) if delivered personally, (ii) if sent by overnight courier
(providing proof of delivery) or (iii) upon the third business day following
mailing by registered mail, postage prepaid, to the parties at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Parent, LFC or Sub, to
Liberty Financial Companies, Inc.
Federal Reserve Plaza
600 Atlantic Avenue, 24th Floor
Boston, MA 02210-6000
Attn: General Counsel
32
<PAGE>
with copies to:
Mayer, Brown & Platt
787 Seventh Avenue
New York, NY 10019-6018
Attn: Joseph W. Bartlett
(b) if to the Company, to
The Colonial Group, Inc.
One Financial Center
Boston, MA 02111
Attn: General Counsel
with copies to:
Bingham, Dana & Gould
150 Federal Street
Boston, MA 02110
Attn: Michael P. O'Brien
Section 8.5. Interpretation. When a reference is made in this Agreement to a
Section or Schedule, such reference shall be to a Section of, or a Schedule
to, this Agreement unless otherwise indicated. The headings contained in this
Agreement (or, where explicitly stated herein, to the Original Agreement) are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed
by the words "without limitation".
Section 8.6. Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
of the parties and delivered to the other parties.
Section 8.7. Entire Agreement; Third-Party Beneficiaries. This Agreement and
the other agreements referred to herein, including without limitation the
Confidentiality Agreement, constitute the entire agreement, and supersede all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter of this Agreement. This Agreement is not
intended to confer upon any person other than the parties hereto and the
third party beneficiaries referred to in the following sentence any rights or
remedies. The parties hereto expressly intend the provisions of Sections 5.14
and 5.19 and paragraphs (a), (b), (d) and (e) of Section 5.18 to confer a
benefit upon and be enforceable by, as third party beneficiaries of this
Agreement, the third persons referred to in, or intended to be benefitted by,
such provisions.
Section 8.8. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the domestic substantive laws of the
Commonwealth of Massachusetts, without giving effect to any choice or
conflicts of laws rule or provision that would result in the application of
the domestic substantive laws of any other jurisdiction.
Section 8.9. Assignment. Neither this Agreement nor any of the rights,
interests or obligations under this Agreement shall be assigned, in whole or
in part, by operation of law or otherwise by any of the parties without the
prior written consent of the other parties, and any such assignment that is
not consented to shall be null and void. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of, and be
enforceable by, the parties and their respective successors and permitted
assigns.
Section 8.10. Enforcement. The parties agree that irreparable damage would
occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that the parties shall be entitled to an injunction
or injunctions to prevent breaches of this Agreement and to enforce
specifically the terms and provisions of this Agreement.
33
<PAGE>
Section 8.11. Severability. Whenever possible, each provision or portion of
any provision of this Agreement will be interpreted in such manner as to be
effective and valid under applicable law but if any provision or portion of
any provision of this Agreement is held to be invalid, illegal or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity, illegality or unenforceability will not affect
any other provision or portion of any provision in such jurisdiction, and
this Agreement will be reformed, construed and enforced in such jurisdiction
as if such invalid, illegal or unenforceable provision or portion of any
provision had never been contained herein.
Section 8.12. Release of LAC. The parties hereby agree that LAC shall be
released from its obligations under the Original Agreement.
Section 8.13. Miscellaneous. References in this Agreement to the date of the
Original Agreement shall be deemed to be references to October 12, 1994.
34
<PAGE>
IN WITNESS WHEREOF, Parent, LFC, Sub and the Company have caused this
Agreement to be signed by their respective officers thereunto duly
authorized, as if under seal, all on the date first written above.
LIBERTY FINANCIAL COMPANIES, INC.
(to be renamed "LFC HOLDINGS, INC.")
Kenneth R. Leibler
President
C. Allen Merritt
Treasurer
Attest:
John A. Benning
Clerk
NEW LFC, INC.
(to be renamed "LIBERTY FINANCIAL
COMPANIES, INC.")
Kenneth R. Leibler
President
C. Allen Merritt
Treasurer
Attest:
John A. Benning
Clerk
35
<PAGE>
APPLE MERGER CORPORATION
Kenneth R. Leibler
President
Gerald Rush
Treasurer
Attest:
John A. Benning
Clerk
THE COLONIAL GROUP, INC.
Harold W. Cogger
President
Richard A. Silver
Treasurer
Attest:
Arthur O. Stern
Clerk
36
<PAGE>
Index of Exhibits
Exhibits
<TABLE>
<CAPTION>
<S> <C>
Exhibit A Form of Parent's Amended and Restated Articles of Organization
Exhibit B Form of Parent's Certificate of Designation
Exhibit C Form of Stockholders' Agreement
Exhibit D Examples of Price Reduction Formula Pursuant to Section
2.1(c)(VIII)
Exhibit E Form of Voting Agreement
</TABLE>
37
<PAGE>
FORM CD-74-10M-79-152328 EXHIBIT A
The Commonwealth of Massachusetts
Examiner
MICHAEL JOSEPH CONNOLLY
Secretary of State
ONE ASHBURTON PLACE, BOSTON, MASS. 02108
RESTATED ARTICLES OF ORGANIZATION
General Laws, Chapter 156B, Section 74
FEDERAL IDENTIFICATION
NO.
This certificate must be submitted to the Secretary of the Commonwealth
within sixty days after the date of the vote of stockholders adopting the
restated articles of organization. The fee for filing this certificate is
prescribed by General Laws, Chapter 156B, Section 114. Make check payable to
the Commonwealth of Massachusetts.
We, Kenneth R. Leibler , President and
John A. Benning , Clerk of
Liberty Financial Companies, Inc.
(Name of Corporation)
located at Federal Reserve Plaza, 600 Atlantic Avenue, Boston, MA 02210
do hereby certify that the following restatement of the articles of
organization of the corporation was duly adopted at a meeting held on , 19 ,
by vote of
1,000 shares of Common out of 1,000 shares outstanding,
shares of out of shares outstanding; and
shares of out of shares outstanding,
being at least two-thirds of each class of stock outstanding and entitled to
vote and of each class or series of stock adversely affected thereby:
1. The name by which the corporation shall be known is:
Liberty Financial Companies, Inc.
2. The purposes for which the corporation is formed are as follows:--
C [ ] To engage in any financial services business, including without
limitation, to act as a broker-dealer,
P [ ] investment adviser or transfer agent, and to carry on any business or
other activity which may be
M [ ] lawfully carried on by a corporation organized under the Business
Corporation Law of The
RA [ ] Commonwealth of Massachusetts, whether or not related to those
referred to hereinabove.
P.C.
Note: If the space provided under any article or item on this form is
insufficient, additions shall be set forth on separate 8-1/2 x 11 sheets of
paper leaving a left hand margin of at least 1 inch for binding. Additions to
more than one article may be continued on a single sheet so long as each
article requiring each such addition is clearly indicated.
<PAGE>
3. The total number of shares and the par value, if any, of each class of
stock which the corporation is authorized to issue is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
WITHOUT PAR VALUE WITH PAR VALUE
CLASS OF STOCK NUMBER OF SHARES NUMBER OF SHARES PAR VALUE
Preferred 10,000,000 $.01
Common 100,000,000 $.01
</TABLE>
*4. If more than one class is authorized, a description of each of the
different classes of stock with, if any, the preferences, voting powers,
qualifications, special or relative rights or privileges as to each class
thereof and any series now established:
See Continuation Sheet 4A attached hereto and incorporated herein by
reference.
*5. The restrictions, if any, imposed by the articles of organization upon
the transfer of shares of stock of any class are as follows:
None.
*6. Other lawful provisions, if any, for the conduct and regulation of the
business and affairs of the corporation, for its voluntary dissolution, or
for limiting, defining, or regulating the powers of the corporation, or of
its directors or stockholders, or of any class of stockholders:
See Continuation Sheets 6A-6P attached hereto and incorporated herein by
reference.
* If there are no such provisions, state "None".
<PAGE>
*We further certify that the foregoing restated articles of organization
effect no amendments to the articles of organization of the corporation as
heretofore amended, except amendments to the following articles.
(*If there are no such amendments, state "None".)
Briefly describe amendments in space below:
IN WITNESS WHEREOF AND UNDER THE PENALTIES OF PERJURY, we have hereto signed
our names this day of in the year 19 .
Kenneth R. Leibler President
John A. Benning Clerk
<PAGE>
THE COMMONWEALTH OF MASSACHUSETTS
RESTATED ARTICLES OF ORGANIZATION
(General Laws, Chapter 156B, Section 74)
I hereby approve the within restated articles of organization and, the filing
fee in the amount of $ having been paid, said articles are deemed to have
been filed with me this day of , 19 .
MICHAEL JOSEPH CONNOLLY
Secretary of State
TO BE FILLED IN BY CORPORATION
PHOTO COPY OF RESTATED ARTICLES OF ORGANIZATION TO BE SENT
TO: Willie J. Washington, Esq.
Choate, Hall & Stewart
Exchange Place
53 State Street
Boston, MA 02109
Telephone (617) 227-5020
Copy Mailed
<PAGE>
CONTINUATION SHEET 4A
to the Restated Articles of Organization
of Liberty Financial Companies, Inc.
ARTICLE IV
Section 1
Common Stock. The holders of the Common Stock shall have the exclusive right
to vote for the election of directors and on all other matters requiring
action by the stockholders or submitted to the stockholders for action,
except as may be determined by the board of directors of the corporation (the
"Board of Directors") with respect to any series of Preferred Stock issued
pursuant to Section 2 of this ARTICLE IV or as may otherwise be required by
law. Except as otherwise provided by Section 1 of ARTICLE VI hereof, each
share of the Common Stock shall entitle the holder thereof to one vote.
Subject to any preferential rights of the holders of any series of Preferred
Stock then outstanding, the holders of the Common Stock shall be entitled to
receive, to the extent permitted by law and ratably in proportion to the
number of shares of Common Stock then held by them, such dividends as may
from time to time be declared by the directors.
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the corporation, after any preferential amounts to be distributed to the
holders of any series of Preferred Stock then outstanding have been paid or
declared and set apart for payment and subject to the rights, if any, of the
holders of any series of Preferred Stock then outstanding to share in any
remaining assets of the corporation, and after the corporation shall have
satisfied or made provision for its debts and other obligations, the holders
of the Common Stock shall be entitled to receive the remaining assets of the
corporation available for distribution to its stockholders ratably in
proportion to the number of shares of Common Stock then held by them.
Section 2
Preferred Stock. The shares of Preferred Stock may be issued from time to
time in one or more series. The Board of Directors may determine, in whole or
in part, the preferences, voting powers, qualifications and special or
relative rights or privileges of any such series before the issuance of any
shares of that series. The Board of Directors shall determine the number of
shares constituting each series of Preferred Stock and each series shall have
a distinguishing designation.
ARTICLE VI
Section 1
The following restrictions apply to the Voting Stock (as such term is defined
below) of the corporation:
1.1 Certain Definitions. For purposes of this Section 1 and all other
Sections of this ARTICLE VI, the following words have the meanings indicated:
1.1.1. "Affiliate" means, with respect to any Person, any other Person that
directly, or indirectly through one or more intermediates, controls, or is
controlled by or is under common control with, such Person. The term
"control" (including the terms "controlling," "controlled by" and "under
common control with") means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract or
otherwise.
1.1.2. "Associate" means, with respect to any Person, (i) any other Person
(other than the corporation or a Subsidiary of which a majority of each class
of equity securities is owned by the corporation) of which such Person is an
officer, director, trustee, partner or employee or is, directly or
indirectly, the beneficial owner of ten percent (10%) or more of any class of
equity securities; (ii) any trust or other estate in which such Person serves
as a trustee or in a similar fiduciary capacity;
<PAGE>
(iii) any relative or spouse of such Person, or any relative of such spouse,
who has the same home as such Person; or (iv) any investment company
registered under the Investment Company Act of 1940, as amended, for which
such Person or any Affiliate of such Person serves as investment adviser.
1.1.3. A Person shall be deemed to "own" any shares of Voting Stock:
(i) that such Person beneficially owns directly or indirectly, whether or
not of record; or
(ii) that such Person has the right to acquire pursuant to any agreement,
arrangement or understanding or upon exercise of conversion rights, warrants
or options or otherwise, whether or not conditional; or
(iii) that are beneficially owned, directly or indirectly (including shares
deemed to be owned through application of clause (ii) above), whether or not
of record, by an Affiliate or Associate of such Person; or
(iv) that are beneficially owned, directly or indirectly, whether or not of
record, by any other Person (including any shares which such other Person has
the right to acquire pursuant to any agreement, arrangement or understanding
or upon exercise of conversion rights, warrants or options or otherwise,
whether or not conditional) with whom such Person has any agreement,
arrangement or understanding for the purpose of acquiring, holding, voting or
disposing of Voting Stock; provided, however, that (A) directors, officers,
and employees of the corporation shall not be deemed to have any such
agreement, arrangement, or understanding on the basis of their status, or
actions taken in their capacities as directors, officers, or employees of the
corporation or any Subsidiaries of the corporation, and (B) a Person shall
not be deemed the owner of or to own any shares of Voting Stock solely
because (x) such shares of Voting Stock have been tendered pursuant to a
tender or exchange offer made by such Person or any of such Person's
Affiliates or Associates until such tendered shares of Voting Stock are
accepted for payment or exchange or (y) such Person or any of such Person's
Affiliates or Associates has or shares the power to vote or direct the voting
of such shares of Voting Stock pursuant to a revocable proxy given in
response to a public proxy or consent solicitation made to more than ten (10)
holders of shares of Voting Stock and pursuant to, and in accordance with,
applicable rules and regulations under the Exchange Act, except if such power
(or arrangements relating thereto) is then reportable under Item 6 of
Schedule 13D under the Exchange Act (or any similar provision of a comparable
or successor report).
The outstanding shares of capital stock of the corporation shall include
those shares deemed owned through the application of clauses (ii) and (iii)
above, but shall not include any other shares that may be issuable pursuant
to any agreement, arrangement or understanding or upon exercise of conversion
rights, warrants, options or otherwise, whether or not conditional.
