LIBERTY FINANCIAL COMPANIES INC /MA/, 424B4, 1997-07-18

LIBERTY FINANCIAL COMPANIES INC /MA/
424B4, 1997-07-18
LIFE INSURANCE

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PROSPECTUS

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-29315

2,500,000 Shares

[LOGO]

Liberty Financial Companies, Inc.
Common Stock

----------

All of the 2,500,000 shares of Common Stock offered hereby are being sold
by LFC Holdings, Inc. and certain other shareholders (collectively, the
"Selling Shareholders") of Liberty Financial Companies, Inc. (the "Company" or
"Liberty Financial"). See "PRINCIPAL AND SELLING SHAREHOLDERS." LFC Holdings,
Inc. is an indirect subsidiary of Liberty Mutual Insurance Company ("Liberty
Mutual"). The Company will not receive any of the proceeds from the sale of the
shares by the Selling Shareholders.

Of the shares of Common Stock offered hereby, 2,000,000 shares initially
are being offered in the United States and Canada by the U.S. Underwriters (the
"U.S. Offering") and 500,000 shares initially are being offered in a concurrent
offering outside the United States and Canada by the International Managers
(the "International Offering" and, together with the U.S. Offering, the
"Offerings"). The public offering price and the underwriting discount per share
are identical for both of the Offerings. See "UNDERWRITING."

The Common Stock is traded on the New York Stock Exchange under the symbol
"L". The Common Stock is also listed on the Boston Stock Exchange. On July 17,
1997, the last reported sale price of the Common Stock on the New York Stock
Exchange was $54.75 per share. See "PRICE RANGE OF COMMON STOCK AND
DIVIDENDS."

Investors should consider carefully the factors set forth under the
caption "INVESTMENT CONSIDERATIONS" on page 8.

----------

THESE SECURITIES 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. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.

- --------------------------------------------------------------------------------
Price to Underwriting Proceeds to
Public Discount (1) Selling Shareholders (2)
Per Share ...... $52.50 $2.50 $50.00
Total (3) ...... $131,250,000 $6,250,000 $125,000,000
- --------------------------------------------------------------------------------

(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters and certain related persons against certain
liabilities under the Securities Act of 1933, as amended. See
"UNDERWRITING."
(2) Before deducting expenses of the offering estimated at $425,000 payable by
LFC Holdings, Inc.
(3) LFC Holdings, Inc. has granted the U.S. Underwriters and the International
Managers 30-day options to purchase up to 300,000 and 75,000 additional
shares of Common Stock, respectively, solely to cover over-allotments, if
any. If all such additional shares are purchased, the total Price to
Public, Underwriting Discount and Proceeds to Selling Shareholders will be
$150,937,500, $7,187,500 and $143,750,000, respectively. See "UNDERWRITING."
----------

The shares of Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them, and
subject to the approval of certain legal matters by counsel for the
Underwriters and certain other conditions. The Underwriters reserve the right
to withdraw, cancel or modify such offer and to reject any order in whole or in
part. It is expected that delivery of the shares will be made in New York, New
York, on or about July 23, 1997.

----------
Merrill Lynch & Co.
Goldman, Sachs & Co.
PaineWebber Incorporated
Fox-Pitt, Kelton Inc.
----------

The date of this Prospectus is July 17, 1997.

<PAGE>

FOR NORTH CAROLINA INVESTORS: THE COMMISSIONER OF INSURANCE FOR THE STATE
OF NORTH CAROLINA HAS NOT APPROVED OR DISAPPROVED THIS OFFERING, NOR HAS THE
COMMISSIONER RULED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.

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 the Company outstanding 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 "Restated
Articles") include provisions limiting the voting power of shares of the
Company's Voting Stock (as defined in the Restated Articles) held by holders of
20% or more of 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 or the Investment Company Act of 1940 of
investment advisory contracts to which certain of the Company's subsidiaries
are or may become parties. See "INVESTMENT CONSIDERATIONS--
Regulation," "BUSINESS--Regulation" and "DESCRIPTION OF CAPITAL STOCK."

Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock. Such
transactions may include stabilizing the purchase of shares of Common Stock to
cover syndicate short positions. For a description of these activities, see
"Underwriting."

2
<PAGE>

AVAILABLE INFORMATION

Liberty Financial is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy or information statements and other
information with the Securities and Exchange Commission (the "Commission").
Such reports, proxy or information statements and other information filed by
the Company with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
Seven World Trade Center, New York, New York 10048 and Northwest Atrium Center,
Suite 1400, 500 West Madison Street, Chicago, Illinois 60661. Copies of such
material can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549 upon payment of prescribed fees.
The Commission maintains a site on the World Wide Web at http://www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants, such as the Company, that file electronically with the
Commission through the Commission's Electronic Data Gathering, Analysis and
Retrieval (EDGAR) system.

