SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ------------- to -----------------
Commission File Number: 1-13654
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LIBERTY FINANCIAL COMPANIES, INC.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3260640
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
600 Atlantic Avenue, Boston, Massachusetts 02210-2214
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(Address of principal executive offices) (Zip Code)
(617) 722-6000
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
There were 28,091,971 shares of the registrant's Common Stock, $.01 par
value, and 327,741 shares of the registrant's Series A Convertible Preferred
Stock, $.01 par value, outstanding as of April 30, 1996.
Exhibit index - Page 18 Page 1 of 21
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
QUARTERLY REPORT ON FORM 10-Q FOR PERIOD ENDED MARCH 31, 1996
TABLE OF CONTENTS
Part I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 1996 and
December 31, 1995
Consolidated Income Statements for the Three Months Ended
March 31, 1996 and 1995
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity for the
Three Months Ended March 31, 1996
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
Exhibit Index
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
Unaudited
<CAPTION>
March 31 December 31
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments $10,178,616 $10,144,742
Cash and cash equivalents 1,011,718 875,314
Accrued investment income 133,289 132,856
Deferred policy acquisition costs 263,455 179,672
Value of insurance in force 59,992 43,939
Deferred distribution costs 119,388 114,579
Intangible assets 207,417 192,301
Other assets 132,013 106,734
Separate account assets 986,500 959,224
----------- -----------
$13,092,388 $12,749,361
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities $10,191,629 $10,084,392
Notes payable to affiliates 229,000 229,000
Payable for investments purchased
and loaned 546,908 317,715
Other liabilities 239,812 259,685
Separate account liabilities 923,948 889,107
----------- -----------
Total liabilities 12,131,297 11,779,899
----------- -----------
Redeemable convertible preferred stock,
par value $0.01; 327,741 shares authorized,
issued and outstanding 13,237 13,040
----------- -----------
Stockholders' Equity:
Common stock, $.01 par value, authorized
100,000,000 shares; issued and outstanding
28,055,820 shares in 1996; 27,682,536
shares in 1995 281 277
Additional paid-in capital 821,674 810,510
Net unrealized investment gains 48,001 87,158
Retained earnings 78,605 59,370
Unearned compensation (707) (893)
------------ ------------
Total stockholders' equity 947,854 956,422
------------ ------------
$ 13,092,388 $ 12,749,361
============ ============
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED INCOME STATEMENTS
(in thousands, except per share data)
Unaudited
<CAPTION>
Three Months Ended
March 31
-----------------
1996 1995
---- ----
<S> <C> <C>
Revenues:
Net investment income $ 192,012 $ 185,162
Investment management revenues and other fees 57,393 24,945
Distribution and sales charge fees 10,767 715
Policyholder assessments 7,180 6,922
Securities commissions 8,469 4,093
Other revenues 315 1,209
Net realized investment gains (losses) 3,774 (5,653)
--------- ---------
279,910 217,393
--------- ---------
Expenses:
Interest credited to policyholders 140,897 130,919
Operating expenses 63,296 43,209
Commission expense 6,970 3,549
Policy benefits 1,166 810
Amortization of deferred policy
acquisition costs 14,108 13,794
Amortization of value of insurance in force 1,718 3,524
Amortization of deferred distribution costs 6,784 339
Amortization of intangible assets 3,731 1,540
Interest expense 4,966 1,503
--------- ---------
243,636 199,187
--------- ---------
Income before income taxes 36,274 18,206
Provision for income taxes 12,452 8,127
========= =========
Net income $ 23,822 $ 10,079
========= =========
Net income per share $ 0.81 $ 0.42
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Unaudited
<CAPTION>
Three Months Ended
March 31
------------------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 23,822 $ 10,079