For all purposes hereof "beneficial" ownership, with respect to any
securities, shall include, without limitation, (i) the power to vote, or
direct the voting of, such securities or (ii) the power to exercise
investment discretion over such securities, including the power to dispose,
or to direct the disposition, of such securities. Furthermore, a Person shall
be deemed to own "beneficially" any securities that such Person owns
beneficially for purposes of Sections 13(d) or 16(a) of the Exchange Act or
any rules and regulations promulgated thereunder, as in effect from time to
time (or any similar successor provision of law).
1.1.4. "Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor statute thereto.
1.1.5. "Group", with respect to any Person, shall include:
(i) such Person;
(ii) any Affiliates and Associates of such Person; and
(iii) those additional Persons that, together with such Person, jointly
file a statement of beneficial ownership pursuant to Section 13(d) of the
Exchange Act or any successor provision, irrespective of any disclaimers of
beneficial ownership.
<PAGE>
1.1.6. "Person" means any individual, corporation, association,
partnership, joint venture, trust, organization, business, government or any
government agency or political subdivision thereof or any other entity.
1.1.7. "Voting Stock" means all outstanding shares of capital stock of the
corporation entitled to vote in the election of directors; and each reference
to a portion of shares of Voting Stock shall refer to such proportion of the
votes entitled to be cast by such shares.
1.1.8. "Subsidiary" means any corporation of which a majority of any class
of equity security is owned, directly or indirectly, by the corporation;
provided, however, that for the purposes of Section 1.4 of this ARTICLE VI,
the term "Subsidiary" shall mean only a corporation of which a majority of
each class of equity security is owned, directly or indirectly, by the
corporation.
1.2 Limitation on Entitlement to Vote Applicable to Certain
Stockholders. With respect to any matter submitted to a vote of the holders
of the Voting Stock at any meeting of such holders or any matter upon which
the holders of Voting Stock propose or purport to take action by written
consent without a meeting: (i) no Person that owns Voting Stock may vote that
amount of such shares that constitutes the Excludable Shares, if any, owned
by such Person (provided, however, that if such Person is a member of a
Group, such Person shall be subject to clause (ii) below rather than to this
clause (i)); (ii) no Person that is a member of a Group of Persons owning
Voting Shares may vote that amount of shares owned by such Person that
constitutes the Allocable Excludable Shares, if any, owned by such Person;
and (iii) that amount of shares having the status of Excludable Shares
(adjusted as necessary to give effect to the provisos to the definition set
forth below of Allocable Excludable Shares) shall be excluded and deducted
from the total number of shares of Voting Stock deemed to be outstanding for
purposes of determining the number of shares of Voting Stock necessary to
constitute a quorum at any such meeting or to approve a matter submitted for
stockholder approval at any such meeting or by means of any such written
consent. For purposes of this Section 1:
(a) the term "Excludable Shares" means, with respect to any Person or
Group, that amount of shares of Voting Stock owned by such Person or Group,
as the case may be, that would result in such Person or Group, as the case
may be, owning more than twenty percent (20%) of the combined voting power of
the outstanding shares of Voting Stock (with the determination of the voting
power of each Person and Group owning Voting Stock being calculated and
recalculated for this purpose as often as is necessary to give effect to the
exclusion from voting and the determination of shares deemed to be
outstanding for purposes related thereto of Excludable Shares held by other
Persons or Groups); and
(b) the term "Allocable Excludable Shares" means, with respect to each
Person that is a member of a Group which owns Excludable Shares, an amount of
shares owned by such Person equal to such Person's pro rata share (based upon
the number of shares of Voting Stock owned by such Person) within such Group
of the total amount of Excludable Shares owned by such Group; provided,
however, that shares that are deemed owned by two or more Persons who are
members of such Group as a result of attributions in accordance with Section
1.1.3 hereof shall for this purpose be deemed to be owned by such one of such
Persons which most directly owns such shares; and provided, further, that,
with respect to any Person that is a member of more than one such Group,
"Allocable Excludable Shares" means the greatest number of Excludable Shares
so allocated with respect to such Person with respect to any single Group.
1.3 Right of Inquiry of the Corporation. The corporation shall have the right
to inquire of any Person whom the corporation believes may own Voting Stock
or any other Person who purports to exercise voting rights with respect to
any Voting Stock, and each such Person shall have the obligation to provide
such information to the corporation as the corporation may reasonably
request, with respect to any matters pertinent to the operation or
implementation of this Section 1, including, without limitation, (i) the
number of shares owned by such Person, (ii) whether shares owned of record by
such Person are owned by other Persons and the identity of such other Persons
and the nature of their ownership interest, (iii) whether any Affiliates or
Associates of such Person own any Voting Stock, (iv) whether such Person is a
member of a Group of Persons owning Voting Stock, or (v) whether such Person
or any of
<PAGE>
such Person's Affiliates or Associates has any agreement, arrangement or
understanding with any other Person with respect to any Voting Stock.
1.4 Persons to Whom This ARTICLE Does Not Apply. The provisions of Section
1.2 of this ARTICLE VI shall not apply to (i) Liberty Mutual Insurance
Company, a Massachusetts corporation organized as a mutual insurance company
("Liberty Mutual"), Liberty Mutual Fire Insurance Company, a Massachusetts
corporation organized as a mutual insurance company ("Liberty Fire") or any
subsidiary of Liberty Mutual or Liberty Fire as to which Liberty Mutual
and/or Liberty Fire possess(es) the voting power to elect a majority of the
directors of such subsidiary (in the case of a corporation) or control(s) at
least a majority of the other beneficial interests entitled to vote generally
(in the case of a non-corporate entity), (ii) any savings, profit sharing,
stock bonus or employee stock ownership plan or plans established by the
corporation or a Subsidiary and qualified under Section 401(a) of the
Internal Revenue Code of 1986, as amended, or any successor provision, which
holds shares of Voting Stock on behalf of participating employees and their
beneficiaries with the right to instruct the trustee how to vote such shares
of Voting Stock with respect to all matters submitted to stockholders for
voting, or (iii) participating employees and beneficiaries under the plans
referred to in the immediately preceding clause (ii) because of their
participation in such savings, profit sharing, stock bonus or employee
ownership plans. In addition, the provisions of Section 1.2 of this ARTICLE
VI shall not be applicable with respect to any Person or Group if the
conditions specified in either Section 1.4.1 or 1.4.2 hereof are met:
1.4.1. Approval in Advance by the Board of Directors. The board of
directors of the corporation (the "Board of Directors") (i) has expressly
approved in advance either (A) the acquisition of outstanding shares of
Voting Stock by such Person or Group that caused such Person or Group to
become the owner of Excludable Shares, or (B) the issue or sale by the
corporation of shares of Voting Stock to such Person or Group that caused
such effect, and (ii) in advance of such acquisition or issue or sale have
expressly determined that such provisions shall not be applicable to such
Person or Group.
1.4.2. Approval by Board of Directors. The Board of Directors have
determined that such provision shall not apply to such Person or Group.
1.5 Powers of the Board of Directors. The Board of Directors shall have the
power to determine, for the purposes of this Section 1, on the basis of
information known to it after reasonable inquiry, all facts necessary to
determine compliance with or implementation of this Section 1, including,
without limitation, (i) the number of shares of Voting Stock owned by any
Person or Group or a member of any Group (including, without limitation, in
accordance with the first proviso to the definitions of Excludable Shares and
Allocable Excludable Shares set forth in Section 1.2 hereof), (ii) whether
two or more Persons constitute a Group, (iii) whether a Person is an
Affiliate or Associate of another Person or a member of any Group, (iv)
whether a Person has an agreement, arrangement or understanding with another
Person, (v) the calculation (including the manner of calculation) of the
amount of Excludable Shares held by any Person or Group or the Allocable
Excludable Shares held by any Person (including, without limitation, in
accordance with the first proviso to the definitions of Excludable Shares and
Allocable Excludable Shares set forth in Section 1.2 hereof), and (vi) any
other facts which the Board of Directors determines to be relevant. Any
determinations made by the Board of Directors pursuant to this Section 1 in
good faith and on the basis of such information and advice as was then
reasonably available for such purpose shall be conclusive and binding upon
the corporation and its stockholders.
Section 2
2.1 Terms of Directors. The directors, other than those who may be elected by
the holders of any series of Preferred Stock, shall be divided into three
classes, as nearly equal in number as possible, with the initial term of
office of the first class of directors to expire at the first annual meeting
of stockholders after their election; the initial term of office of the
second class of directors to expire at the second annual meeting of
stockholders after their election; and the initial term of office of the
third class of directors to expire at the third annual meeting of
stockholders after their election. The initial classification of the
directors into the three classes shall be made by vote of the corporation's
initial stockholder. Upon the expiration of the initial terms of office for
each class of directors, the directors elected to succeed those directors
whose terms expire shall be elected for a term of office which shall continue
until the third succeeding annual meeting, and until a successor shall be
elected or until the director sooner dies, resigns or is removed. The number
of directors shall not be increased or decreased at a time when, or to the
extent that, it would result in the directors not being divided as nearly
equally as possible into three
<PAGE>
classes each consisting of approximately one-third of the number of
directors. No decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director. Any director
elected to fill a newly created directorship or any vacancy on the Board of
Directors resulting from any death, resignation, removal or other cause shall
hold office for the remainder of the full term of the class of directors in
which the new directorship was created or the vacancy occurred are until such
director's successor shall have been elected and qualified. The total number
of directors need not be an exact multiple of three. A director may succeed
himself.
2.2 Removal of Directors. Any director of the corporation may be removed from
office only for cause and only by the affirmative vote of not less than
sixty-seven percent (67%) of the total number of votes of the then
outstanding shares of Voting Stock entitled to vote thereon, voting as a
single class. For purposes of this Section 2.2 "cause" shall mean only (i)
conviction of a felony, (ii) declaration of unsound mind by order of a court
of competent jurisdiction, (iii) gross dereliction of duty (other than
resulting from incapacity due to physical or mental illness), or (iv)
commission of an action which constitutes intentional misconduct or a knowing
violation of law if such action in either event results both in an improper
substantial personal benefit to the director and a material injury to the
corporation.
2.3 Directors Elected by Stockholders Other Than Holders of Common Stock.
Notwithstanding anything in these Restated Articles of Organization or the
By-laws of the corporation to the contrary, whenever the holders of any one
or more classes or series of shares of capital stock of the corporation other
than shares of Common Stock shall have the right, voting separately by class
or series, to elect directors at an annual or special meeting of
stockholders, the election, term of office, removal, filling of vacancies and
other features of such directorship shall be governed by the terms of these
Restated Articles of Organization applicable thereto, but such directors so
elected shall not be divided into classes pursuant to this Section 2 unless
expressly provided by such terms. References in this Section 2 to an annual
meeting of stockholders shall be deemed to include a special meeting held in
place of an annual meeting.
Section 3
3.1 The corporation may carry on any business, operation or activity referred
to in ARTICLE II hereof to the same extent as might an individual, whether as
principal, agent, contractor or otherwise, and either alone or in conjunction
or a joint venture or other arrangement with any corporation, association,
trust, firm or individual.
3.2 The corporation may carry on any business, operation or activity through
a wholly or partly owned subsidiary.
3.3 The corporation may be a partner in any business enterprise which it
would have power to conduct by itself.
3.4 Meetings of the stockholders may be held anywhere in the United States.
3.5 Except as otherwise provided by law, no stockholder shall have any right
to examine any property or any books, accounts or other writings of the
corporation if there is reasonable ground for belief that such examination
will for any reason be adverse to the interests of the corporation, and a
vote of the Board of Directors refusing permission to make such examination
and setting forth that in the opinion of the Board of Directors such
examination would be adverse to the interests of the corporation shall be
prima facie evidence that such examination would be adverse to the interests
of the corporation. Every such examination shall be subject to such
reasonable regulations as the Board of Directors may establish in regard
thereto.
3.6 The Board of Directors may specify the manner in which the accounts of
the corporation shall be kept and may determine what constitutes net
earnings, profits and surplus, what amounts, if any, shall be reserved for
any corporate purpose, and what amounts, if any, shall be declared as
dividends. Unless the Board of Directors otherwise specifies, the excess of
the consideration for any shares of its capital stock with par value issued
by it over such par value shall be surplus. The Board of Directors may
allocate to capital stock less than all of the consideration for any share of
its capital stock without par value issued
<PAGE>
by it, in which case the balance of such consideration shall be surplus. All
surplus shall be available for any corporate purpose, including the payment
of dividends.
3.7 The purchase or other acquisition or retention by the corporation of
shares of its own capital stock shall not be deemed a reduction of its
capital stock. Upon any reduction of capital or capital stock, no stockholder
shall have any right to demand any distribution from the corporation, except
as and to the extent that the stockholders shall have provided at the time of
authorizing such reduction.
3.8 (i) A director who has a financial interest in a contract or other
transaction may be counted for purposes of establishing the existence of a
quorum at a meeting of the Board of Directors (or of a committee of the Board
of Directors) at which action with respect to the transaction is taken and
may vote to approve the transaction and any related matters.
(ii) A contract or other transaction in which a director or officer has a
financial interest shall not be void or voidable for that reason, if any one
of the following is met:
(A) the material facts as to the director's or officer's interest are
disclosed or are known to the Board of Directors or committee of the Board of
Directors acting on the transaction, and the Board of Directors or such
committee authorizes, approves or ratifies the transaction by the affirmative
vote of a majority of the disinterested directors (or, if applicable, the
sole disinterested director) on the Board of Directors or such committee, as
the case may be, even though the disinterested directors be less than a
quorum; or
(B) the material facts as to the director's or officer's interest are
disclosed or are known to the holders of the shares of the corporation's
capital stock then entitled to vote for directors, and such holders, voting
such shares as a single class, by a majority of the votes cast on the
question, specifically authorize, approve or ratify the transaction; or
(C) the transaction was fair to the corporation as of the time it was
entered into by the corporation.
A failure to meet any of the requirements in subparagraphs (A), (B) or (C)
above shall not create an inference that the transaction is void or voidable
for that reason. For purposes of subparagraph (A) above a director shall be
disinterested with respect to a transaction unless he shall have a financial
interest in such transaction.
(iii) The directors shall have the power to fix from time to time their own
compensation.
3.9 No director of the corporation shall be liable to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 61 or 62 of Chapter 156B of the General Laws of The
Commonwealth of Massachusetts, or (iv) for any transaction in which the
director derived an improper personal benefit. No amendment to or repeal of
any provision of this Section 3.9, directly or by adoption of an inconsistent
provision of these Articles of Organization, shall apply to or have any
effect on any liability or alleged liability of any director of the
corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment or repeal.