This Prospectus constitutes a part of a Registration Statement on Form S-3
filed by the Company with the Commission under the Securities Act of 1933, as
amended (the "Securities Act"). This Prospectus omits certain of the
information contained in the Registration Statement and reference is hereby
made to the Registration Statement and to the exhibits relating thereto for
further information with respect to the Company and the Common Stock offered
hereby. Any statements contained herein concerning the provisions of any
documents are not necessarily complete, and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected at the public reference facilities maintained
by the Commission discussed above, and copies thereof may be obtained from the
Commission at prescribed rates. The Registration Statement and certain of the
exhibits thereto may also be accessed electronically at the Commission's site
on the World Wide Web at http://www.sec.gov.

INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE

The following documents, previously filed by the Company with the
Commission under the Exchange Act, are incorporated in this Prospectus by
reference and made a part hereof:

(1) Annual Report on Form 10-K for the fiscal year ended December 31, 1996,
filed on March 28, 1997 (File No. 1-13654).

(2) Quarterly Report on Form 10-Q for the period ended March 31, 1997, filed
on May 14, 1997 (File No. 1-13654).

All documents subsequently filed by the Company pursuant to sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the termination of any
offering made hereby shall be deemed to be incorporated by reference in this
Prospectus and to be a part of this Prospectus from the date of the filing of
such documents. Any statements contained herein or in a document incorporated
or deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any other subsequently filed document that also is or is
deemed to be incorporated by reference herein modifies or replaces 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.

The Company will provide without charge to each person to whom this
Prospectus is delivered, on written or oral request of such person, a copy of
any or all of the documents referred to above that have been or may be
incorporated by reference in this Prospectus, other than exhibits to such
documents. Such written or oral requests should be directed to the attention of
Investor Relations, Liberty Financial Companies, Inc., 600 Atlantic Avenue,
Boston, Massachusetts 02210-2214 (telephone: (617) 722-6000).

3
<PAGE>

PROSPECTUS SUMMARY

The following summary information is qualified in its entirety by, and
should be read in conjunction with, the more detailed information and
Consolidated Financial Statements and Notes thereto included elsewhere in this
Prospectus or incorporated herein by reference. Except as otherwise noted, all
information in this Prospectus assumes no exercise of the Underwriters'
over-allotment option. All financial information set forth herein is presented
in accordance with generally accepted accounting principles ("GAAP"), unless
otherwise noted, and includes data for acquired entities from and after the
applicable acquisition date. All references herein to the Consolidated
Financial Statements shall be deemed to refer to the audited Consolidated
Financial Statements included herein.

The Company

Liberty Financial is a leading asset accumulation and management company.
The Company is a leader in each of its two core product lines-retirement
- -oriented insurance products and investment management products. Retirement-
oriented insurance products consist substantially of annuities, and investment
management products consist of mutual funds, wealth management and institutional
asset management. The Company sells its products through multiple distribution
channels, including brokerage firms, banks and other depository institutions,
financial planners and insurance agents, as well as directly to investors. The
Company's net operating income (i.e., net income excluding net realized
investment gains and losses, net of related income taxes) was $26.7 million in
the first quarter of 1997, and $94.8 million, $76.5 million and $56.2 million in
1996, 1995 and 1994, respectively. The following table sets forth the Company's
assets under management as of March 31, 1997 and December 31, 1996, 1995 and
1994:

<TABLE>
<CAPTION>
Assets Under Management
---------------------------------------------
As of December 31,
--------------------------
As of
March 31, 1997 1996 1995 1994
---------------- ------- ------- ------
(dollars in billions)
<S> <C> <C> <C> <C>
Retirement-oriented insurance products ...... $12.2 $12.1 $10.6 $ 9.3
Mutual funds ................................. 24.8 25.7 23.3 7.4
Wealth management ........................... 5.5 5.3 4.5 4.1
Institutional asset management ............... 4.5 4.9 4.1 4.8
------ ------ ------ ------
Total .................................... $47.0 $48.0 $42.5 $25.6
====== ====== ====== ======
</TABLE>