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14,842 7,377
Interest credited to policyholders 140,897 130,919
Net realized investment (gains) losses (3,774) 5,653
Net amortization on investments 1,498 2,457
Change in deferred policy acquisition costs (1,658) (9,045)
Net change in other assets and liabilities (45,508) (11,009)
----------- -----------
Net cash provided by operating activities 130,119 136,431
----------- -----------
Cash flows from investing activities:
Investments purchased held to maturity 0 (46,962)
Investments purchased available for sale (544,015) (484,098)
Investments sold held to maturity 0 14,929
Investments sold available for sale 92,655 27,623
Investments matured held to maturity 0 65,539
Investments matured available for sale 300,557 184,427
Change in policy loans (4,191) (7,375)
Change in mortgage loans 1,731 2,056
Acquisitions, net of cash acquired (7,085) (72,737)
----------- -----------
Net cash used in investing activities (160,348) (316,598)
----------- -----------
Cash flows from financing activities:
Withdrawals from policyholder accounts (252,581) (240,092)
Deposits to policyholder accounts 218,922 411,346
Securities lending 198,014 364,938
Borrowings from affiliates 0 100,000
Increase in revolving credit facility 3,000 0
Exercise of stock options 212 0
Dividends paid (934) 0
----------- -----------
Net cash provided by financing activities 166,633 636,192
----------- -----------
Increase in cash and cash equivalents 136,404 456,025
Cash and cash equivalents at beginning of period 875,314 726,711
----------- -----------
Cash and cash equivalents at end of period $ 1,011,718 $ 1,182,736
=========== ===========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands)
Unaudited
<CAPTION>
Net
Additional Unrealized Total
Common Paid-In Investment Retained Unearned Stockholders'
Stock Capital Gains Earnings Compensation Equity
------ --------- --------- -------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1995 $277 $810,510 $87,158 $59,370 $(893) $956,422
Common stock
issued in
Independent
acquisition 3 7,497 0 0 0 7,500
Proceeds from
exercise of
stock options 0 212 0 0 0 212
Unearned
compensation 0 0 0 0 186 186
Accretion to
face value of
preferred
stock 0 0 0 (197) 0 (197)
Common stock
dividends 1 3,455 0 (4,154) 0 (698)
Preferred stock
dividends 0 0 0 (236) 0 (236)
Change in net
unrealized
gains 0 0 (39,157) 0 0 (39,157)
Net income 0 0 0 23,822 0 23,822
---- -------- ------- ------- ----- --------
Balance, March
31, 1996 $281 $821,674 $48,001 $78,605 $(707) $947,854
==== ======== ======= ======= ====== ========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. General
The accompanying unaudited consolidated financial statements include all
adjustments, consisting of normal recurring accruals, that management
considers necessary for a fair presentation of the Company's financial
position and results of operations as of and for the interim periods
presented. Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission, although the Company
believes the disclosures in these consolidated financial statements are
adequate to present fairly the information contained herein. These
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements contained in the Company's 1995
Annual Report to Stockholders. The results of operations for the three months
ended March 31, 1996 are not necessarily indicative of the results to be
expected for the full year.
2. Acquisition
On March 7, 1996, the Company acquired, for cash and common stock, all the
outstanding common stock of Independent Holdings, Inc. ("Independent"). In
addition, the Company agreed to make contingent payments in common stock upon
the attainment of certain objectives. Independent is engaged in the
distribution of insurance and investment products through banks and other
financial institutions. The Company plans to consolidate the operations of
its Bank Marketing Group into Independent's operations. Included in operating
expenses for the three months ended March 31, 1996 are restructuring charges
of $1.9 million recognized in connection with this planned consolidation.
This acquisition is not currently material to the results of operations or
financial condition of the Company.