3.10 The corporation shall indemnify each person who is or was a director,
officer, employee or other agent of the corporation, each person who is or
was serving at the request of the corporation as a director, trustee,
officer, employee or other agent of another organization in which it directly
or indirectly owns shares or of which it is directly or indirectly a
creditor, and each person who is or was serving at the request of the
corporation in any capacity with respect to any employee benefit plan against
all liabilities, costs and expenses, including but not limited to amounts
paid in satisfaction of judgments, in settlement or as fines and penalties,
and counsel fees and disbursements, reasonably incurred by him in connection
with the defense or disposition of or otherwise in connection with or
resulting from any action, suit or other proceeding, whether civil, criminal,
administrative or investigative, before any court or administrative or
legislative or investigative body, in which he may be or may have been
involved as a party or otherwise or with which he may be or may have been
threatened, while in office or thereafter, by reason of his being or having
been such a director, officer, employee, agent or trustee, or having served
in any capacity with
<PAGE>
respect to any employee benefit plan, or by reason of any action taken or not
taken in any such capacity, except with respect to any matter as to which he
shall have been finally adjudicated by a court of competent jurisdiction not
to have acted in good faith in the reasonable belief that his action was in
the best interest of the corporation or, to the extent that such matter
relates to service with respect to an employee benefit plan, in the best
interests of the participants or beneficiaries of such employee benefit plan.
Expenses, including but not limited to counsel fees and disbursements, so
incurred by any such person in defending any such action, suit or proceeding
may be paid from time to time by the corporation in advance of the final
disposition of such action, suit or proceeding upon receipt of an undertaking
by or on behalf of the person indemnified to repay the amounts so paid if it
shall ultimately be determined that indemnification of such expenses is not
authorized hereunder, which undertaking may be accepted without reference to
the financial ability of such person to make repayment.
As to any matter disposed of by settlement by any such person, pursuant to a
consent decree or otherwise, no such indemnification either for the amount of
such settlement or for any other expenses shall be provided unless such
settlement shall be approved as in the best interests of the corporation,
after notice that it involves such indemnification, (a) by a vote of a
majority of the disinterested directors then in office (even though the
disinterested directors be less than a quorum), or (b) by any disinterested
person or persons to whom the question may be referred by vote of a majority
of such disinterested directors, or (c) by vote of the holders of a majority
of the outstanding stock at the time entitled to vote for directors, voting
as a single class, exclusive of any stock owned by any interested persons, or
(d) by any disinterested person or persons to whom the question may be
referred by vote of the holders of a majority of such stock. No such approval
shall prevent the recovery from any such director, officer, employee, agent
or trustee or any such person serving in any capacity with respect to any
employee benefit plan of any amounts paid to him or on his behalf as
indemnification in accordance with the preceding sentence if such person is
subsequently adjudicated by a court of competent jurisdiction not to have
acted in good faith in the reasonable belief that his action was in the best
interests of the corporation or, to the extent that such matter relates to
service with respect to an employee benefit plan, in the best interests of
the participants or beneficiaries of such employee benefit plan.
The right of indemnification hereby provided shall not be exclusive of or
affect any other rights to which any director, officer, employee, agent, or
trustee or any such person serving in any capacity with respect to any
employee benefit plan may be entitled or which may lawfully be granted to
him. As used herein, the terms "director," "officer," "employee," "agent" and
"trustee" include their respective executors, administrators and other legal
representatives, and "interested" person is one against whom the action, suit
or other proceeding in question or another action, suit or other proceeding
on the same or similar grounds is then or had been pending or threatened, and
a "disinterested" person is a person against whom no such action, suit or
other proceeding is then or had been pending or threatened.
By action of the Board of Directors, notwithstanding any interest of the
directors in such action, the corporation may purchase and maintain
insurance, in such amounts as the Board of Directors may from time to time
deem appropriate, on behalf of any person who is or was a director, officer,
employee or other agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee or other
agent of another organization or with respect to any employee benefit plan,
in which it directly or indirectly owns shares or of which it is directly or
indirectly a creditor, against any liability incurred by him in any such
capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability.
3.11 The corporation shall have all powers granted to corporations by the
laws of The Commonwealth of Massachusetts, provided that no such power shall
include any activity inconsistent with the Massachusetts Business Corporation
Law or the general laws of said Commonwealth.
Section 4
In furtherance and not in limitation of the power conferred upon the Board of
Directors by law, the Board of Directors shall have power to make, adopt,
alter, amend and repeal from time to time By-laws of the corporation, subject
to the right of the stockholders entitled to vote with respect thereto to
amend
<PAGE>
or repeal By-laws made by the Board of Directors as provided for in these
Restated Articles of Organization or the By-Laws of the corporation. Subject
to the provisions set forth herein, the corporation reserves the right to
amend, alter, repeal or rescind any provision contained in these Restated
Articles of Organization in the manner now or hereafter prescribed by law.
Section 5
Any action required or permitted by these Restated Articles of Organization,
the By-laws of the corporation or by law to be taken at any meeting of the
stockholders may be taken without a meeting if holders of all (but not less
than all) shares of stock entitled to vote on the matter consent to the
action in writing and the written consents are filed with the records of the
meetings of stockholders. Such consents shall be treated for the purposes as
a vote at a meeting.
Section 6
Notwithstanding the provisions of Sections 75 and 78 of Chapter 156B of the
General Laws of The Commonwealth of Massachusetts to the contrary, the
stockholder vote required to approve any sale, lease or exchange of all or
substantially all of the property and assets of the corporation or any
consolidation or merger involving the corporation contemplated by said
Sections 75 or 78 shall be the affirmative vote of not less than a majority
of the total number of votes of the then outstanding shares of Voting Stock
entitled to vote thereon, voting together as a single class.
Section 7
The Board of Directors, when evaluating any offer of another party (a) to
make a tender or exchange offer for any equity security of the corporation or
(b) to effect a consolidation or merger or a sale, lease or exchange of a
substantial portion of the property and assets of the corporation or a
Subsidiary (as determined by the Board of Directors), shall, in connection
with the exercise of its judgment in determining what is in the best
interests of the corporation as a whole, be authorized to give due
consideration to any such factors as the Board of Directors determines to be
relevant, including, without limitation:
(A) the interests of the corporation's stockholders;
(B) whether the proposed transaction might violate federal or state laws;
(C) not only the consideration being offered in the proposed transaction,
in relation to the then current market price for the outstanding capital
stock of the corporation, but also to the market price for the capital stock
of the corporation over a period of years, the estimated price that might be
achieved in a negotiated sale of the corporation as a whole or in part or
through orderly liquidation, the premiums over market price for the
securities of other corporations in similar transactions, current political,
economic and other factors bearing on securities prices and the corporation's
financial condition and future prospects; and
(D) the social, legal and economic effects upon employees, clients and
other customers, suppliers and others having similar relationships with the
corporation, and the communities in which the corporation conducts its
business.
In connection with any such evaluation, the Board of Directors is authorized
to conduct such investigations and to engage in such legal proceedings as the
Board of Directors may determine.
Section 8
The Board of Directors is authorized from time to time to enact by
resolution, without additional authorization by the stockholders of the
corporation, By-laws of the corporation, in such form and with such
additional terms as the Board of Directors may determine, with respect to the
matters of corporate proceeding set forth below.
<PAGE>
(A) Regulation of the procedure for submitting nominations of persons to be
elected directors, which shall be made only at a meeting of stockholders,
including requirements that nominations of persons to be elected directors,
other than nominations submitted on behalf of the incumbent Board of
Directors, be (i) accompanied by a petition in support of such nominations
signed by at least that number of holders of shares of capital stock of the
corporation entitled to vote generally in elections of directors as is
specified in such By-law (but not more than one hundred (100) such holders),
holding in the aggregate not less than that percentage of the shares of
capital stock of the corporation entitled to vote generally in elections of
directors, outstanding as of the date such position is submitted as is
specified in such By-law (but not more than one percent (1%) of the combined
voting power of the then outstanding Voting Stock entitled to vote generally
in the election of directors); and (ii) submitted to the corporate clerk or
other designated officer or agent of the corporation that number of days
before the meeting of the stockholders at which such election is to be held
as is specified in such By-law (but not more than sixty (60) days before such
meeting). The presiding officer of the meeting shall, if the facts warrant,
determine and declare to the meeting that a nomination was not made in
accordance with the provisions prescribed by this Section 8 or any By-law
adopted pursuant hereto, and if he so determines, he shall so declare to the
meeting, and the defective nomination shall be disregarded.
(B) Regulation of business to be conducted at meetings of stockholders,
including requirements that only such business shall be conducted and only
such proposals shall be acted upon as are directed by the Board of Directors
or as are made by a stockholder who has submitted notice thereof to the
corporate clerk or other designated officer or agent of the corporation that
number of days before the meeting of stockholders at which such proposal is
to be made as is specified in such By-law (but not more than sixty (60) days
before such meeting) setting forth such proposal, the reasons therefor, the
identity of the stockholder or stockholders making such proposal, the number
of shares of capital stock which are beneficially owned by them and any
financial interest of such stockholders in such proposal as specified in such
By-law. The presiding officer of the meeting shall, if the facts warrant,
determine and declare to the meeting that proposed business or a proposal was
not made in accordance with the provisions prescribed by this Section 8 or
any By-law adopted pursuant hereto, and if he so determines, he shall so
declare to the meeting, and any such business shall not be transacted or any
such proposal shall be disregarded.
(C) Regulation of the order of business and conduct of stockholder meetings
and the authority of the presiding officer and of the attendance at annual or
special meetings of the stockholders of the corporation, including the
limitation of attendance through a ticket procedure pursuant to which persons
who wish to attend such meetings would be required to provide written notice
to the corporate clerk or other designated officer or agent of the
corporation that number of days prior to the date of such meeting specified
in such By-law (but not more than thirty (30) days before such meeting) of
their intent to attend in person, and the corporate clerk or other designated
officer or agent of the corporation would issue a single admission ticket to
each holder of shares of the stock of the corporation entitled to vote at
such meeting and to such other persons as the Board of Directors may direct,
and admission to such meeting would be limited to holders of such tickets and
officers and directors of, counsel to, and the auditors of the corporation
and, to the extent authorized by the Board of Directors or the presiding
officer at such meeting, employees or other agents of the corporation.
Application of any such By-law, if adopted, in any particular case would be
permitted to be waived by the presiding officer at such meeting.
In the event that any such By-law is adopted pursuant to this Section 8, in
addition to any other affirmative vote required by law, these Restated
Articles of Organization or the By-laws of the corporation, such By-law may
only be amended or repealed upon the affirmative vote of not less than a
majority of the total number of votes of the then outstanding shares of
Voting Stock entitled to vote thereon, voting together as a single class,
obtained at any regular or special meeting of the stockholders, but only if
notice of the proposed amendment or repeal was contained in the notice of
such meeting.
<PAGE>
Section 9
Notwithstanding any other provisions of these Restated Articles of
Organization or the By-laws of the corporation (and notwithstanding the fact
that a greater or a lesser percentage may be specified by law, these Restated
Articles of Organization or the By-laws of the corporation), the affirmative
vote of a majority of the total number of votes of the then outstanding
shares of Voting Stock entitled to vote thereon, voting together as a single
class, shall be required to amend or repeal, or to adopt any provision
inconsistent with the purpose or intent of, Section 1, Section 2, Section
3.9, Section 3.10, Section 4, Section 5, Section 6, Section 7, Section 8 and
this Section 9 of this ARTICLE VI.
<PAGE>
EXHIBIT B
FORM OF
CERTIFICATE OF DESIGNATION OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF LIBERTY FINANCIAL COMPANIES, INC.
(Pursuant to Section 26 of the
Chapter 156B of the General Laws
of the Commonwealth of Massachusetts)
LIBERTY FINANCIAL COMPANIES, INC., a corporation duly organized and existing
under Chapter 156B of the General Laws of the Commonwealth of Massachusetts
(the "Corporation"), hereby certifies that the following resolution was duly
adopted by the Board of Directors of the Corporation:
RESOLVED, that pursuant to the authority expressly granted to and vested in
the Board of Directors of the Corporation (the "Board of Directors") by the
provisions of Article IV, Section 2 of the Amended and Restated Articles of
Organization of the Corporation (the "Articles of Organization"), there
hereby is created, out of the 10,000,000 shares of Preferred Stock of the
Corporation, $.01 per value, authorized in Article IV of the Articles of
Organization (the "Preferred Stock"), a series of the Preferred Stock
designated as "Series A Convertible Preferred Stock" (the "Series A
Convertible Preferred Stock") consisting of 1,040,000 shares, which series
shall have the following preferences, voting powers, qualifications and
special or relative rights and privileges:
Section 1. Face Amount. The face amount of each share of Series A Convertible
Preferred Stock shall be $50.00. The Corporation shall not split (by means of
dividend in kind or otherwise), combine or otherwise reclassify or
recapitalize the Series A Convertible Preferred Stock.
Section 2. Dividends.
(a) The holders of shares of the Series A Convertible Preferred Stock will be
entitled to receive, cumulative cash dividends on the shares of the Series A
Convertible Preferred Stock at the rate of $2.875 per annum per share, and no
more, payable in equal quarterly installments on March 31, June 30, September
30 and December 31, in each year, commencing on the first such date following
the 30th business day following the first issuance of shares of Series A
Convertible Preferred Stock. Such dividends shall be cumulative from the date
of original issue of each share of the Series A Convertible Preferred Stock
to and including the date provision for the payment of liquidation value, or
redemption price, as the case may be, plus all then accrued and unpaid
dividends, has been made in accordance with the applicable provisions of this
certificate of designation, whether or not such dividends are declared and
whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends. The Board of Directors of the
Corporation shall declare such quarterly dividends in each case from and to
the extent the Corporation has funds legally available therefor. Each such
dividend shall be paid to the holders of record of the shares of the Series A
Convertible Preferred Stock as they appear on the share register of the
Corporation on such record date, not more than 30 days nor less than 10 days
preceding the dividend payment date thereof, as shall be fixed by the Board
of Directors.