Multiple Asset Accumulation Products. The Company sells a full range of
retirement-oriented insurance products, grouped by whether they provide fixed,
indexed or variable returns to policyholders. Substantially all of these
products currently are annuities that are written by the Company's wholly-owned
subsidiary, Keyport Life Insurance Company ("Keyport"), one of the country's
leading and most innovative annuity companies. Annuities are insurance products
which provide a tax-deferred means of accumulating savings for retirement
needs, as well as a tax-efficient source of income in the payout period. The
Company's principal fixed annuity products are individual single premium
deferred fixed annuities ("SPDAs"), which represented $8.6 billion of
policyholder liabilities as of March 31, 1997. In addition to SPDAs, Keyport
also sells equity-indexed and variable annuities. Equity-indexed annuities are
an innovative product first introduced to the marketplace by the Company when
it began selling its KeyIndex[RegTM] product in 1995. An equity-indexed annuity
credits interest to the policyholder at a "participation rate" equal to a
portion of the change in value of a specified equity index (in the case of
KeyIndex, the Standard & Poor's 500 Composite Stock Index).

The Company has four operating units engaged in investment management: The
Colonial Group, Inc. ("Colonial"), Stein Roe & Farnham Incorporated ("Stein
Roe"), Newport Pacific Management, Inc. ("Newport") and Liberty Asset
Management Company ("LAMCO"), each of which carries strong brand name
recognition in the markets it serves. As of the date of this Prospectus, the
Company sponsored 67 open-end mutual funds, as well as seven closed-end funds.
The open-end funds consist of 36 intermediary-distributed Colonial mutual
funds, 20 direct-marketed Stein Roe funds and 11 other funds included among the
investment options available under the Company's variable annuities. The
closed-end funds consist of five Colonial funds and two LAMCO funds.

4
<PAGE>

Forty-nine of the Company's 67 open-end mutual funds are long-term funds
(defined as open-end funds having at least a three-year performance record,
excluding funds that invest solely in money market securities). Thirty-eight of
those 49 funds (representing 68% of the total assets in those 49 funds as of
May 31, 1997) were ranked by Lipper Analytical Services, Inc. in the top two
quartiles of their respective peer groups for the three-year period ended that
date.

Multiple Distribution Channels. Liberty Financial sells its products
through multiple distribution channels. The Company distributes its products
through all the major third party intermediary channels, including brokerage
firms, banks and other depository institutions, financial planners and
insurance agents. To capitalize on the growing importance of banks and other
depository institutions as intermediaries for its products, the Company also
operates its own distribution unit which sells mutual funds and annuities
through such entities. Certain of the Company's products also are sold directly
to investors, including its mutual funds sold without a sales load, wealth
management and institutional asset management products. The Company believes
that it is one of the few asset accumulators with a significant presence in
both the intermediary and direct channels. Total product sales for the three
months ended March 31, 1997 and for the year ended December 31, 1996 were $2.1
billion and $8.6 billion, respectively (including $0.2 billion and $1.0
billion, respectively, of reinvested dividends). During the three months ended
March 31, 1997 and during 1996, 53% and 61%, respectively, of sales were made
through intermediary distributors, with the balance made directly to the
investor. Over 35,000 individual brokers and other intermediaries sold Liberty
Financial products in 1996.

Business Strategy. The Company's business strategy has four interrelated
elements:

[bullet] Diversification. The Company believes that the diversification in
its products and distribution channels allows it to accumulate assets in
different market cycles, thereby reducing earnings volatility. Within
its two core product lines, the Company sells a range of products that
serve individuals at different stages of their life and earnings cycle.
This mix also is designed to include products that will be in demand
under a variety of economic and market conditions. Similarly, the
Company reaches customers through a variety of distribution channels.
Diversification of distribution channels allows the Company to reach
many segments of the marketplace and lessens its dependence on any one
source of assets.

[bullet] Innovation. Liberty Financial believes that product and
distribution innovations are essential in order to grow its asset base
and meet the ever changing financial needs of its customers. The Company
believes that it has an impressive track record in such innovations. For
example, Newport created the first U.S.- based mutual fund to focus
exclusively on the "Tiger" countries of Asia. This fund had $1.7
billion of assets under management as of March 31, 1997. The Stein Roe
Young Investor[RegTM] Fund was the first mutual fund to be coupled
with an educational program to teach young people about investing,
while offering parents an excellent device to save for educational and
other family needs. The Stein Roe Young Investor Fund had $330.3
million of assets under management and over 85,000 shareholders of
record as of March 31, 1997. The Company introduced the first
equity-indexed annuity product to the marketplace. At March 31, 1997
and December 31, 1996, the Company's equity-indexed annuity
policyholder balances were $926.8 million and $787.8 million,
respectively. The Company's equity-indexed annuity sales during the
three months ended March 31, 1997 and during 1996 were $123.4 million
and $655.2 million, respectively. The Company is also recognized as a
leader in electronic commerce on the Internet. For example, in early
1997, the Company introduced a new Web site for the Stein Roe funds
which incorporates state-of-the-art security and customization
features.