3. Investments
Investments, all of which pertain to Keyport Life Insurance Company
("Keyport"), were comprised of the following (in thousands):
March 31 December 31
1996 1995
---- ----
Fixed maturities available for sale $ 9,546,612 $ 9,535,948
Mortgage loans 72,774 74,505
Policy loans 502,517 498,326
Other invested assets 27,337 10,748
Equity securities at fair value 29,376 25,215
----------- -----------
Total $10,178,616 $10,144,742
=========== ===========
<PAGE>
4. Net Income per Share
Net income per share is calculated by dividing applicable net income
by the weighted average number of shares of common stock outstanding during
each period adjusted for the incremental shares attributable to common
stock equivalents. Common stock equivalents consist of outstanding employee
stock options. In calculating net income per share, net income is reduced
by convertible preferred stock dividend requirements. These shares earn
cumulative dividends at the annual rate of $2.875 per share and are
redeemable at the option of the Company, subject to certain conditions,
anytime after March 24, 1998. The convertible preferred stock was
determined not to be a common stock equivalent at the time of issuance.
5. Subsequent Event
On April 11, 1996, the Company acquired for cash all the outstanding
capital stock of KJMM Investment Management Company, Inc. ("KJMM"), a
registered investment adviser which manages investment assets, primarily in
the investment counsel business. KJMM had assets under management of
approximately $400.0 million as of the date of acquisition.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Overview
Approximately 57.1% of the Company's operating earnings for the three months
ended March 31, 1996 relates to the Company's investment spread business at
Keyport, with the remaining 42.9% attributable to the Company's asset management
activities. This compares to approximately 88.6% and 11.4%, respectively, for
the year earlier period. This increase in the percentage of earnings
attributable to the Company's asset management business resulted primarily from
the acquisitions of Colonial on March 24, 1995, Newport on April 3, 1995 and
American Asset Management on September 29, 1995. This increase also reflects the
growth in fee-based assets under management (excluding Keyport's general account
investments) from $16.3 billion as of December 31, 1994 to $32.7 billion as of
March 31, 1996.
Net investment income and interest credited to policyholders are the
Company's largest revenue and expense items, respectively. As reflected in the
table below, net investment income and interest credited increased for the three
months ended March 31, 1996 compared to the three months ended March 31, 1995.
These increases were primarily due to higher average investment and policy
liability balances, respectively. The investment spread percentage in 1996
decreased compared to 1995 principally as a result of a decrease in the weighted
average investment yield earned during the 1996 period.
Three Months Ended
March 31
------------------
1996 1995
---- ----
(in millions)
Net investment income $ 192.0 $ 185.2
Interest credited to policyholders 140.9 130.9
-------- -------
Investment spread $ 51.1 $ 54.3
======== =======
Investment spread percentage 1.83% 2.07%
======== =======
For all of 1996, assuming a constant interest rate environment, Keyport
anticipates a lower investment yield compared to 1995 and a lower interest
credited rate. However, the interest credited rate is expected to decrease
faster than the investment yield, and, accordingly, the investment spread
percentage and investment spread is expected to increase.
Results of Operations
Revenues
Net investment income is derived from the investments which support Keyport's
fixed annuity business and its closed block of single premium whole life
insurance. Net investment income was $192.0 million for the three months ended
March 31, 1996 compared to $185.2 million for the three months ended March 31,
1995, an increase of $6.8 million or 3.7%. This increase in net investment
income was primarily due to a higher level of portfolio assets during the
period, the impact of which was approximately $12.7 million. For the three
months ended March 31, 1996, the overall portfolio yield decreased to 7.58% from
7.84% for the three months ended March 31, 1995. The impact of this lower yield
was approximately $5.9 million.
Investment management revenues and other fees are earned in connection with
managing or administering mutual funds and private client accounts for
individual and institutional investors. Such revenues and fees were $57.4
million for the three months ended March 31, 1996 compared to $24.9 million for
the three months ended March 31, 1995, an increase of $32.5 million.
Approximately $30.0 million of this increase related to the impact of the
full-quarter consolidation of Colonial which was acquired during the last week
of the 1995 quarterly period. This increase also reflects $2.9 million
attributable to Newport.
Distribution and sales charge fees are asset-based fees earned on the load
mutual funds the Company sponsors which do not carry front-end sales
commissions. Such fees were $10.8 million for the three months ended March 31,
1996 compared to $0.7 million for the three months ended March 31, 1995. This
increase was attributable to the full quarter consolidation of Colonial as
discussed above.