(b) If dividends are not paid in full, or declared in full and sums set apart
for the payment thereof, upon the shares of the Series A Convertible
Preferred Stock and shares of any other Preferred Stock ranking on a parity
as to dividends with the Series A Convertible Preferred Stock ("Dividend
Parity Stock"), all dividends declared upon shares of the Series A
Convertible Preferred Stock and shares of any Dividend Parity Stock shall be
paid or declared pro rata so that in all cases the amount of dividends paid
or declared per share on the Series A Convertible Preferred Stock and such
Dividend Parity Stock shall bear to each other the same ratio that
accumulated dividends per share, including dividends accrued or in arrears,
if any, on the shares of the Series A Convertible Preferred Stock and such
Dividend Parity Stock bear to each other.
(c) Except as provided in Section 2(b), unless full cumulative dividends on
the shares of Series A Convertible Preferred Stock have been paid or declared
in full and sums set aside for the payment thereof, (x) no dividends (other
than a dividend in shares of the Common Stock (as hereinafter defined)
B-1
<PAGE>
or in shares of any other capital stock of the Corporation ranking junior to
the Series A Convertible Preferred Stock as to dividends ("Junior Dividend
Stock")) shall be paid or declared and sums set aside for payment therefor or
other distribution made upon the Corporation's Common Stock, par value $.01
per share (the "Common Stock"), any Dividend Parity Stock or any Junior
Dividend Stock and (y) no shares of the Common Stock, any Dividend Parity
Stock or any Junior Dividend Stock shall be redeemed, repurchased or
otherwise acquired for any consideration (or any payment made to or available
for a sinking fund for the redemption of any such shares) by the Corporation
or any subsidiary of the Corporation (except by conversion into or exchange
for shares of Common Stock or shares of Junior Dividend Stock).
(d) Holders of shares of the Series A Convertible Preferred Stock shall not
be entitled to any dividends, whether payable in cash, property or shares of
capital stock, in excess of full accrued and cumulative dividends as herein
provided. No interest or sum of money in lieu of interest shall be payable in
respect of any dividend payment or payments on the shares of the Series A
Convertible Preferred Stock that may be in arrears.
(e) The terms "accrued dividends," "dividends accrued" and "dividends in
arrears," whenever used herein with reference to shares of Preferred Stock
(including, without limitation, the Series A Convertible Preferred Stock)
shall be deemed to mean an amount which shall be equal to dividends thereon
at the annual dividend rates per share for the respective series from the
date or dates on which such dividends commence to accrue to the end of the
then current quarterly, semi-annual or other applicable dividend period for
such Preferred Stock (or, in the case of redemption, to the date of
redemption), less the amount of all dividends paid, or declared in full and
sums set aside for the payment thereof, upon such shares of Preferred Stock.
(f) Dividends payable on the shares of the Series A Convertible Preferred
Stock for any period less than a full quarterly dividend period shall be
computed on the basis of a 365 or 366-day year, as the case may be, and the
actual number of days elapsed in the period for which payable.
Section 3. Redemption.
(a) The shares of the Series A Convertible Preferred Stock will be redeemable
at the option of the Corporation by resolution of its Board of Directors, in
whole or from time to time in part, at any time on or after [ ], 1998
[third anniversary of closing]; provided, however, that prior to [ ],
2,000 [fifth anniversary of closing], a condition to any redemption by the
Corporation pursuant to this Section 3(a) shall be that the Trading Price (as
hereinafter defined) of the Common Stock shall have exceeded $59.20 (adjusted
from time to time for any stock split, stock dividend, combination of shares,
recapitalization or similar event pertaining to the Common Stock following
the initial issuance of shares of Series A Convertible Preferred Stock,
including other events which would result in an adjustment to the conversion
rate then in effect pursuant to Section 6(f)) for 20 Trading Days out of the
30 consecutive Trading Days immediately preceding the date notice of such
Redemption is mailed by the Corporation under Section 3(c).
The redemption price per share for any period shall be the amount set forth
below opposite such period, plus, in each case, all dividends accrued and
unpaid on the shares of Series A Convertible Preferred Stock to be redeemed
up to and including the date fixed for redemption.
<TABLE>
<CAPTION>
If redeemed during
the twelve-month period
beginning ,
in the year specified below Price
<S> <C>
1998 $50.000
1999 $50.000
2000 $51.500
2001 $51.125
2002 $50.750
2003 $50.375
2004 $50.000
</TABLE>
B-2
<PAGE>
"Trading Price," with respect to any Trading Day, shall mean the last
reported sales price regular way for such Trading Day, or in case no such
reported sale takes place on such Trading Day, the average of the reported
closing bid and asked prices regular way for such trading day, of the Common
Stock, in either case as reported in the principal consolidated transaction
reporting system with respect to securities listed or admitted to trading on
the New York Stock Exchange, or if the Common Stock is not listed or admitted
to trading on such Exchange, as reported in the principal consolidated
transaction reporting system with respect to securities listed on the
principal national securities exchange on which the Common Stock is listed or
admitted to trading or, if not listed or admitted to trading on any national
securities exchange, the last quoted sale price or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market,
as reported by the National Association of Securities Dealers, Inc. Automated
Quotations System ("NASDAQ") or such other system then in use, or, if on any
such date the Common Stock is not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Common Stock selected by the Board of
Directors. If the Common Stock is not publicly held or so listed or publicly
traded, "Trading Price" shall mean the Fair Market Value per share as
determined in good faith by the Board of Directors of the Corporation.
"Trading Day" means a day on which the principal national securities exchange
on which the Common Stock is listed or admitted to trading is open for the
transaction of business or, if the Common Stock is not listed or admitted to
trading on any national securities exchange, any day other than a Saturday,
Sunday, or a day on which banking institutions in the State of New York are
authorized or obligated by law or executive order to close.
"Fair Market Value" means the amount which a willing buyer would pay a
willing seller in an arms- length transaction.
(b) If less than all of the outstanding shares of the Series A Convertible
Preferred Stock are to be redeemed, the number of shares to be redeemed shall
be determined by the Board of Directors and the shares to be redeemed shall
be determined pro rata or by lot or in such other manner and subject to such
regulations as the Board of Directors in its sole discretion shall prescribe;
provided, however, that no fraction of a share shall be redeemed, and if a
proration would result in a fraction of a share, the number of shares to be
redeemed from each holder shall be rounded off to the nearest full share.
(c) On [tenth anniversary of closing], 2005, the Corporation shall redeem all
shares of Series A Convertible Preferred Stock which then remain outstanding
at a redemption price of $50.00 per share, plus all dividends accrued and
unpaid on such shares of Series A Convertible Preferred Stock; provided,
however, that if there are insufficient legally available funds for
redemption in full under this subparagraph (c), the Corporation shall redeem
such lesser number of shares of Series A Convertible Preferred Stock as may
lawfully be redeemed from funds legally available therefor, and shall redeem
all or part of the remainder of the shares of Series A Convertible Preferred
Stock as shall thereafter remain outstanding as soon as the Corporation has
sufficient funds which are legally available therefor until all such shares
of Series A Convertible Preferred Stock have been redeemed.
(d) At least 30 days but not more than 60 days prior to the date fixed for
each redemption of shares of the Series A Convertible Preferred Stock
pursuant to this Section 3, a written notice shall be mailed to each holder
of record of Series A Convertible Preferred Stock to be redeemed in a postage
prepaid envelope addressed to such holder at his post office address as shown
on the records of the Corporation, notifying such holder of the election of
the Corporation to redeem such shares, stating the date fixed for redemption
thereof (the "Redemption Date"), and calling upon such holder to surrender to
the Corporation on or after the Redemption Date at the place designated in
such notice his certificate or certificates representing the number of shares
specified in such notice of redemption. Such notice also shall specify (i)
the date on which the conversion rights of the holder shall terminate in
accordance with Section 6 and (ii) the current conversion rate for shares of
Series A Convertible Preferred Stock.
On or after the Redemption Date each holder of shares of the Series A
Convertible Preferred Stock to be redeemed shall present and surrender his
certificate or certificates for such shares to the Corporation at the place
designated in such notice and thereupon the redemption price of such shares
B-3
<PAGE>
shall be paid to or on the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be cancelled. In case less than all shares represented by
any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares. Notwithstanding any other provision of
this certificate of designation, from and after the Redemption Date (unless
default shall be made by the Corporation in payment of the redemption price),
all dividends on the shares of the Series A Convertible Preferred Stock
designated for redemption in such notice shall cease to accrue, and all
rights of the holders thereof as stockholders of the Corporation, except the
right to receive the applicable redemption price of such shares (including
all accrued and unpaid dividends up to and including the Redemption Date)
upon the surrender of certificates representing the same shall cease and
terminate and such shares shall not thereafter be transferred (except with
the consent of the Corporation) on the books of the Corporation, and such
shares shall not be deemed to be outstanding for any purpose whatsoever.
At its election, the Corporation prior to the Redemption Date may deposit the
redemption price (including all accrued and unpaid dividends up to the
Redemption Date) of shares of the Series A Convertible Preferred Stock so
called for redemption in trust for the holders thereof with a bank or trust
company (having a capital surplus and undivided profits aggregating not less
than $50,000,000) in the Borough of Manhattan, City and State of New York,
the City of Boston, Commonwealth of Massachusetts, or in any other city in
which the Corporation at the time shall maintain a transfer agency with
respect to such shares (the "Paying Agent"), in which case the aforesaid
notice to holders of shares of the Series A Convertible Preferred Stock to be
redeemed shall state the date of such deposit, shall specify the office of
such Paying Agent as the place of payment of the redemption price, and shall
call upon such holders to surrender the certificates representing such shares
at such price on or after the date fixed in such redemption notice (which
shall not be later than the Redemption Date) against the payment of the
redemption price (including all accrued and unpaid dividends up to and
including the Redemption Date). Any interest accrued on such funds shall be
paid to the Corporation from time to time.
If the certificates for any shares of Series A Convertible Preferred Stock so
called for redemption shall not have been duly surrendered for redemption
within six months from and after the Redemption Date, the fund, if any,
deposited by the Corporation with the Paying Agent may again be used by the
Corporation for its corporate purposes and may be withdrawn by the
Corporation, and all holders of certificates for the shares so called for
redemption but unsurrendered during such six months shall thereafter have
only the rights of general creditors against the Corporation for the amount
sufficient to redeem the shares evidenced by such certificates, without
interest thereon.
(e) Shares of the Series A Convertible Preferred Stock (x) authorized under
this certificate of designation and subject to issuance under Section 2.1(c)
of the Agreement and Plan of Merger dated as of October 12, 1994 among the
Corporation, Apple Merger Corporation and The Colonial Group, Inc., as from
time to time amended, which are not issued thereunder or (y) which are
redeemed pursuant to the provisions of this Section 3, surrendered to the
Corporation upon conversion or (if so determined by the Board of Directors in
connection therewith) otherwise repurchased or reacquired by the Corporation,
shall thereupon be retired and may not be reissued as shares of the Series A
Convertible Preferred Stock, but thereafter shall have the status of
authorized but unissued shares of the Preferred Stock, without designation as
to series until such shares are once more designated as part of a particular
series of the Preferred Stock.
(f) The Corporation may at any time and from time to time repurchase or
otherwise reacquire shares of Series A Convertible Preferred Stock at such
price or prices as the Board of Directors of the Corporation may determine.
Section 4. Voting Rights. Each share of Series A Convertible Preferred Stock
shall be entitled to such number of votes as shall equal the number of shares
of Common Stock into which such share is then convertible. Except as
otherwise provided in Section 7, or by the Articles of Organization of the
Corporation, as amended from time to time, or by law, the shares of Series A
Convertible Preferred Stock, the shares of Common Stock and any other shares
of Preferred Stock at the time entitled to vote generally shall vote together
as one class on all matters submitted to a vote of stockholders of the
Corporation.
B-4
<PAGE>
Section 5. Liquidation Rights.
(a) In the event of any liquidation, dissolution or winding up of the affairs
of the Corporation, whether voluntary or otherwise, after payment or
provision for payment of the debts and other liabilities of the Corporation,
the holders of shares of the Series A Convertible Preferred Stock shall be
entitled to receive, in cash, out of the remaining net assets of the
Corporation, the amount of Fifty Dollars ($50.00) for each share of the
Series A Convertible Preferred Stock held, plus an amount equal to all
dividends accrued and unpaid on each such share up to and including the date
fixed for distribution, before any distribution shall be made to the holders
of shares of the Common Stock or any other capital stock of the Corporation
ranking (as to any such distribution) junior to the Series A Convertible
Preferred Stock ("Junior Liquidation Stock"), or before the Corporation shall
redeem, repurchase or otherwise acquire for value any shares of Common Stock
or Junior Liquidation Stock. If upon any liquidation, dissolution or winding
up of the Corporation, the assets distributable among the holders of shares
of the Series A Convertible Preferred Stock and all other classes and series
of Preferred Stock ranking (as to any such distribution) on a parity with the
Series A Convertible Preferred Stock ("Parity Liquidation Stock") are
insufficient to permit the payment in full to the holders of all such shares
of all preferential amounts payable to all such holders, then the entire
assets of the Corporation thus distributable shall be distributed ratably
among the holders of the shares of the Series A Convertible Preferred Stock
and such Parity Liquidation Stock in proportion to the respective amounts
that would be payable per share if such assets were sufficient to permit
payment in full.
(b) For purposes of this Section 5, a distribution of assets in any
dissolution, winding up or liquidation shall not include (i) any
consolidation or merger of the Corporation with or into any other corporation
or entity, (ii) any dissolution, liquidation, winding up or reorganization of
the Corporation immediately followed by reincorporation of another
corporation which shall succeed to all or substantially all of the assets of
the Corporation or (iii) a sale or other disposition of all or substantially
all of the Corporation's assets to another corporation or entity; provided,
however, that in each case, effective provision is made in the articles of
organization of the resulting and surviving corporation or otherwise for the
protection of the rights of the holders of shares of the Series A Convertible
Preferred Stock in accordance with Section 6(k).
(c) After the payment of the full preferential amounts provided for herein to
the holders of shares of the Series A Convertible Preferred Stock or funds
necessary for such payment have been set aside in trust for the holders
thereof, such holders shall be entitled to no other or further participation
in the distribution of the assets of the Corporation.
Section 6. Conversion.