[bullet] Integration. Liberty Financial actively promotes integration of
its operating units and believes that such efforts will enable it to
accumulate additional assets by leveraging distribution capabilities and
to reduce expenses by consolidating redundant back office functions. For
example, upon the Company's acquisition of Newport in April, 1995,
Colonial assumed the marketing, sales, service and administration of
Newport's flagship Tiger Fund, which was rebranded under the Colonial
name. In conjunction with Colonial's sales efforts, the Colonial Newport
Tiger Fund's assets have more than tripled from April, 1995 to March 31,
1997. The availability of the Colonial Newport Tiger Fund has
facilitated new intermediary distribution relationships for Colonial,
including approximately 6,000 new broker relationships. Stein Roe
manages a substantial portion of Keyport's general account assets and
together with Colonial and Newport manages certain of the funds
underlying Keyport's variable annuity products.

5
<PAGE>

Colonial's transfer agency operations perform these functions for the
Stein Roe funds. The Company's bank distribution unit was the largest
distributor of Keyport's annuities both during the three months ended
March 31, 1997 and during 1996, and the second and third largest
distributor, respectively, of the Colonial funds during such periods.

[bullet] Acquisitions. Where appropriate, the Company seeks acquisitions
that provide additional assets, new or complementary investment
management capabilities, distribution capabilities or other integration
or diversification opportunities in its core product areas. Acquisitions
are an integral part of Liberty Financial's business strategy. Stein Roe
(acquired in 1986), Keyport (acquired in 1988), Colonial (acquired in
1995), Newport (acquired in 1995) and major components of the Company's
bank distribution unit (including Independent Financial Marketing Group,
Inc. ("Independent"), acquired in 1996) all joined Liberty Financial by
acquisition. The Company has also made asset acquisitions, including
most recently a coinsurance agreement with respect to a $954.0 million
block of SPDAs entered into in August, 1996. While the Company is
constantly evaluating acquisition opportunities, as of the date of this
Prospectus the Company has not entered into any definitive agreement for
a material acquisition.

The Company's business strategy is based on its belief that its products
have attractive growth prospects due to important demographic and economic
trends. These trends include the need for the aging baby boom generation to
increase savings and investment, lower public confidence in the adequacy of
government and employer-provided retirement benefits, longer life expectancies,
and rising health care costs. The Company believes that its product mix and
distribution strength are well suited to exploit these demographic and economic
trends and will help the Company maintain and enhance its position as a leading
asset accumulation and management company.

The Offering (1)

Shares offered by
the Selling Shareholders ...... 2,500,000 shares
Common Stock outstanding after
this offering (2) ............ 29,118,513 shares
Use of proceeds .................. The Company will not receive any proceeds. All
of the proceeds of this offering will be received
by the Selling Shareholders.
NYSE symbol ..................... "L"
</TABLE>

- ----------------

(1) Assumes no exercise of the Underwriters' over-allotment option and is based
on the number of shares of Common Stock outstanding at July 15, 1997.

(2) Excludes (i) 3,187,537 shares of Common Stock issuable upon exercise of
outstanding stock options having an average exercise price of $22.31 per
share, (ii) 345,286 shares of Common Stock issuable upon conversion of the
Company's Series A Convertible Preferred Stock and (iii) shares issuable
in connection with the acquisition of Independent in four annual
installments based upon attainment of certain performance objectives.
Approximately 77,000 shares will be issued in July, 1997 representing the
first installment.

6
<PAGE>

Summary Consolidated Financial Data(1)
(in millions, except per share data)