Policyholder assessments are comprised of separate account fees earned on
variable annuity policyholder account balances and surrender charges on
policyholder withdrawals of fixed and variable annuities. Such revenues were
$7.2 million for the three months ended March 31, 1996 compared to $6.9 million
for the three months ended March 31, 1995, an increase of $0.3 million, or 3.7%.
This increase was primarily due to higher separate account fees which increased
due to higher separate account policy liability balances.
Securities commissions are revenues earned primarily on the sales of
investment and insurance products in the Company's asset management and bank
marketing businesses. These revenues were $8.5 million for the three months
ended March 31, 1996 compared to $4.1 million for the three months ended March
31, 1995, an increase of $4.4 million. This increase was primarily attributable
to securities commissions of $3.1 million earned by Independent since its
acquisition on March 7, 1996. The associated commission expense incurred in
generating these increased commission revenues increased by $3.4 million during
the period. In addition, for the three months ended March 31, 1996, securities
commissions reflect an increase of $2.2 million of net retained commissions on
the sales of Colonial mutual funds. This relates to the full-quarter
consolidation of Colonial discussed above.
Net realized investment gains were $3.8 million for the three months ended
March 31, 1996 compared to net realized investment losses of $5.7 million for
the three months ended March 31, 1995. The net realized gains in the 1996 period
were attributable to securities calls and to sales of securities at Keyport and
included $1.7 million attributable to Colonial. The realized losses for the
three months ended March 31, 1995 were primarily attributable to sales of fixed
maturities during the year which were sold on the basis of relative value and
credit quality and for tax purposes.
Expenses
Interest credited to policyholders is the expense Keyport incurs on its fixed
annuity and whole life insurance policy liabilities. Interest credited was
$140.9 million for the three months ended March 31, 1996 compared to $130.9
million for the three months ended March 31, 1995, an increase of $10.0 million
or 7.6%. This increase was due primarily to growth in policy liabilities which
had the effect of increasing interest credited by $10.9 million. For the three
months ended March 31, 1996, the overall interest credited rate was 5.75%
compared to 5.77% for the three months ended March 31, 1995. The impact of this
lower rate was approximately $0.9 million. The total increase in interest
credited of $10.0 million offset, in part, by the increase in net investment
income of $6.8 million discussed above, resulted in a decrease in investment
spread for the three months ended March 31, 1996 of $3.2 million. The investment
spread percentage in 1996 decreased to 1.83% from 2.07% in 1995.
Operating expenses were $63.3 million for the three months ended March 31,
1996 compared to $43.2 million for the three months ended March 31, 1995, an
increase of $20.1 million, or 46.5%. These expenses primarily represent
compensation and other general and administrative expenses. The increase for the
three months ended March 31, 1996 includes $22.3 million of operating expenses
related to Colonial, Newport and Independent and reflects decreases in certain
operating expenses in the Company's asset management activities. Also, included
in operating expenses for the three months ended March 31, 1996 are
restructuring charges of $1.9 million related to the Company's bank marketing
business. This restructuring charge was recognized in connection with the
planned consolidation of the operations of the Bank Marketing Group into
Independent's operations and represents severance, occupancy and other direct
costs. In the three months ended March 31, 1995, a restructuring charge of $2.1
million was recognized in connection with a reorganization of certain research
and investment management activities at Stein Roe.
Commission expense relates to the commission income earned on the sale of
investment and insurance products. For the three months ended March 31, 1996,
commission expense totaled $7.0 million compared to $3.6 million for the three
months ended March 31, 1995, an increase of $3.4 million. This increase is
related to the increase in securities commissions earned.
Policy benefits represent death benefits incurred in excess of policyholder
account balances. Policy benefits were $1.2 million for the three months ended
March 31, 1996 compared to $0.8 million for the three months ended March 31,
1995, an increase of $0.4 million. This increase was due to less favorable
mortality experience during the 1996 period.