(a) Holders of shares of the Series A Convertible Preferred Stock shall have
the right, exercisable at any time and from time to time (subject, in the
case of shares of the Series A Convertible Preferred Stock called for
redemption to the limitation set forth below), to convert all or any such
shares of the Series A Convertible Preferred Stock into shares of Common
Stock (calculated as to each conversion to the nearest 1/100th of a share) at
a rate of 1.0559 shares of Common Stock for each share of the Series A
Convertible Preferred Stock so converted, subject to adjustment as described
in Section 6(f) below. In the case of shares of the Series A Convertible
Preferred Stock called for redemption, conversion rights will expire at the
close of business on the fifth business day preceding the Redemption Date;
provided, however, that if the Corporation defaults in its obligations under
Section 3 after calling shares of Series A Convertible Preferred Stock for
redemption, the right to convert such shares at any time or from time to time
hereunder shall be restored. Upon conversion, no adjustment or payment will
be made for dividends or interest, but if any holder surrenders a share of
the Series A Convertible Preferred Stock for conversion after the close of
business on the record date for the payment of a dividend and prior to the
opening of business on the next dividend payment date, then, notwithstanding
such conversion, the dividend payable on such dividend payment date will be
paid to the registered holder of such share on such record date.
(b) Mechanics of Conversion. In order to exercise his conversion right
granted in this Section 6, the holder of any shares of Series A Convertible
Preferred Stock to be converted shall surrender his
B-5
<PAGE>
certificate or certificates therefor to the designated office of the transfer
agent or register for shares of Series A Convertible Preferred Stock, if such
be appointed, and otherwise at the principal office of the Corporation, and
shall give written notice to the Corporation at said office that the holder
elects to convert the shares of Series A Convertible Preferred Stock
represented by such certificate or certificates, or any number thereof. Such
notice shall also state the name or names (with address or addresses) in
which the certificate or certificates for shares of Common Stock issuable
upon such conversion shall be issued. If required by the Corporation, the
certificate or certificates so surrendered for conversion shall be endorsed
or accompanied by written instruments of transfer, in form satisfactory to
the Corporation, duly executed by the registered holder thereof or by his
attorney-in-fact thereunto duly authorized in writing. The date of receipt by
such transfer agent or registrar (or the Corporation) of the certificate or
certificates so surrendered for conversion and such notice shall be the
conversion date, and the conversion rate in effect on the conversion date
shall be the applicable conversion rate. As soon as practicable after the
conversion date, the Corporation shall cause to be issued and delivered to
such holder, or on his written order, a certificate or certificates for the
number of full shares of Common Stock issuable upon such conversion in
accordance with the provisions of this Section 6 and cash as provided in
Section 6(c) in respect of any fraction of a share of Common Stock which
would otherwise be issuable under this Section 6.
(c) No fractional shares of Common Stock or scrip representing fractional
shares shall be issued upon conversion of shares or the Series A Convertible
Preferred Stock. If more than one share of the Series A Convertible Preferred
Stock shall be surrendered for conversion at one time by the same holder, the
number of full shares of Common Stock which shall be issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
the Series A Convertible Preferred Stock so surrendered. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of the Series A Convertible Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fraction in an
amount equal to the same fraction of the Trading Price for the Common Stock
on the last Trading Day preceding the date of conversion.
(d) If a holder converts a share or shares of the Series A Convertible
Preferred Stock, the Corporation shall pay any documentary, stamp or similar
issue or transfer tax due on the issue of Common Stock upon the conversion.
The holder, however, shall pay to the Corporation the amount of any tax which
is due (or shall establish to the satisfaction of the Corporation payment
therefor) if the shares are to be issued in a name other than the name of
such holder.
(e) The Corporation shall reserve and shall at all times have reserved out of
its authorized but unissued shares of Common Stock a sufficient number of
shares of Common Stock to permit the conversion of the then outstanding
shares of the Series A Convertible Preferred Stock. All shares of Common
Stock which may be issued upon conversion of shares of the Series A
Convertible Preferred Stock shall be validly issued, fully paid and
nonassessable. In order that the Corporation may issue shares Common Stock
upon conversion of shares of the Series A Convertible Preferred Stock, the
Corporation will endeavor to comply with all applicable federal and state
securities laws and will endeavor to list such shares of Common Stock to be
issued upon conversion on each securities exchange on which Common Stock is
listed.
(f) The conversion rate in effect at any time shall be subject to adjustment
from time to time as follows:
(i) In case the Corporation shall (1) pay a dividend in shares of
Common Stock to holders generally of Common Stock, (2) make a distribution in
shares of Common Stock to holders generally of Common Stock, (3) subdivide
the outstanding shares of Common Stock into a greater number of shares of
Common Stock or (4) combine the outstanding shares of Common Stock into a
smaller number of shares of Common Stock, the conversion rate immediately
prior to such action shall be adjusted so that the holder of any shares of
the Series A Convertible Preferred Stock thereafter surrendered for
conversion shall be entitled to receive that number of shares of Common Stock
equal to the number of shares of Common Stock which he would have owned
immediately following such action had such shares of the Series A Convertible
Preferred Stock been converted immediately prior thereto. An adjustment made
pursuant to this
B-6
<PAGE>
Section 6(f)(i) shall become effective as of the opening of business on the
business day next following the record date in the case of a dividend or
distribution (subject to readjustment to the extent that such dividend or
distribution is not paid or made in whole or in part) and shall become
effective immediately after the effective date in the case of a subdivision
or combination.
(ii) In case the Corporation shall issue rights or warrants to
substantially all holders of the Common Stock entitling them to subscribe for
or purchase shares of Common Stock (or securities convertible into shares of
Common Stock) at a price per share (or per share equivalent, in the case of
such convertible securities) less than the Current Market Price (as defined
below) per share of the Common Stock as of the record date for determining
holders of Common Stock entitled to receive such rights, the number of shares
of Common Stock into which each share of the Series A Convertible Preferred
Stock shall be convertible shall be adjusted so that the same shall be equal
to the number determined by multiplying the number of shares of the Common
Stock into which such share of the Series A Convertible Preferred Stock was
convertible immediately prior to such record date by a fraction of which the
numerator shall be the number of shares of the Common Stock outstanding on
such record date plus the number of additional shares of Common Stock offered
(or into which the convertible securities so offered are convertible), and of
which the denominator shall be the number of shares of the Common Stock
outstanding on such record date, plus the number of shares of Common Stock
which the aggregate offering price of the offered shares of Common Stock (or
the aggregate conversion price of the convertible securities so offered)
would purchase at such current Trading Price. Such adjustment shall become
effective immediately as of the opening of business on the business day next
following such record date, subject to readjustment to the extent that such
rights or warrants are not issued in whole or in part, and to readjustment
upon expiration of such rights or warrants or conversion privileges to the
extent the same shall not have been exercised in full.
Notwithstanding the foregoing, no adjustment shall be made under this
subparagraph (ii) for the issuance of options, grants, rights or warrants
pursuant to any employee benefit plan or employee arrangement at any time
approved by the Board of Directors of the Corporation.
(iii) In case the Corporation shall distribute to substantially all holders
of the Common Stock shares of any class of capital stock other than Common
Stock, evidences of indebtedness or other assets (other than cash dividends),
or shall distribute to substantially all holders of the Common Stock rights
or warrants to subscribe for securities (other than those referred to in
Section 6(f)(ii)), then in each such case the number of shares of Common
Stock into which such share of the Series A Convertible Preferred Stock shall
be convertible shall be adjusted so that the same shall equal the number
determined by multiplying the number of shares of the Common Stock into which
such share of the Series A Convertible Preferred Stock was convertible
immediately prior to the date of such distribution by a fraction of which the
numerator shall be the Current Market Price per share of the Common Stock as
of the record date for such distribution, and of which the denominator shall
be such Current Market Price less the fair market value (as determined by the
Board of Directors, whose determination shall be conclusive evidence of such
fair market value) of the portion of the property so distributed or of such
subscription rights or warrants applicable to one share of the Common Stock.
Such adjustment shall become effective as of the opening of business on the
next business day following the record date for the determination of the
holders of the Common Stock entitled to receive such distribution, subject to
readjustment to the extent such distribution is not made in whole or in part,
and (in the case of such rights or warrants) to readjustment upon expiration
of such rights or warrants to the extent the same shall have not been
exercised in full.
Notwithstanding the foregoing, in the event that the Company shall
distribute rights or warrants (other than those referred to in Section
6(f)(ii)) ("Rights") pro rata to holders of the Common Stock, the Corporation
may, in lieu of making any adjustment pursuant to this Section 6(f)(iii),
make proper provision so that each holder of a share of Series A Convertible
Preferred Stock who converts such share after the record date for such
distribution and prior to the
B-7
<PAGE>
expiration or redemption of such Rights shall be entitled to receive upon
such conversion, in addition to the shares of the Common Stock issuable upon
such conversion (the "Conversion Shares"), a number of Rights to be
determined as follows: (i) if such conversion occurs on or prior to the date
for the distribution to the holders of such Rights of separate certificates
evidencing such Rights (the "Distribution Date"), the same number of Rights
to which a holder of a number of shares of the Common Stock equal to the
number of Conversion Shares is entitled at the time of such conversion in
accordance with the terms and provisions of and applicable to those Rights;
and (ii) if such conversion occurs after the Distribution Date, the same
number of Rights to which a holder of the number of shares of Common Stock
into which a share of the Series A Convertible Preferred Stock so converted
was convertible immediately prior to the Distribution Date would have been
entitled on the Distribution Date in accordance with the terms and provisions
of and applicable to those Rights.
(iv) The "Current Market Price" per share of the Common Stock as of any
date shall mean the average of the daily Trading Prices of the Common Stock
for thirty consecutive trading days ending on such date (or, if such date is
not a Trading Date, the Trading Day next preceding such date).
(g) No adjustment in the conversion rate shall be required until cumulative
adjustments result in a concomitant change of 1% or more of the conversion
price as existed prior to the last adjustment of the conversion rate;
provided, however, that any adjustments which by reason of this Section 6(g)
are not required to be made shall be carried forward and taken into account
in any subsequent adjustment. All calculations under this Section 6 shall be
made to the nearest one-hundredth of a share.
(h) In the event that, as a result of an adjustment made pursuant to Section
6(f), the holder of any share or the Series A Convertible Preferred Stock
thereafter surrendered for conversion shall become entitled to receive any
shares of capital stock of the Corporation other than shares of Common Stock,
thereafter the number of such other shares so receivable upon conversion of
any shares of the Series A Convertible Preferred Stock shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
this Section 6.
(i) The Corporation at its sole discretion may make such increases in the
conversion rate, in addition to those required by subparagraphs (i), (ii) and
(iii) of Section 6(f), as it considers to be advisable in order that any
event treated for Federal income tax purposes as a dividend of stock or stock
rights shall not be taxable to the recipients thereof.
(j) Whenever the conversion rate is adjusted as herein provided, the
Corporation shall promptly (x) file with any transfer agent for the Series A
Convertible Preferred Stock a certificate setting forth the conversion rate
after such adjustment and setting forth a brief statement of the facts
requiring such adjustment, which certificate shall be presumptive evidence of
the correctness of such adjustment, and (B) mail or cause to be mailed a
notice of such adjustment setting forth in reasonable detail the method of
calculation of and the facts requiring such adjustment to the holders of
shares of Series A Convertible Preferred Stock at their last addresses as
they shall appear upon the books of the Corporation.
(k) If any of the following shall occur, namely (i) any reclassification or
change of outstanding shares of the Common Stock issuable upon conversion of
shares of the Series A Convertible Preferred Stock (other than a change in
par value, or from par value to no par value, or from no par value to par
value, or as a result of a subdivision or combination), (ii) any
consolidation or merger to which the Corporation is a party, other than a
merger in which the Corporation is the continuing corporation and which does
not result in any reclassification of, or change (other than a change in
name, or par value, or from par value to no par value, or from no par value
to par value, or as a result of a subdivision or combination) in, outstanding
shares of the Common Stock, or (iii) any sale or conveyance of all or
substantially all of the property or business of the Corporation as an
entirety, then the Corporation, or such successor or purchasing corporation,
as the case may be, shall, as a condition precedent to such reclassification,
change, consolidation, merger, sale or conveyance, provide in its articles of
organizations or other charter document that each share of the Series A
Convertible Preferred Stock shall be convertible into the kind and amount of
shares of capital stock and other securities and property (including cash)
B-8
<PAGE>
receivable upon such reclassification, change, consolidation, merger, sale or
conveyance by a holder of the number of shares of Class A Common Stock
deliverable upon conversion of such share of the Series A Convertible
Preferred Stock immediately prior to such reclassification, change,
consolidation, merger, sale or conveyance. Such articles of organization or
other charter document shall provide for adjustments which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 6. The foregoing, however, shall not in any way affect the right a
holder of a share of the Series A Convertible Preferred Stock may otherwise
have, pursuant to Section 6(f)(iii), to receive Rights upon conversion of a
share of the Series A Convertible Preferred Stock. If, in the case of any
such consolidation, merger, sale or conveyance, the stock or other securities
and property (including cash) receivable thereupon by a holder of the Common
Stock includes shares of capital stock or other securities and property of a
corporation other than the successor or purchasing corporation, as the case
may be, in such consolidation, merger, sale or conveyance, then the articles
of organization or other charter document of such other corporation shall
contain such additional provisions to protect the interests of the holders of
shares of the Series A Convertible Preferred Stock as the Board of Directors
shall reasonably consider necessary by reason of the foregoing. The provision
of this Section 6(k) shall similarly apply to successive consolidations,
mergers, sales or conveyances.
Section 7. Limitations. In addition to any other rights provided by
applicable law, so long as any shares of the Series A Convertible Preferred
Stock are outstanding, the Corporation shall not, without the affirmative
vote of the holders of at least two-thirds (2/3) of the outstanding shares of
the Series A Convertible Preferred Stock, voting separately, create,
authorize or issue any class or series of capital stock ranking either as to
payment of dividends or distribution of assets upon liquidation prior to or
on a parity with the Series A Convertible Preferred Stock; provided, however,
that no such vote or written consent of the holders of the shares of the
Series A Convertible Preferred Stock shall be required if, at or prior to the
time when the issuance of any such shares ranking prior to the Series A
Convertible Preferred Stock is to be made or any such change is to take
effect, as the case may be, provision is made for the redemption of all the
then outstanding shares of the Series A Convertible Preferred Stock in
accordance herewith.