<TABLE>
<CAPTION>
As of or
for the
Three Months
Ended As of or for the
March 31, Year Ended December 31,
------------ -------------------------------------------------------------
1997 1996 1996 1995 1994 1993(2) 1992(3)
------------ ----------- ------------ ------------ ------------ ----------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Investment income ....................... $ 208.0 $ 189.2 $ 796.4 $ 761.8 $ 695.1 $ 675.3 $ 710.0
Interest credited to policyholders ..... (147.3) (138.1) (572.7) (555.8) (481.9) (504.2 ) (571.0)
--------- --------- --------- --------- --------- --------- --------
Investment spread ....................... 60.7 51.1 223.7 206.0 213.2 171.1 139.0
--------- --------- --------- --------- --------- --------- --------
Net realized investment gains (losses) .. 12.9 3.8 8.0 (4.0) (8.2) 11.4 3.1
--------- --------- --------- --------- --------- --------- --------
Fee income:
Investment advisory and administrative
fees ................................... 53.1 46.4 196.4 155.8 95.9 98.9 88.0
Distribution and service fees ........... 12.1 10.6 44.9 28.9 -- -- --
Transfer agency fees .................... 11.8 10.4 43.9 30.8 4.0 5.4 5.0
Surrender charges and net commissions .. 8.5 7.7 34.7 23.4 20.0 22.9 24.2
Separate account fees ................. 3.9 3.5 16.0 13.2 12.5 8.0 5.0
--------- --------- --------- --------- --------- --------- --------
Total fee income ....................... 89.4 78.6 335.9 252.1 132.4 135.2 122.2
--------- --------- --------- --------- --------- --------- --------
Expenses:
Operating expenses(2, 3) ................. (75.8) (65.9) (277.9) (225.1) (174.9) (178.9) (175.8)
Amortization of deferred policy
acquisition costs .................... (16.3) (14.1) (60.2) (58.5) (52.2) (41.0) (17.0)
Amortization of deferred
distribution costs .................... (8.2) (6.8) (33.9) (18.8) -- -- --
Amortization of value of insurance
in force ............................. (3.2) (1.7) (10.2) (9.5) (17.0) (22.4) (32.4)
Amortization of intangible assets(3) ..... (3.2) (3.7) (15.4) (12.2) (5.8) (15.0) (42.3)
Interest expense ....................... (4.5) (5.0) (19.7) (16.2) (4.2) -- --
--------- --------- --------- --------- --------- --------- --------
Total expenses ....................... (111.2) (97.2) (417.3) (340.3) (254.1) (257.3) (267.5)
--------- --------- --------- --------- --------- --------- --------
Pretax income (loss) .................... 51.8 36.3 150.3 113.8 83.3 60.4 (3.2)
Income tax expense ....................... (16.8) (12.5) (49.6) (39.9) (32.5) (29.1) (9.3)
--------- --------- --------- --------- --------- --------- --------
Net income (loss) ....................... $ 35.0 $ 23.8 $ 100.7 $ 73.9 $ 50.8 $ 31.3 $ (12.5)
========= ========= ========= ========= ========= ========= ========
Per Share Data:
Net income (loss) ....................... $ 1.14 $ 0.81 $ 3.36 $ 2.64 $ 2.15 $ 1.32 $ (0.55)
Dividends on common stock(4).............. 0.15 0.15 0.60 0.45 -- -- --
Dividends on convertible preferred stock.. 0.72 0.72 2.88 2.21 -- -- --
Book value ............................. 36.08 33.78 36.63 34.55 27.38 28.00 26.87
Other Operating Data:
Net operating income (loss)(5) ........... $ 26.7 $ 20.9 $ 94.8 $ 76.5 $ 56.2 $ 23.9 $ (14.5)
Net realized investment gains (losses),
net of taxes ............................ 8.3 2.9 5.9 (2.6) (5.4) 7.4 2.0
--------- --------- --------- --------- --------- --------- --------
Net income (loss) ....................... $ 35.0 $ 23.8 $ 100.7 $ 73.9 $ 50.8 $ 31.3 $ (12.5)
========= ========= ========= ========= ========= ========= ========
Balance Sheet Data:
Total investments ....................... $11,541.5 $10,178.6 $11,537.9 $10,144.7 $ 8,590.2 $ 8,411.7 $8,151.6
Intangible assets ....................... 199.9 207.4 205.4 192.3 29.3 35.2 50.2
Total assets ............................. 14,758.7 13,092.4 14,427.7 12,749.4 10,968.8 10,324.6 9,798.3
Notes payable to affiliates .............. 229.0 229.0 229.0 229.0 75.0 -- --
Series A redeemable convertible
preferred stock ....................... 14.0 13.2 13.8 13.0 -- -- --
Stockholders' equity .................... 1,042.8 947.9 1,051.4 956.4 624.7 638.8 612.7
Shares of common stock outstanding ..... 28.9 28.1 28.7 27.7 22.8 22.8 22.8
</TABLE>

- ----------------
(1) Includes data for acquired entities from and after the applicable
acquisition date (the most significant being Colonial, which was acquired
on March 24, 1995). See Note 2 of Notes to the Consolidated Financial
Statements. The data presented should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto and other
financial information included herein and "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION."

(2) In 1993, the Company recognized a $22.1 million option plan compensation
charge, which primarily reflected a revision in the benefit plan formula
from an earnings-based formula to one based upon 104% of book value.

(3) In 1992, the Company changed its estimate of the carrying value of certain
intangible assets in its asset management business, resulting in
additional amortization expense of $21.0 million. In addition, in 1992 the
Company accrued $28.2 million for anticipated guaranty fund assessments in
its annuity insurance business in connection with the failure of certain
unaffiliated insurance companies.