Amortization of deferred policy acquisition costs was $14.1 million for the
three months ended March 31, 1996 compared to $13.8 million for the three months
ended March 31, 1995, an increase of $0.3 million. This increase in amortization
was primarily attributable to reductions made in the last quarter of 1995 in
estimated amortization periods and to the growth of business in force.
Amortization of value of insurance in force was $1.7 million for the three
months ended March 31, 1996 compared to $3.5 million for the three months ended
March 31, 1995. The value of insurance in force is amortized in relation to the
estimated gross profits to be realized over the life of the underlying policies
and is adjusted to reflect actual experience. The decrease in amortization of
$1.8 million for the three months ended March 31, 1996 was primarily related to
changes made in the last quarter of 1995 in estimates on policy persistency.
Amortization of deferred distribution costs was $6.8 million for the three
months ended March 31, 1996 compared to $0.3 million for the three months ended
March 31, 1995. This amortization relates to deferred sales commissions on a
portion of the intangible assets acquired in connection with the Colonial
acquisition and to the distribution of mutual fund shares sold with no up-front
sales commissions. The increase during the 1996 period was attributable to the
full-quarter consolidation of Colonial as discussed above.
Amortization of intangible assets was $3.7 million for the three months ended
March 31, 1996 compared to $1.5 million for the three months ended March 31,
1995, an increase of $2.2 million. This increase was primarily attributable to
the acquisitions of Colonial and Newport in 1995.
Interest expense was $5.0 million for the three months ended March 31, 1996
compared to $1.5 million for the three months ended March 31, 1995, an increase
of $3.5 million. This increase was primarily attributable to the $100.0 million
note issued in connection with the Colonial acquisition, the $24.0 million note
issued in connection with the Newport acquisition and the $30.0 million note
issued in 1995 as a dividend to Liberty Mutual.
Provision for Income Taxes
Provision for income taxes was $12.5 million or 34.3% of income before income
taxes, for the three months ended March 31, 1996. This compares to a provision
of $8.1 million, or 44.6% of income before income taxes, for the three months
ended March 31, 1995. The higher effective tax rate in 1995 primarily reflects
the impact of restructuring and other costs in the Company's asset management
operations for which no tax benefit was provided since the asset management
operations were expected to recognize taxable income for the full year. In 1996,
tax benefit was recognized in the utilization of net operating loss
carryforwards in the Company's asset management operations. In both the 1996 and
1995 periods, substantially all of the provision for income taxes related to
Keyport.
Net Income
Net income was $23.8 million for the three months ended March 31, 1996
compared to $10.1 million for the three months ended March 31, 1995. The higher
net income in the 1996 period was primarily attributable to the Colonial and
Newport acquisitions (offset in part by increased amortization of deferred
distribution costs and intangible assets, and by increased interest expense),
and to net realized investment gains in 1996 compared to net realized investment
losses in 1995. Partially offsetting these items were decreased investment
spread and a higher provision for income taxes.
Financial Condition
Investments totaled $10.2 billion as of March 31, 1996 compared to $10.1
billion as of December 31, 1995. This increase reflects net policyholder
deposits received and the excess of net investment income over policy
acquisition costs and operating expenses. This increase, however, also reflects
net unrealized investment losses of approximately $ 162.8 million during the
three months ended March 31, 1996.
The percentage of Keyport's portfolio invested in below investment grade
securities decreased slightly as of March 31, 1996. As of March 31, 1996, the
carrying value of Keyport's total investments in below investment grade
securities consisted of investments in 116 issuers totaling $759.2 million, or
6.8% of the investment portfolio, compared to 106 issuers totaling $811.8
million, or 7.4%, as of December 31, 1995. For the three months ended March 31,
1996, the yield on Keyport's below investment grade portfolio was 9.5% compared
to 7.1% for the investment grade portfolio.