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation to be signed by its President and its Treasurer, and attested by
its Clerk, this day of , 1995.
LIBERTY FINANCIAL COMPANIES, INC.
By
Name:
President
By
Name:
Treasurer
Attest:
By
Name:
Clerk
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<PAGE>
EXHIBIT C
FORM OF
STOCKHOLDERS AGREEMENT
dated as of , 1995
among Liberty Financial Companies, Inc.,
a Massachusetts Corporation (the "Company"),
Liberty Mutual Insurance Company ("Liberty Mutual"),
and those stockholders of the Company listed on the
signature pages hereof (the "Holders")
PREAMBLE
This Agreement is being executed and delivered as of the date first written
above among the Company, Liberty Mutual and each of the Holders pursuant to
Section 2.1(c)(VII) of the Agreement and Plan of Merger dated as of October
12, 1994 (the "Merger Agreement"), as amended and restated on February 8,
1995 among the Company, (under its former name "New LFC, Inc."), LFC
Holdings, Inc. (under its former name "Liberty Financial Companies, Inc."),
Apple Merger Corporation and The Colonial Group, Inc. Each Holder has
received or will receive pursuant to Section 2.1(c) of the Merger Agreement
that number of shares ("Preferred Shares") specified opposite the Holder's
name on Schedule A attached hereto of the Company's Series A Convertible
Preferred Stock, $.01 par value, having a stated amount of $50.00 per share
and entitled to annual preferential dividends thereon at a rate of 5.75%. The
Preferred Shares are convertible from time to time into shares (the
"Conversion Shares") of the Company's Common Stock, $.01 par value. The
parties are entering into this Agreement in order to set forth certain
agreements among the Company and the Holders pertaining to the Preferred
Shares.
NOW, THEREFORE, in consideration of the premises, the parties hereto hereby
agree as follows:
1. Certain Definitions. Terms defined in the Merger Agreement and not
otherwise defined herein are used herein with the meanings so defined.
2. Restrictions on Transfer of Preferred Shares.
2.1. Lock Up With Respect to Preferred Shares. No Holder may voluntarily or
involuntarily Transfer any Preferred Shares without the written consent of
the Company until the fifth anniversary of the Closing Date ("the Fifth
Anniversary"), except, subject to Section 2.2, to one or more of the
following persons or entities (each, a "Permitted Transferee"):
(i) if the Holder is an individual, to a trust or similar arrangement for
the benefit, primarily, of Holder or the Holder's Immediate Family;
(ii) to another person or entity by operation of law or legal process,
including, without limitation, a decree of divorce, order in a proceeding
under Title 11 of the United States Code (or any successor statute), the laws
of descent and distribution or other transfers by reason of the Holder's
death or legal incompetency;
(iii) if the Holder is a corporation, to a successor corporation in the
event of a reorganization of such corporate Holder;
(iv) to a corporation or trust qualified under section 501(c)(3) of the
Internal Revenue Code; or
(v) to a bona fide pledgee.
"Transfer" shall mean any voluntary or involuntary sale, transfer,
disposition, pledge or assignment, by gift or otherwise; provided, however,
that the term shall not include ordinary proxies or powers of attorney with
respect to voting of shares. "Immediate Family" shall mean, with respect to
an individual, such individual's spouse, issue, adopted issue and parents.
C-1
<PAGE>
The provisions of this Section 2 shall not restrict in any manner the
Transfer of Conversion Shares.
2.2. Joinder of Permitted Transferees. It shall be a precondition to each
Transfer of Preferred Shares to a Permitted Transferee pursuant to Section
2.1 that the Permitted Transferee shall have duly executed and delivered to
the Company a joinder agreement or similar agreement or instrument in a form
reasonably satisfactory to the Company by which such Permitted Transferee
shall become a party to this Agreement as a Holder hereunder and the
Preferred Shares so Transferred shall be made subject to the restrictions of
this Section 2. Notwithstanding the immediately preceding sentence, a
Permitted Transferee referenced in clause (ii) of Section 2.1 shall have the
option of not becoming a party to this Agreement, exercisable by written
notice to the Company in connection with the registration of Transfer of the
applicable Preferred Shares to such Permitted Transferee, in which case such
Permitted Transferee and such Preferred Shares (and any Conversion Shares
issuable upon conversion thereof) shall cease to be subject to the
restrictions, or entitled to the benefits, of this Agreement.
2.3. Certificate for Preferred Shares; Legend. The Preferred Shares held by
each Holder shall be represented by a single certificate registered in the
name of such Holder and bearing the following legend:
The shares represented by this certificate are subject to certain
restrictions contained in a Stockholders Agreement among the Corporation,
Liberty Mutual, the original holder of these securities and certain other
parties. The Corporation will make a copy of said Agreement available to the
holder hereof upon request and without charge.
2.4. Completion of Schedule A by the Company. In order to become party to
this Agreement, each Holder has elected both to receive Preferred Shares and
to become party hereto by so completing such Holder's Election Form in
accordance with Section 2.1(c) of the Merger Agreement. The precise number of
Preferred Shares to be issued to the Holder has been determined in accordance
with said Section 2.1(c). Each Holder hereby authorizes the Company to
complete Schedule A hereto with respect to the number of Preferred Shares and
the corresponding certificate number so issued to such Holder.
3. Put Option of Holders of Preferred Shares. At any time during the first 60
days next succeeding the Fifth Anniversary, any Holder may elect to sell to
Liberty Mutual, and Liberty Mutual shall be obligated to purchase, all, but
not less than all, of the Preferred Shares then owned by such Holder (the
"Put Shares") at a price (the "Put Price") of $50.00 per Put Share (adjusted
for any stock splits, dividends or similar recapitalization events affecting
the Put Shares), plus accrued but unpaid dividends through the date of
purchase in respect of the Put Shares. Such election shall be exercised by
delivery of written notice thereof to Liberty Mutual (with a copy to the
Company), accompanied by the certificate representing such Put Shares duly
endorsed for transfer, with signatures guaranteed by a national bank or
member of the New York Stock Exchange, and all transfer and/or stamp taxes
(if any) paid. Liberty Mutual may designate the Company or another person or
entity as purchaser of the Put Shares; provided, however, that no such
designation shall relieve Liberty Mutual of its obligations under this
Section 3. Liberty Mutual (or such designee) shall pay to each Holder duly
exercising the put option created by this Section 3 in cash the Put Price
(without interest) on the 75th day next succeeding the Fifth Anniversary (or,
if such day is not a business day, the next succeeding business day).
4. No Transfers in Violation of this Agreement. Any purported Transfer of
Preferred Shares in violation of this Agreement shall be null and void; and
the Company shall not registered such Transfer on its books.
5. Miscellaneous.
5.1. Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic substantive laws of the Commonwealth of
Massachusetts without giving effect to any choice or conflicts of laws rule
or provision that would result in the application of the domestic substantive
laws of any other jurisdiction.
5.2. Successors and Assigns. Except as set forth in Section 2.1 pertaining
to Transfers of Preferred Shares to Permitted Transferees, this Agreement may
not be assigned by any party, whether
C-2
<PAGE>
voluntarily, involuntarily, or by operation of law, without the prior written
consent of the other parties hereto. Subject to the foregoing, the provisions
hereof shall inure to the benefit of, and be binding upon, the successors,
permitted assigns, heirs, executors and administrators of the parties hereto.
5.3 Notices, Etc. All notices and other communications required or
permitted hereunder shall be in writing and shall be deemed effectively given
upon personal delivery, confirmation of telex or facsimile transmission, upon
the fifth day following mailing by registered mail, postage prepaid, or upon
the next business day following deposit with a nationally recognized
overnight air courier providing reliable proof of delivery to its customers,
addressed:
(a) if to a Holder, at such Holder's address set forth on the records
of the Company, or at such other address as such Holder shall have furnished
to the Company in writing in accordance with this Section 5.3; or
(b) if to the Company, at the following address:
Liberty Financial Company, Inc.
Federal Reserve Plaza
600 Atlantic Avenue, 24th Floor
Boston, MA 02210
Attention: Treasurer
or at such other address as the Company shall have furnished to the Holders
in accordance with this Section 5.3; or
(c) if to Liberty Mutual, at the following address:
Liberty Mutual Insurance Company
222 Berkeley Street Boston, MA 02116
Attention: Treasurer
or at such other address as Liberty Mutual shall have furnished to the
Holders in accordance with this Section 6.3.
5.4. Severability. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, it shall, to the extent practicable, be
modified so as to make it valid, legal and enforceable, and the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby.
5.5. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
5.6. Amendments; Waivers. This Agreement may be amended, and any provisions
hereof may be waived, as to any Holder or Holders, only by the written
consent of the Company; Liberty Mutual and such Holder or Holders.
C-3
<PAGE>
IN WITNESS WHEREOF, the parties thereto, intending to be legally bound
hereby, have executed and delivered this Agreement as of the date first
written above.
LIBERTY FINANCIAL COMPANIES, INC.
By
Name:
Title:
LIBERTY MUTUAL INSURANCE COMPANY
By
Name:
Title:
HOLDERS:
Name:
Name:
Name:
C-4
<PAGE>
Schedule A
Schedule of Holders and Preferred Shares
Holder No. of Preferred Shares Certificate No.
A-1(S)
<PAGE>
EXHIBIT D
Examples Of Price Reduction Formula Pursuant To Section 2.1(c)(VIII)
Assume Starting Specified Assets Under Management of $14.0B
<TABLE>
<CAPTION>
Adjusted Merger Consideration(1)
Adjustment Date Common Preferred
Specified Assets Consideration Stock Stock
Under Adjustment Adjustment Adjustment Consideration Exchange Exchange
Management Percentage Numerator(2) Ratio Reduction Ratio Ratio Cash
<S> <C> <C> <C> <C> <C> <C> <C>
>$11.9B None 1:1 0.770:1 $40.00
$11.9B 85% 7.5% 7.5/92.5% 8.1% 0.919:1 0.708:1 $36.76
$11.2B 80% 12.5% 12.5/92.5% 13.5% 0.865:1 0.666:1 $34.60
*<$10.5B 75% 17.5% 17.5/92.5% 18.9% 0.811:1 0.624:1 $32.44
0.811:1 0.624:1 $32.44
</TABLE>
(1)100%--Consideration Reduction Percentage
(2)Lesser of 92.5%-Adjustment Percentage or 17.5%
* If Specified Assets Under Management as of the Close of Business on the
Adjustment Date are less than 75% of Specified Assets Under Management as of
the Close of Business on the date of the Original Agreement ($10.5B in these
examples), then Parent may terminate the Agreement pursuant to Section
7.1(c).
D-1
<PAGE>
EXHIBIT E
FORM OF VOTING AGREEMENT
October 12, 1994
LIBERTY FINANCIAL COMPANIES, INC.
Federal Reserve Plaza
600 Atlantic Avenue, 24th Floor
Boston, MA 02210
Ladies and Gentlemen:
Each of the undersigned (a "Stockholder") beneficially owns and has sole
voting power with respect to the number of shares of either or both of Series
A and Series B common stock, par value $0.10 per share (the "Shares"), of The
Colonial Group, Inc. ("Colonial"), indicated opposite such Stockholder's name
on Schedule A hereto.
Substantially contemporaneously with the execution of this letter agreement,
each of Liberty Financial Companies, Inc. ("LFC"), Apple Merger Corporation
("Sub") and Colonial are entering into an Agreement and Plan of Merger of
even date herewith (the "Merger Agreement") providing, among other things,
for the merger of Colonial with and into Sub (the "Merger"). Each of the
Merger Agreement and the Merger have been approved and authorized for
submission to the stockholders of Colonial, with a the recommendation that
the stockholders approve the same, by the Board of Directors of Colonial,
acting unanimously. Each Stockholder acknowledges that LFC has undertaken and
will continue to undertake substantial expenses in connection with the
negotiation and execution of the Merger Agreement and the subsequent actions
necessary to consummate the Merger and the other transactions contemplated by
the Merger Agreement.
In consideration of LFC's entering into the Merger Agreement and the expenses
incurred and to be incurred by LFC in connection therewith, and for $1.00 and
other valuable consideration, the receipt and adequacy of which are hereby
acknowledged by each party hereto, each Stockholder hereby agrees with LFC as
follows:
1. Each Stockholder shall vote or cause to be voted for the approval of the
Merger Agreement and the Merger, and shall vote or cause to be voted against
the approval of any other agreement or transaction providing for a merger,
consolidation, sale of assets or other business combination of Colonial or
any of its subsidiaries with any person or entity other than you and your
subsidiaries, all of the Shares owned by such Stockholder, whether such
Shares are held by such Stockholder on the date of this letter agreement (as
reflected on Schedule A hereto) or are subsequently acquired (whether
pursuant to the exercise of stock options or otherwise).
2. Each Stockholder will not sell, assign, transfer or otherwise dispose of
(including without limitation, by the creation of a Lien (as defined in
paragraph 3 below)) or permit to be sold, assigned, transferred or otherwise
disposed of, any Shares owned by such Stockholder, whether such Shares are
held by such Stockholder on the date of this letter agreement or are
subsequently acquired (whether pursuant to the exercise of stock options or
otherwise), except (a) for transfers by will or by operation of law (in which
case this letter agreement shall bind the transferee), (b) for transfers to
any other Stockholders, (c) for Transfers under the Company Stock Purchase
Agreement (as such term is defined in the Merger Agreement) and (d) as LFC
may otherwise agree in writing.
3. Each Stockholder severally represents that he has the complete and
unrestricted power and the unqualified right to enter into and perform the
terms of this letter agreement. Each Stockholder further severally represents
that, as of the date hereof, such Stockholder owns the number of Shares
indicated opposite such Stockholder's name on Schedule A hereto, free and
clear of any liens, claims, charges or other encumbrances and restrictions of
any kind whatsoever (except for Liens arising under such Company Stock
Purchase Agreement) ("Liens"), and has sole and unrestricted voting power
with respect to such Shares.
E-1
<PAGE>
4. The agreements contained herein shall remain in full force and effect
until the earlier of (i) the consummation of the Merger and (ii) the
termination of the Merger Agreement in accordance with Article VII thereof.