(4) The amount for 1995 does not include a non-cash dividend of $30.0 million
paid to an affiliate of Liberty Mutual. See Note 5 of Notes to the
Consolidated Financial Statements.

(5) Net operating income (loss) is defined as net income (loss), excluding net
realized investment gains and losses, net of related income taxes.

7
<PAGE>

INVESTMENT CONSIDERATIONS

This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act. Actual results could differ
materially from those projected in such forward-looking statements as a result
of the investment considerations set forth below and the matters set forth in
this Prospectus generally. The Company cautions the reader, however, that this
list of factors may not be exhaustive. The following investment considerations
should be considered carefully in addition to the other information contained
in this Prospectus before purchasing the Common Stock offered hereby.

Interest Rate Risk

The Company's investment spread (i.e., the amount by which investment
income exceeds interest credited to annuity and life insurance policyholders)
is the most significant component of its results of operations. The Company's
results of operations and financial condition are significantly dependent on
the Company's ability to manage effectively its investment spread. The Company
will experience a compression of its investment spread when it is unable or
chooses not to maintain the same margin between its investment earnings and its
crediting rates. When interest rates rise, the Company may not be able to
reposition the assets in its investment portfolio into higher-yielding assets
that will be necessary to fund the higher crediting rates necessary to keep its
SPDAs competitive. As a result, the Company may experience either a decrease in
SPDA sales and an increase in surrenders (as described below) if it chooses to
maintain its spread by not raising its crediting rates, or spread compression
if it does increase its crediting rates. Conversely, when interest rates fall,
the Company would have to reinvest the cash received from its investments
(i.e., interest and payments of principal upon maturity or redemption) in the
lower-yielding instruments then available. If the Company were unable (e.g.,
because of guaranteed minimum crediting rates or delays or limitations on the
frequency of crediting rate resets) or chose not to reduce the crediting rates
on SPDAs or acquire relatively higher-risk securities yielding higher rates of
return, spread compression would occur.

If, as a result of interest rate increases, the Company were unable or
chose not to raise its renewal crediting rates to keep them competitive, the
Company may experience an increase in surrenders. If the Company lacked
sufficient liquidity, the Company might have to sell investment securities to
fund associated payments. Because the value of such securities would likely
have decreased in response to the increase in interest rates, the Company would
realize a loss on the sales. In addition, regardless of whether the Company
realizes an investment loss, the surrenders would produce a decrease in
invested assets, with an adverse effect on future earnings therefrom. Finally,
premature surrenders may also cause the Company to accelerate amortization of
expenses related to the policy acquisition (principally commissions), which
would otherwise be amortized over the life of the policy. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION."

Investment Portfolio Risks

The Company's general account investments are subject to additional risks
due to the nature of certain investment assets, including mortgage backed
securities ("MBSs"), certain securities which are not freely tradeable and
below investment grade securities. MBSs, including collateralized mortgage
obligations, are subject to prepayment risks that vary with, among other
things, interest rates. As of March 31, 1997, Keyport owned approximately $4.0
billion of MBSs (31.9% of its general account investments). During periods of
declining interest rates, MBSs generally prepay faster as the underlying
mortgages are prepaid and refinanced by the borrowers in order to take
advantage of the lower rates. MBSs that have an amortized cost that is greater
than par (i.e., purchased at a premium) may incur a reduction in yield or a
loss as a result of such prepayments. In addition, during such periods, the
Company will generally be unable to reinvest the proceeds of any such
prepayment at comparable yields, which may contribute to spread compression.
Conversely, during periods of rising interest rates, prepayments generally
slow. Significant delays in expected rates of prepayment could adversely affect
the Company's liquidity. MBSs that have an amortized value that is less than
par (i.e., purchased at a discount) may incur a decrease in yield or a loss as
a result of slower prepayments.

As of March 31, 1997, approximately $3.3 billion, or 26.6%, of the
Company's general account investments were invested in securities which were
sold without registration under the Securities Act and were not freely
tradeable under the Securities Act or which were otherwise illiquid. These
securities may be resold pursuant to an exemption from registration under the
Securities Act. If the Company sought to sell such securities, it might be

8
<PAGE>

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 levels. The
Company's inability to dispose of illiquid and/or restricted securities at
desired times and prices could have a material adverse effect on the Company's
investment spread and liquidity.