Keyport analyzes its investment portfolio at least quarterly in order to
determine if its ability to realize the carrying value on any investment has
been impaired. If impairment in value is determined to be other than temporary,
the cost basis of the impaired security is written down to fair value. The
amount of the writedown is recorded as a realized investment loss. For the three
months ended March 31, 1996, there were no such adjustments to Keyport's
investment portfolio.
Cash and cash equivalents increased to approximately $1.0 billion as of March
31, 1996 from $875.3 million as of December 31, 1995. Substantially all of this
increase relates to securities being held by Keyport as collateral in connection
with its securities lending activities. The Company records the collateral
received from its securities lending transactions as an asset and its obligation
to return the collateral, when the transaction is closed, as a liability. As of
March 31, 1996, the Company had an asset, and a corresponding liability of
$515.7 million for cash pledged as collateral.
Deferred policy acquisition costs increased to $263.5 million as of March 31,
1996 from $179.7 million as of December 31, 1995. Deferral of current period
costs (primarily commissions) incurred to generate annuity sales totaled $15.8
million, while amortization of these costs totaled $14.1 million. The adjustment
to deferred policy acquisition costs relating to the valuation of debt and
equity securities under SFAS No. 115 increased deferred policy acquisition costs
by $82.9 million during the three months ended March 31, 1996.
Intangible assets, including goodwill, were $207.4 million as of March 31,
1996 compared to $192.3 million as of December 31, 1995. This net increase of
$15.1 million during 1996 was attributable to the acquisition of Independent.
Policy liabilities increased by 1.1% to $10.2 billion during the three months
ended March 31, 1996. This reflects the net policyholder deposits received and
interest credited to policyholder liabilities.
Stockholders' equity as of March 31, 1996 was $947.8 million compared to
$956.4 as of December 31, 1995, a decrease of $8.6 million. Net income during
the period was $23.8 million, and cash dividends on the Company's Preferred and
Common Stock totaled $0.9 million. Common Stock totaling $7.5 million was issued
in connection with the acquisition of Independent. Net unrealized investment
losses during the period decreased stockholders' equity by $39.2 million. As of
March 31, 1996, there were 28,055,820 common shares outstanding compared to
27,682,536 shares as of December 31, 1995.
Liquidity and Capital Resources
The Company is a holding company whose liquidity needs include the following:
(i) payment of operating expenses; (ii) debt service; (iii) payment of dividends
on preferred stock and common stock; (iv) acquisitions; and (v) providing
working capital where needed to its operating subsidiaries. The Company's
principal sources of cash are dividends from its principal operating
subsidiaries, and, in the case of funding for acquisitions and certain long-term
capital needs of its subsidiaries, long-term borrowings.
On a consolidated basis, net cash provided by operating activities totaled
$130.1 million for the three months ended March 31, 1996. Based upon the
historical cash flow of the Company, the Company's current financial condition
and the Company's expectation that there will not be a material adverse change
in the results of operations of the Company and its subsidiaries during the next
twelve months, the Company believes that cash flow provided by operating
activities over this period will provide sufficient liquidity for the Company to
meet its working capital, capital investment and other operational cash needs,
its debt service obligations, its obligations to pay dividends on the Preferred
Stock, and (assuming Liberty Mutual continues to participate in the Dividend
Reinvestment Plan) its intentions to pay dividends on the Common Stock.
Each of the Company's business segments have their own financial resources
and liquidity requirements. In the Company's annuity insurance operations, such
resources and requirements pertain to the management of the general account
assets and policyholder liabilities. Keyport uses cash for the payment of
annuity and life insurance benefits, operating expenses and policy acquisition
costs, and the purchase of investments. Keyport generates cash from net
investment income, annuity premiums and deposits, and from maturities of fixed
investments. In the Company's asset management activities, financial resources
and liquidity requirements pertain to the investment management and distribution
of mutual funds and private accounts. The Company's asset management operating
subsidiaries generate cash from asset management, distribution and sales charge
fees. In addition, with respect to Colonial, a credit facility is maintained to
finance sales of mutual fund shares having contingent deferred sales loads.