5. LFC hereby acknowledges that, in the case of a Stockholder who also is a
director of Colonial, a vote or similar action by such Stockholder/director
in favor of an Acquisition Proposal (as such term is defined in the Merger
Agreement) in accordance with Section 5.9 of the Merger Agreement shall in no
event be deemed to be a breach or violation of this Agreement by such
Stockholder/director.
6. Each Stockholder has signed this letter agreement intending to be bound
severally hereby and not to be bound as joint obligors with any other
Stockholder.
7. This letter agreement is to be governed by and construed in accordance
with the domestic substantive laws of the Commonwealth of Massachusetts,
without giving effect to any choice or conflict of laws rule or provision
that would result in the application of the domestic substantive laws of any
other jurisdiction. If any provision hereof is deemed unenforceable, the
enforceability of the other provisions hereof shall not be affected.
8. This letter agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original, and which collectively shall
constitute a single agreement. This letter agreement may be amended, or a
provision hereof waived, as to any Stockholder, only by means of a subsequent
writing between LFC and such Stockholder.
Please confirm our agreement with you by signing a copy of this letter.
John A. McNeice, Jr.
C. Herbert Emilson
Harold W. Cogger
Davey S. Scoon
Arthur O. Stern
AGREED TO AND ACCEPTED
THIS 12TH DAY OF OCTOBER, 1994
LIBERTY FINANCIAL COMPANIES, INC.
BY:
Name:
Title:
E-2
<PAGE>
APPENDIX II
October 12, 1994
Board of Directors
The Colonial Group, Inc.
One Financial Center
Boston, Massachusetts 02111
Members of the Board:
The Colonial Group, Inc. (the "Company"), Liberty Financial Companies, Inc.
("Parent"), a wholly- owned subsidiary of Liberty Mutual Insurance Company
("Liberty Mutual"), and Newco ("Sub"), a wholly- owned subsidiary of Parent,
propose to enter into an agreement (the "Agreement") pursuant to which the
Company will be merged with and into Sub in a transaction (the "Merger") upon
the closing of which the separate existence of Sub and the Company shall
cease, and Sub shall continue as the surviving corporation (the "Surviving
Corporation"). The Surviving Corporation will be a wholly-owned subsidiary of
Parent upon the closing of the Merger.
The principal terms of the Merger are:
1. Liberty Mutual will receive 2.5348 shares of Parent Common Stock, par
value $.01 per share ("New Parent Common Stock") in exchange for each Parent
share currently held; and
2. Holders of any shares of the Company's Class A Common Stock, par value
$.10 per share ("Company Class A Common Stock") and Class B Common Stock, par
value $.10 per share ("Company Class B Common Stock" and, together with the
Company Class A Common Stock, the "Common Stock") will have the right to
receive one share of New Parent Common Stock in exchange for each share of
Common Stock currently held, unless such shareholder elects the right to
receive either:
a) $40 per share in cash ("Cash Consideration") for each share of Common
Stock held; or
b) 0.77 share of Series A Convertible Preferred Stock of Parent, par value
$.01 per share ("New Preferred Stock").
Pursuant to the terms of the Merger, the New Preferred Stock will pay a
dividend of 5.75% and will be convertible into 1.0557 shares of New Common
Stock, reflecting a conversion premium of 23%. The New Preferred Stock will
have a maturity of 10 years. After the third anniversary of the closing of
the Merger, the New Preferred Stock will be redeemable at the option of
Parent; provided, however, that prior to the fifth anniversary of the
closing, Parent may not redeem the New Preferred Stock unless the New Common
Stock trades above $59.20 (a premium of 25% over the effective conversion
price) for 20 out of the 30 days immediately preceding the date on which
notices of redemption are mailed. Prior to the fifth anniversary, the New
Preferred Stock is redeemable at par. After the fifth anniversary, the New
Preferred Stock is redeemable at a premium to par declining to par at
maturity. Each share of New Preferred Stock will be entitled to such number
of votes as shall equal the number of shares of New Common Stock into which
such share is then convertible. Holders of Common Stock electing to receive
New Preferred Stock will have the option to deposit some or all of their
shares of New Preferred Stock into a "lock up pool", meaning that the
encumbered shares may not be sold for 5 years. In consideration of the lock
up, shareholders may put their shares of New Preferred Stock on the fifth
anniversary to Liberty Mutual at $50.00 per share, plus accrued and unpaid
dividends.
Shareholders may not elect to receive both Cash Consideration and New
Preferred Stock. In addition, the maximum aggregate Cash Consideration will
be $100 million and the maximum number of shares of New Preferred Stock to be
issued will be 1,040,000. If the aggregate number of shares of Common Stock
designated for Cash Consideration or New Preferred Stock exceeds the
aggregate maximum limits for each option, then, in each case, the number of
shares of Common Stock subject to an election to receive the right to such
consideration will be reduced ratably until the aggregate Cash Consideration
no longer exceeds $100 million and/or the number of shares of New Preferred
Stock no longer exceeds 1,040,000, respectively.
You have asked us whether, in our opinion, the proposed consideration to be
received by the holders of the Common Stock in the Merger, taken as a whole,
is fair to such shareholders from a financial point of view.
1
<PAGE>
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Company's Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended December 31, 1993 and the
Company's Forms 10-Q and the related unaudited financial information for the
quarterly periods ending March 31, 1994 and June 30, 1994;
(2) Reviewed Parent financial information for the three fiscal years ended
December 31, 1993 and other interim reports through August 31, 1994 furnished
by Parent;
(3) Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of the Company and
Parent, furnished to us by the Company and Parent;
(4) Conducted discussions with members of senior management of the Company
and Parent concerning their respective businesses and prospects;
(5) Reviewed the historical market prices and trading activity for the
Company Class A Common Stock and compared them with those of certain publicly
traded companies which we deemed to be reasonably similar to the Company;
(6) Compared the results of operations of the Company and Parent with those
of certain companies which we deemed to be reasonably similar to the Company
and Parent, respectively;
(7) Compared the proposed financial terms of the transactions contemplated by
the Agreement with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
(8) Reviewed a draft of the Agreement dated October 12, 1994; and
(9) Reviewed such other financial studies and analyses and performed such
other investigations and taken into account such other matters as we deemed
necessary including our assessment of general economic and market conditions.
In preparing our opinion, we have relied on the accuracy and completeness of
all information supplied or otherwise made available to us by the Company and
Parent, and we have not independently verified such information or assumed
any responsibility therefor or undertaken an independent appraisal of the
assets of the Company or Parent. With respect to the financial forecasts
furnished by the Company and Parent, we have assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgment of the Company's or Parent's management as to the expected future
financial performance of the Company or Parent, as the case may be.
In connection with the preparation of this opinion, we were requested by the
Company to contact only a limited number of potential acquirors.
We have, in the past, provided financial advisory and financing services to
the Company, Parent and Liberty Mutual, including the uncompleted offering of
equity securities of Parent and the proposed offering of debt securities of
Liberty Mutual, and have received or, in the case of Liberty Mutual's
proposed offering of debt securities, will receive fees for the rendering of
such services.
On the basis of, and subject to the foregoing, we are of the opinion that the
proposed consideration to be received by the holders of the Common Stock
pursuant to the Merger, taken as a whole, is fair to such shareholders from a
financial point of view.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By:
Director
Investment Banking Group
2
<PAGE>
February 9, 1995
Board of Directors
The Colonial Group, Inc.
One Financial Center
Boston, Massachusetts 02111
Members of the Board:
We refer to our letter to you dated October 12, 1994 (the "Opinion Letter")
concerning the merger, as described in the Agreement and Plan of Merger dated
as of October 12, 1994 (the "Original Agreement"), of The Colonial Group,
Inc. (the "Company") with and into a wholly-owned subsidiary of Liberty
Financial Companies, Inc. (the "Parent"). A copy of the Opinion Letter is
attached hereto. Capitalized terms which are used herein without definition
and which are defined in the Opinion Letter have the same meaning herein as
in the Opinion Letter.
We have reviewed a draft dated February 6, 1995 of the Amendment and
Restatement dated February 8, 1995 of the Original Agreement (the "Revised
Agreement"). As contemplated by the Revised Agreement, Parent has created a
new wholly-owned subsidiary ("New LFC"). Immediately prior to the Revised
Merger (as defined below), Parent will contribute to New LFC all of its
assets (including the stock of its subsidiaries, but excluding (i) the
capital stock of New LFC and (ii) a $30 million promissory note from SteinRoe
Services, Inc.) and liabilities in exchange for an additional 22,812,200
shares of stock of New LFC, whereas, after such exchange, Parent will own an
amount of shares in New LFC equal to the amount of shares which Liberty
Mutual Equity Corporation would have owned in Parent pursuant to the
transaction described in the Original Agreement. Subsidiary stock contributed
to New LFC will include all of the issued and outstanding capital stock of
Apple Merger Corporation ("Sub"), which will merge with and into the Company
pursuant to the Revised Agreement. Parent will change its name to "LFC
Holdings, Inc." and New LFC will change its name to "Liberty Financial
Companies, Inc."
Pursuant to the Revised Agreement, Sub will be merged with and into the
Company in a transaction (the "Revised Merger") upon the closing of which the
separate existence of Sub will cease, and the Company will continue as the
surviving corporation. This surviving corporation will be a wholly-owned
subsidiary of New LFC upon the closing of the Revised Merger.
Pursuant to the terms of the Revised Merger, holders of shares of Common
Stock will receive consideration identical to that described in the Opinion
Letter, except that New LFC will be the issuer of the New Parent Common Stock
and the New Preferred Stock described therein and will have the optional and
mandatory redemption rights and obligations of Parent described therein with
respect to the New Preferred Stock.
Except as expressly stated above, the transaction described in the Opinion
Letter remains unchanged.
The Revised Agreement if executed and delivered by the parties thereto on
October 12, 1994 would not have altered our opinion as stated in the Opinion
Letter. Accordingly, you may rely on the Opinion Letter as if the Revised
Agreement were described therein.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By: Peter C. Jachym
Director
1
<PAGE>
APPENDIX III
October 12, 1994
Board of Directors
The Colonial Group, Inc.
One Financial Center
Boston, Massachusetts 02111
Members of the Board:
The Colonial Group, Inc. (the "Company"), Liberty Financial Companies, Inc.
("Parent"), a wholly- owned subsidiary of Liberty Mutual Insurance Company
("Liberty Mutual"), and Apple Merger Corporation ("Sub"), a wholly-owned
subsidiary of Parent, propose to enter into an agreement (the "Merger
Agreement") pursuant to which the Company will be merged with and into Sub in
a transaction (the "Merger") upon the closing of which the separate existence
of Sub and the Company shall cease, and Sub shall continue as the surviving
corporation (the "Surviving Corporation"). The Surviving Corporation will be
a wholly-owned subsidiary of Parent upon the closing of the Merger.
Pursuant to the terms of the Merger, holders of shares of the Company's Class
A Common Stock, par value $.10 per share ("Company Class A Common Stock") and
Class B Common Stock, par value $.10 per share ("Company Class B Common
Stock" and, together with the Company Class A Common Stock, the "Common
Stock") will receive one share of Parent Common Stock, par value $.01 per
share ("New Common Stock") in exchange for each share of Common Stock
currently held, unless such shareholder elects to receive either:
a) $40 per share in cash ("Cash Consideration") for each share of Common
Stock held; or
b) 0.77 share of Series A Convertible Preferred Stock of Parent, par value
$.01 per share ("New Parent Preferred Stock").
Immediately prior to the closing of the Merger, each outstanding share of
common stock of Parent, par value $.01 per share, will be converted into
2.5348 shares of New Common Stock.
Pursuant to the terms of the Merger, each share of the New Parent Preferred
Stock will pay a dividend of 5.75% per annum and will be convertible, at any
time, into 1.0559 shares of New Common Stock, reflecting a conversion premium
of 23%. The New Parent Preferred Stock will be subject to mandatory
redemption by Parent 10 years after the closing of the Merger to the extent
that Parent has funds legally available therefor. After the third anniversary
of the closing of the Merger, the New Parent Preferred Stock will be
redeemable at the option of Parent; provided, however, that prior to the
fifth anniversary of the closing, Parent may not redeem the New Parent
Preferred Stock unless the New Common Stock trades above $59.20 (a premium of
25% over the effective conversion price) for 20 out of the 30 trading days
immediately preceding the date on which notices of redemption are mailed.
Prior to the fifth anniversary, the New Parent Preferred Stock is redeemable
at par. After the fifth anniversary, the New Parent Preferred Stock is
redeemable at a premium to par declining to par at maturity. Each share of
New Parent Preferred Stock will be entitled to such number of votes as shall
equal the number of shares of New Common Stock into which such share is then
convertible. Holders of Common Stock electing to receive New Parent Preferred
Stock will have the option to deposit some or all of their shares of New
Parent Preferred Stock into a "lock-up pool". Shares so deposited may not be
sold for 5 years. In consideration of the lock-up, during a period of 60 days
commencing on the fifth anniversary of the closing of the Merger,
shareholders may put all, but not less than all, of their shares of New
Parent Preferred Stock deposited in the lock-up pool to Liberty Mutual at
$50.00 per share, plus accrued and unpaid dividends.
Shareholders may not elect to receive both Cash Consideration and New Parent
Preferred Stock. In addition, the maximum aggregate Cash Consideration will
be $100 million and the maximum number of shares of New Parent Preferred
Stock to be issued will be 1,040,000. If the aggregate number of shares of
Common Stock electing to receive the right to Cash Consideration or New
Parent Preferred Stock exceeds the aggregate maximum limits for each form of
consideration, then, in each case, the number of shares of Common Stock
subject to an election to receive the right to such consideration will be
reduced ratably until the aggregate Cash Consideration no longer exceeds $100
million and/or the number of shares of New Parent Preferred Stock no longer
exceeds 1,040,000, respectively. The balance of the shares of Common Stock
otherwise subject to such an election each will be exchanged for one share of
New Common Stock in the Merger.