Approximately $10.3 billion, or 81.9%, of the Company's general account
investments of $12.6 billion at March 31, 1997, was rated by Standard & Poor's
Corporation, Moody's Investors Service, Inc. or under comparable statutory
rating guidelines established by the National Association of Insurance
Commissioners ("NAIC"). At March 31, 1997, the carrying value of investments in
below investment grade securities totaled $991.5 million, or 7.9% of general
account investments. Below investment grade securities generally provide higher
yields and involve greater risks than investment grade securities because their
issuers typically are more highly leveraged and more vulnerable to adverse
economic conditions than investment grade issuers. In addition, the trading
market for these securities may be more limited than for investment grade
securities. Defaults or the inability to liquidate these securities at their
carrying value could adversely affect the Company's results of operations and
financial condition.

While the Company seeks to mitigate the potentially adverse effects of
interest rate changes through asset/liability management and through various
hedging techniques, there can be no assurance that such portfolio management
techniques will be effective in mitigating the potentially adverse effects of
interest rate changes. The Company employs hedging strategies to manage interest
rate risk, including interest rate swaps and caps. The primary risk associated
with swaps and caps is counterparty nonperformance. In addition, swap agreements
have interest rate risk. Such instruments are entered into for hedging (as
opposed to investment or speculative) purposes in connection with the management
of the Company's general account portfolio, and from time to time the Company
incurs gains or losses on such instruments.

The Company purchases S&P 500 call options to hedge the guarantees made to
equity-indexed policyholders. The value of call options can be adversely
affected by changes in the level of the S&P 500 index. Call options also have
the risk of counterparty nonperformance. The Company believes that changes in
the value of its S&P 500 call options will be substantially offset by changes
in the value of its equity-indexed liabilities. However, there can be no
assurance that these hedges will be effective in offsetting the potentially
adverse effects of changes in S&P 500 index levels impacting interest credited
to equity-indexed policyholders. Keyport's profitability could be adversely
affected if the value of its S&P 500 call options increase less than (or
decrease more than) the value of the guarantees made to equity-indexed
policyholders. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION--Management of the Company's Investments"
and "BUSINESS--Retirement-Oriented Insurance Products--General Account
Investments."

Other Factors Affecting Product Sales and Asset Retention

The Company's product sales and asset levels are affected by certain
general economic and market factors such as changes in interest rates and stock
prices. These factors can influence, among other things, product sales and
asset retention. In particular, significant growth in the retirement-oriented
savings market and strong stock market appreciation have been material factors
in the growth in the Company's assets and its ability to generate new sales in
recent years. There can be no assurance, however, that these economic and
market trends will continue. Adverse economic conditions and other factors,
including a protracted or precipitous decline in stock market and other
economic conditions that affect the popularity of the Company's products and
services, may negatively affect the Company's results of operations and
financial condition.

Industry sales and surrenders of SPDAs tend to be sensitive to prevailing
interest rates. Sales can be expected to decrease and surrenders to increase in
interest rate environments when SPDA rates are lower than rates offered by
competing conservative fixed-return investments, such as bank certificates of
deposit. SPDA sales also can be adversely affected by low interest rates.

Sales of mutual funds and other investment management products also are
subject to market forces. Changes in the financial markets, including
significant increases or decreases in interest rates or stock prices, can
increase or decrease fund sales and redemptions, as well as the values of
assets in such portfolios, all of which impact investment management fees. The
competitiveness of the Company's investment management products (both in terms
of new sales and asset retention) also is dependent on the relative
attractiveness of their underlying investment philosophies and methods under
prevailing market conditions.

9
<PAGE>

All of the Company's annuities permit the policyholder at any time to
withdraw all or any part of the accumulated policy value. Premature termination
of an annuity policy results in the loss by the Company of anticipated future
earnings related to the annuity premium deposit and the accelerated recognition
of the sales expenses related to policy acquisition, as described above.
Surrender charges provide a measure of protection against premature withdrawal
of policy values. All of the Company's SPDAs currently are issued with
surrender charges. At March 31, 1997, 85.0% of the Company's SPDAs remained in
the surrender charge period. During the remaining nine months of 1997, and
during 1998 and 1999, policies having aggregate balances of $697.6 million,
$993.8 million and $1.2 billion, respectively, were scheduled as of March 31,
1997 to come off the surrender charge period. Substantially all of the
Company's investment management assets are subject to client withdrawals. Most
of the Company's mutual fund assets are held in open-end funds. Shareholders of
open-end funds generally can redeem their shares on a daily basis. In addition,
the Company's other investment management clients generally may terminate their
relationship on 30 to 60 days' notice. Significant levels of asset withdrawals
could have a material adverse effect on the Company's results of operations.
See "BUSINESS--Retirement-Oriented Insurance Products--Sales and Asset
Retention" and "--Investment Management--Sales and Asset Retention."