Cash received by Keyport for annuity premiums, from the maturity 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 and has strategies in place to maintain
sufficient liquidity in changing interest rate environments. Consistent with the
nature of its obligations, Keyport has invested a substantial amount of its
general account assets in readily marketable securities. As of March 31, 1996,
71.3% of Keyport's total investments, including short-term investments, are
considered readily marketable.
Keyport believes that liquidity to fund withdrawals would be available
through incoming cash flow, the sale of short-term or floating-rate instruments
or securities in its short duration portfolio, thereby precluding the sale of
fixed maturity investments in a potentially unfavorable market. Although the
Company 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 the Company's operations and liquidity.
Regulatory authorities restrict dividend payments from Keyport to the Company
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.
The Company considers these requirements in managing its cash flows and
liquidity needs. As of March 31, 1996, Keyport could declare dividends of up to
$34.6 million without the approval of the Commissioner of Insurance of the State
of Rhode Island. Keyport has not paid any dividends since its acquisition in
1988. Stein Roe is also subject to certain regulatory standards which may
restrict its ability to pay dividends. As of March 31,1996, Stein Roe exceeded
the most restrictive of these standards by approximately $0.7 million. In
addition, Colonial's credit facility contains a covenant which may restrict
Colonial's ability to pay dividends. As of March 31, 1996, the amount of
dividends Colonial could pay under such restrictions was $17.9 million.
Investment Management and Risk Management
Keyport manages its portfolio, in part, based on the effective duration of
its portfolio investments and the anticipated effective duration of its policy
liabilities. As of March 31, 1996, the duration of Keyport's fixed income
portfolio (representing 90.1% of Keyport's total general account investments,
and calculated including cash and short term investments) was 2.8 years.
Keyport's investment management strategy takes into account the anticipated
cash flow requirements of its policy liabilities. Liability cash outflows are
affected by policy 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 analyses of these scenarios,
investment strategies are designed to meet policy obligations, maintain the
desired investment spread between assets and liabilities, and limit the
potential adverse impact of changing market interest rates.
A key element of Keyport's business activities is its asset/liability
management process. This process integrates investment management and liability
management to reduce the risk presented by changing market 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 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 targeting the effective
duration of the investment portfolio and utilizing interest rate swaps and caps
to hedge asset and liability cash flow sensitivities. Interest rate swaps and
caps involve, to varying degrees, elements of credit risk and market risk which
are not reflected in the Company's consolidated financial statements. The
Company periodically monitors credit risk and the financial stability of its
counterparties according to prudent investment guidelines and established
procedures.
Credit risk also arises from the possibility that a default would affect
adversely a fixed maturity investment's anticipated return. Keyport seeks to
manage this risk by careful credit analysis and ongoing credit monitoring.
Strict investment guidelines limit the total exposure of debt and derivative
instruments in any single issuer as a percentage of Keyport's stockholder's
equity and total invested assets. In addition, the portfolio is monitored to
maintain diversification across industry and security type. Keyport also
monitors its investment portfolio monthly to identify securities that may
exhibit a deterioration in credit quality.
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. Keyport actively
manages its below investment grade portfolio to optimize its risk return
profile.
Effects of Inflation
Inflation has not had a significant impact on the operations of the Company
since the Company's assets (which consist primarily of cash and investments) and
its liabilities are monetary in nature. However, inflation may result in
increased operating expenses that may not be readily recoverable in the prices
of the services charged by the Company.
Recent Accounting Pronouncement
In 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which became effective in 1996. SFAS 123 establishes
a fair-value-based method of accounting under which compensation cost is
recognized over the service period. However, SFAS 123 allows a company to
continue to measure compensation cost under Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has
elected to continue to follow the accounting method under APB 25 and will adopt
the disclosure requirements of SFAS 123 in its December 31, 1996 consolidated
financial statements.