1
<PAGE>
You have asked us whether, in our opinion, the proposed consideration to be
received by the holders of the Common Stock in the Merger, taken as a whole,
is fair to such shareholders from a financial point of view.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed the Company's Annual Reports, Forms 10-K and related financial
information for the five fiscal years ended December 31, 1993 and the
Company's Forms 10-Q and the related unaudited financial information for the
quarterly periods ended March 31, 1994 and June 30, 1994;
(2) Reviewed certain information, including financial forecasts, relating to
the business, earnings, cash flow, assets and prospects of the Company and
Parent, furnished to us by the Company;
(3) Conducted discussions with members of senior management of the Company
concerning the Company's business, operations and prospects;
(4) Reviewed the historical market prices and trading activity for the
Company Class A Common Stock and compared them with those of certain publicly
traded companies which we deemed to be reasonably similar to the Company;
(5) Compared the results of operations of the Company with those of certain
companies which we deemed to be reasonably similar to the Company;
(6) Compared the proposed financial terms of the transactions contemplated by
the Merger Agreement with the financial terms of certain other mergers and
acquisitions which we deemed to be relevant;
(7) Reviewed the Merger Agreement;
(8) Reviewed analyses, valuations and diligence materials compiled or
prepared by Merrill Lynch & Co. Inc. ("Merrill Lynch") in its capacity as
financial advisor to the Company; and
(9) Reviewed such other financial studies and analyses, performed such other
investigations, and considered as assessed such other matters, including
economic, market, monetary and other trends, factors and conditions, as we
deemed necessary or appropriate for purposes of performing our duties
hereunder.
In preparing our opinion, we have relied on the accuracy and completeness of
all analyses, due diligence materials, financial forecasts and other
information compiled, prepared, supplied or otherwise made available to us by
the Company, Parent, and Merrill Lynch; and we have not independently
verified such information or undertaken an independent appraisal of the
assets of the Company or Parent. With respect to the financial forecasts
furnished by the Company and Parent, we have assumed that they have been
reasonably prepared and reflect the best currently available estimates and
business judgment of the Company's or Parent's management as to the expected
future financial performance of the Company or Parent, as the case may be.
With the consent of the Company, we have relied upon the foregoing
assumptions in considering the value of the non-cash consideration to be
delivered in the Merger and have made no independent investigation with
respect thereto.
In connection with the preparation of this opinion, we have not been
authorized by the Company or the Board of Directors to solicit, nor have we
solicited, third-party indications of interest for the acquisition of all or
any part of the Company.
On the basis of, and subject to the foregoing, we are of the opinion that the
proposed consideration to be received by the holders of the Common Stock
pursuant to the Merger, taken as a whole, is fair to such shareholders from a
financial point of view.
Very truly yours,
BERKSHIRE CAPITAL CORPORATION
By:
H. Bruce McEver
President
2
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February 8, 1995
Board of Directors
The Colonial Group, Inc.
One Financial Center
Boston, Massachusetts 02111
Members of the Board:
We refer to our letter to you dated October 12, 1994 (the "Opinion Letter")
concerning the merger of The Colonial Group, Inc. (the "Company") with and
into a wholly-owned subsidiary of Liberty Financial Companies, Inc. (the
"Parent"). A copy of the Opinion Letter is attached hereto. Capitalized terms
which are used herein without definition and which are defined in the Opinion
Letter have the same meanings herein as in the Opinion Letter.
We have reviewed a February 6, 1995 draft of the Amendment and Restatement
dated February 8, 1995, of the Agreement and Plan of Merger dated as of
October 12, 1994, among Parent, New LFC, Inc., a Massachusetts corporation
("New LFC"), Apple Merger Corporation ("Sub") and the Company (the "Revised
Agreement") which contemplates the following revised structure of the
transaction described in the Opinion Letter (the "Revised Structure").
Parent will form a new wholly-owned subsidiary, New LFC, and New LFC will
form a new wholly- owned subsidiary, Sub. Immediately prior to the effective
time of the Revised Merger (as defined below) Parent will contribute all of
its assets (including all of the outstanding common stock of Sub, but
excluding a $30,000,000 note issued by SteinRoe Services, Inc. due March 31,
2000 and the shares of LFC Common Stock, as hereinafter defined, held by
Parent) and related liabilities to New LFC in exchange for 22,812,200 shares
of the common stock, $.01 par value, of New LFC ("LFC Common Stock") which is
equal to the number of shares of the common stock, $.01 par value, of Parent
("Parent Common Stock") which Liberty Mutual Equity Corporation would have
owned pursuant to the structure described in the Opinion Letter. At the
effective time of the Revised Merger, New LFC will exchange with each holder
of the Class B Common Stock, $.01 par value, of Parent ("Parent Class B
Common Stock"), 2.5348 shares of LFC Common Stock for each share of Parent
Class B Common Stock held by such holder.
Pursuant to the Revised Agreement (a) Sub will be merged with and into the
Company, the separate existence of Sub will cease and the Company will
continue as the surviving corporation (the "Revised Merger") and (b) each
holder of Common Stock will receive one share of LFC Common Stock (rather
than one share of Parent Common Stock, as contemplated in the Opinion Letter)
for each share of Common Stock currently held, unless such shareholder elects
to receive Cash Consideration or .77 shares of Series A Convertible Preferred
Stock of New LFC, $.01 par value ("LFC Preferred Stock"; rather than .77
shares of the New Parent Preferred Stock as contemplated in the Opinion
Letter), for each share of Common Stock. The rights, powers, designations,
preferences, qualifications and restrictions of the LFC Common Stock and the
LFC Preferred Stock are identical to those of the New Common Stock and the
New Parent Preferred Stock, respectively, except for the issuer thereof.
Except as set forth above, the Revised Structure and the structure of the
transaction contemplated in the Opinion Letter are the same.
Please be advised that if the structure of the transaction described in the
Opinion Letter had been the Revised Structure, that fact would not have
altered the opinion expressed in the Opinion Letter.
Very truly yours,
BERKSHIRE CAPITAL CORPORATION
By:
H. Bruce McEver
President
1
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APPENDIX IV
Sections 85-98 of Massachusetts Business Corporation Law
S. 85. Dissenting stockholder; right to demand payment for stock; exception
A stockholder in any corporation organized under the laws of Massachusetts
which shall have duly voted to consolidate or merge with another corporation
or corporations under the provisions of sections seventy-eight or
seventy-nine who objects to such consolidation or merger may demand payment
for his stock from the resulting or surviving corporation and an appraisal in
accordance with the provisions of sections eighty-six to ninety-eight,
inclusive, and such stockholder and the resulting or surviving corporation
shall have the rights and duties and follow the procedure set forth in those
sections. This section shall not apply to the holders of any shares of stock
of a constituent corporation surviving a merger if, as permitted by
subsection (c) of section seventy-eight, the merger did not require for its
approval a vote of the stockholders of the surviving corporation.
S. 86. Selections applicable to appraisal; prerequisites
If a corporation proposes to take a corporate action as to which any section
of this chapter provides that a stockholder who objects to such action shall
have the right to demand payment for his shares and an appraisal thereof,
sections eighty-seven to ninety-eight, inclusive, shall apply except as
otherwise specifically provided in any section of this chapter. Except as
provided in sections eighty-two and eighty- three, no stockholder shall have
such right unless (1) he files with the corporation before the taking of the
vote of the shareholders on such corporate action, written objection to the
proposed action stating that he intends to demand payment for his shares if
the action is taken and (2) his shares are not voted in favor of the proposed
action.
S. 87. Statement of rights of objecting stockholders in notice of meeting;
form
The notice of the meeting of stockholders at which the approval of such
proposed action is to be considered shall contain a statement of the rights
of objecting stockholders. The giving of such notice shall not be deemed to
create any rights in any stockholder receiving the same to demand payment for
his stock, and the directors may authorize the inclusion in any such notice
of a statement of opinion by the management as to the existence or
non-existence of the right of the stockholders to demand payment for their
stock on account of the proposed corporate action. The notice may be in such
form as the directors or officers calling the meeting deem advisable, but the
following form of notice shall be sufficient to comply with this section:
"If the action proposed is approved by the stockholders at the meeting and
effected by the corporation, any stockholder (1) who files with the
corporation before the taking of the vote on the approval of such action,
written objection to the proposed action stating that he intends to demand
payment for his shares if the action is taken and (2) whose shares are not
voted in favor of such action has or may have the right to demand in writing
from the corporation (or, in the case of a consolidation or merger, the name
of the resulting or surviving corporation shall be inserted), within twenty
days after the date of mailing to him of notice in writing that the corporate
action has become effective, payment for his shares and an appraisal of the
value thereof. Such corporation and any such stockholder shall in such cases
have the rights and duties and shall follow the procedure set forth in
sections 88 to 98, inclusive, of chapter 156B of the General Laws of
Massachusetts."
S. 88. Notice of effectiveness of action objected to
The corporation taking such action, or in the case of a merger or
consolidation the surviving or resulting corporation, shall, within ten days
after the date on which such corporate action became effective, notify each
stockholder who filed a written objection meeting the requirements of section
eighty- six and whose shares were not voted in favor of the approval of such
action, that the action approved at the meeting of the corporation of which
he is a stockholder has become effective. The giving of such notice shall not
be deemed to create any rights in any stockholder receiving the same to
demand payment for his stock. The notice shall be sent by registered or
certified mail, addressed to the stockholder at his last known address as it
appears in the records of the corporation.
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S. 89. Demand for payment; time for payment
If within twenty days after the date of mailing of a notice under subsection
(e) of section eighty-two, subsection (f) of section eighty-three, or section
eighty-eight, any stockholder to whom the corporation was required to give
such notice shall demand in writing from the corporation taking such action,
or in the case of a consolidation or merger from the resulting or surviving
corporation, payment for his stock, the corporation upon which such demand is
made shall pay to him the fair value of his stock within thirty days after
the expiration of the period during which such demand may be made.
S. 90. Demand for determination of value; bill in equity; venue
If during the period of thirty days provided for in section eighty-nine the
corporation upon which such demand is made and any such objecting stockholder
fail to agree as to the value of such stock, such corporation or any such
stockholder may within four months after the expiration of such thirty-day
period demand a determination of the value of the stock of all such objecting
stockholders by a bill in equity filed in the superior court in the county
where the corporation in which such objecting stockholder held stock had or
has its principal office in the commonwealth.
S. 91. Parties to suit to determine value; service
If the bill is filed by the corporation, it shall name as parties respondent
all stockholders who have demanded payment for their shares and with whom the
corporation has not reached agreement as to the value thereof. If the bill is
filed by a stockholder, he shall bring the bill in his own behalf and in
behalf of all other stockholders who have demanded payment for their shares
and with whom the corporation has not reached agreement as to the value
thereof, and service of the bill shall be made upon the corporation by
subpoena with a copy of the bill annexed. The corporation shall file with its
answer a duly verified list of all such other stockholders, and such
stockholders shall thereupon be deemed to have been added as parties to the
bill. The corporation shall give notice in such form and returnable on such
date as the court shall order to each stockholder party to the bill by
registered or certified mail, addressed to the last known address of such
stockholder as shown in the records of the corporation, and the court may
order such additional notice by publication or otherwise as it deems
advisable. Each stockholder who makes demand as provided in section
eighty-nine shall be deemed to have consented to the provisions of this
section relating to notice, and the giving of notice by the corporation to
any such stockholder in compliance with the order of the court shall be a
sufficient service of process on him. Failure to give notice to any
stockholder making demand shall not invalidate the proceedings as to other
stockholders to whom notice was properly given, and the court may at any time
before the entry of a final decree make supplementary orders of notice.
S. 92. Decree determining value and ordering payment; valuation date
After hearing the court shall enter a decree determining the fair value of
the stock of those stockholders who have become entitled to the valuation of
and payment for their shares, and shall order the corporation to make payment
of such value, together with interest, if any, as hereinafter provided, to
the stockholders entitled thereto upon the transfer by them to the
corporation of the certificates representing such stock if certificated or,
if uncertificated, upon receipt of an instruction transferring such stock to
the corporation. For this purpose, the value of the shares shall be
determined as of the day preceding the date of the vote approving the
proposed corporate action and shall be exclusive of any element of value
arising from the expectation or accomplishment of the proposed corporate
action.
S. 93. Reference to special master
The court in its discretion may refer the bill or any question arising
thereunder to a special master to hear the parties, make findings and report
the same to the court, all in accordance with the usual practice in suits in
equity in the superior court.
S. 94. Notation on stock certificates of pendency of bill
On motion the court may order stockholder parties to the bill to submit their
certificates of stock to the corporation for the notation thereon of the
pendency of the bill and may order the corporation to note such pendency in
its records with respect to any uncertificated shares held by such
stockholder parties, and may on motion dismiss the bill as to any stockholder
who fails to comply with such order.
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S. 95. Costs; interest
The costs of the bill, including the reasonable compensation and expenses of
any master appointed by the court, but exclusive of fees of counsel or of
experts retained by any party, shall be determined by the court and taxed
upon the parties to the bill, or any of them, in such manner as appears to be
equitable, except that all costs of giving notice to stockholders as provided
in this chapter shall be paid by the corporation. Interest shall be paid upon
any award from the date of the vote approving the proposed corporate action,
and the court may on application of any interested party determine the amount
of interest to be paid in the case of any stockholder.
S. 96. Dividends and voting rights after demand for payment
Any stockholder who has demanded payment for his stock as provided in this
chapter shall not thereafter be entitled to notice of any meeting of
stockholders or to vote such stock for any purpose and shall not be entitled
to the payment of dividends or other distribution on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the date of the vote approving the proposed corporate
action) unless:
(1) A bill shall not be filed within the time provided in section ninety;
(2) A bill, if filed, shall be dismissed as to such stockholder; or
(3) Such stockholder shall with the written approval of the corporation, or
in the case of a consolidation or merger, the resulting or surviving
corporation, deliver to it a written withdrawal of his objections to and an
acceptance of such corporate action.
Notwithstanding the provisions of clauses (1) to (3), inclusive, said
stockholder shall have only the rights of a stockholder who did not so demand
payment for his stock as provided in this chapter.
S. 97. Status of shares paid for
The shares of the corporation paid for by the corporation pursuant to the
provisions of this chapter shall have the status of treasury stock, or in the
case of a consolidation or merger the shares or the securities of the
resulting or surviving corporation into which the shares of such objecting
stockholder would have been converted had he not objected to such
consolidation or merger shall have the status of treasury stock or
securities.
S. 98. Exclusive remedy; exception
The enforcement by a stockholder of his right to receive payment for his
shares in the manner provided in this chapter shall be an exclusive remedy
except that this chapter shall not exclude the right of such stockholder to
bring or maintain an appropriate proceeding to obtain relief on the ground
that such corporate action will be or is illegal or fraudulent as to him.
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