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
11 Statement re Computation of Per Share Earnings
12 Statement re Computation of Ratios
27 Financial Data Schedule
(b) Reports on Form 8-K
On March 20, 1996, the Company filed a current report on Form 8-K dated March
14, 1996, in connection with the termination of KPMG LLP as its independent
accountants.
On April 12, 1996, the Company filed a current report on Form 8-K dated April
10, 1996, in connection with the appointment of Ernst & Young LLP as its
independent accountants.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY FINANCIAL COMPANIES, INC.
/s/ Gerald Rush
---------------------------------
Gerald Rush
Vice President Finance
(Duly Authorized Officer and
Chief Accounting Officer)
Date: May 13, 1996
<PAGE>
Exhibit Index
Exhibit
No. Description Page
- - ------- ----------- ----
11 Statement re Computation of Per Share Earnings
12 Statement re Computation of Ratios
27 Financial Data Schedule
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
EXHIBIT 11 - Statement re Computation of Per Share Earnings
(In thousands, except share and per share amounts)
<CAPTION>
March 31
--------
1996 1995
---- ----
<S> <C> <C>
Primary net income per common share:
Net income $ 23,822 $ 10,079
Less: cumulative preferred dividends 236 18
----------- -----------
Net income available for common shareholders $ 23,586 $ 10,061
=========== ===========
Weighted average shares outstanding 27,781,577 23,180,323
Common stock equivalents 1,480,752 668,043
----------- -----------
Total 29,262,329 23,848,366
=========== ===========
Primary net income per common share $ 0.81 $ 0.42
=========== ===========
Fully diluted net income per common share:
Net income $ 23,822 $ 10,079
Less: cumulative preferred dividends 236 18
----------- -----------
Net income available for common shareholders $ 23,586 $ 10,061
=========== ===========
Weighted average shares outstanding 27,781,577 23,180,323
Common stock equivalents 1,486,397 668,043
----------- -----------
Total 29,267,974 23,848,366
=========== ===========
Fully diluted net income per common share $ 0.81 $ 0.42
=========== ===========
</TABLE>
<TABLE>
LIBERTY FINANCIAL COMPANIES, INC.
EXHIBIT 12 - Statement re Computation of Ratios
($ in thousands)
<CAPTION>
Three Months Ended
March 31
------------------
1996 1995
---- ----
<S> <C> <C>
Earnings:
Income before income taxes $36,274 $18,206
Add fixed charges:
Interest on indebtedness 4,966 1,503
Portion of rent representing the interest factor 1,067 656
Preferred stock dividends 236 18
Accretion to face value of redeemable
convertible preferred stock 197 0
------- -------
Income as adjusted $42,740 $20,383
======= =======
Fixed charges:
Interest on indebtedness $ 4,966 $ 1,503
Portion of rent representing the interest factor 1,067 656
Preferred stock dividends 236 18
Accretion to face value of redeemable
convertible preferred stock 197 0
------- -------
Total fixed charges $ 6,466 $ 2,177
======= =======
Ratio of earnings to fixed charges 6.61 x 9.36 x
======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 9,546,612
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 29,376
<MORTGAGE> 72,774
<REAL-ESTATE> 0
<TOTAL-INVEST> 10,178,616
<CASH> 1,011,718
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 263,455
<TOTAL-ASSETS> 13,092,388
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 10,191,629
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 229,000
0
13,237
<COMMON> 281
<OTHER-SE> 947,573
<TOTAL-LIABILITY-AND-EQUITY> 13,092,388
0
<INVESTMENT-INCOME> 192,012
<INVESTMENT-GAINS> 3,774
<OTHER-INCOME> 84,124
<BENEFITS> 1,166
<UNDERWRITING-AMORTIZATION> 14,108
<UNDERWRITING-OTHER> 63,296
<INCOME-PRETAX> 36,274
<INCOME-TAX> 12,452
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 23,822
<EPS-PRIMARY> .81
<EPS-DILUTED> .81
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