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, 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 to accumulate and retain assets are investor returns and relative
performance, access to and maintenance of distribution relationships, pricing
practices, and product and service features. The Company's ability to
accumulate and retain assets under management could be adversely affected if
investment results underperform the market or the competition. Such
underperformance could result in reduced sales and asset withdrawals. No
assurance can be given as to the Company's future investment results.

The Company distributes the majority of its products (53.0% and 61.0%,
respectively, during the three months ended March 31, 1997 and during 1996)
through intermediaries. The proliferation of competing products requires the
Company to compete to establish and maintain distribution relationships and to
maintain "shelf space" with distributors. In response to the proliferation of
available investment products, many of the larger distributors have begun to
reduce the number of companies for whom they distribute. Product features,
relative performance, pricing and support services to distributors and their
customers are important factors in competing for distribution relationships. An
interruption in the Company's continuing relationship with certain of these
distributors could materially adversely affect the Company's ability to market
its products. There can be no assurance that the Company would be able to find
alternative sources of distribution in a timely manner. Some distributors have
begun to assess fee sharing payments or similar charges as additional
compensation for fund sales. The Company can be confronted with the choice of
absorbing these charges or limiting its access to certain distributors. See
"BUSINESS--Distribution" and "--Competition."

Control by Liberty Mutual; Potential Conflicts of Interest

Upon completion of this offering, based upon shares outstanding as of July
15, 1997, Liberty Mutual will own, indirectly through a wholly-owned subsidiary,
approximately 74.7% of the Company's outstanding Common Stock and approximately
73.8% of the combined voting power of the Company's outstanding Common Stock and
Preferred Stock (approximately 73.4% and 72.6%, respectively, if the
over-allotment option granted to the Underwriters is exercised in full). Liberty
Mutual has and following this offering will continue to have the power to elect
the entire Board of Directors and to approve any action requiring shareholder
approval, including adopting amendments to the Company's Restated Articles,
approving the issuance of additional Common Stock or other equity securities
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 the Company's
voting stock. Fifteen of the Company's 18 directors also are directors of
Liberty Mutual.

Liberty Financial is a party to various agreements with Liberty Mutual and
certain of its affiliates. 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.
From time to time Liberty

10
<PAGE>

Financial has received capital contributions, loans and other credit support
and advances from Liberty Mutual. Liberty Mutual has no obligation to make
further capital contributions or loans or advances or otherwise provide credit
support to Liberty Financial.

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. 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 financial results of Liberty Mutual.
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. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION--Liquidity and Capital Resources,"
"MANAGEMENT," "PRINCIPAL AND SELLING SHAREHOLDERS" and "CERTAIN RELATIONSHIPS
AND RELATED TRANSACTIONS--Matters Pertaining to Liberty Mutual."

Importance of Credit Ratings for Annuities

Keyport competes with other insurance companies 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 insurance companies currently range from "A++" (Superior) to
"F" (in Liquidation) and some companies are not rated. At present, Keyport is
rated "AA-" (excellent financial security) by Standard & Poor's Corporation
("S&P"), "A1" (good financial strength) by Moody's Investors Service, Inc.
("Moody's") and "AA-" (very high claims paying ability) by Duff & Phelps. The
S&P and Duff & Phelps "-" modifier signifies that Keyport is at the lower end
of the AA category. These ratings reflect the opinion of the rating agency as
to the relative financial strength of Keyport and Keyport's ability to meet its
contractual obligations to its policyholders. Such ratings are not "market"
ratings or recommendations to use or invest in Keyport or Liberty Financial and
should not be relied upon when making a decision to invest in the Common Stock.
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, the level of surrenders on existing policies
and the Company's relationships with distributors could be materially adversely
affected. No assurance can be given that Keyport will be able to maintain its
financial ratings. See "BUSINESS--Retirement-Oriented Insurance Products--Sales
and Asset Retention."

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
senior officers at the Company and Keyport, Colonial, Stein Roe, Newport and
the Company's other subsidiaries and experienced portfolio managers and sales
executives. Competition for such persons is intense. Certain of these employees
are responsible for significant client relationships. In general, Liberty
Financial's employees are not subject to non-compete arrangements. Loss of key
personnel could have a material adverse effect on Liberty Financial. The
Company does not have, and is not contemplating securing, any significant
amount of key-man life insurance for its employees.

Holding Company Structure; Dividend Restrictions

Liberty Financial is a holding company whose principal assets (and source
of funds for the payment of operating expenses, principal and interest on debt,
redemption of stock and dividends) consist of its equity interests in Keyport,
Colonial, Stein Roe, Newport 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. As of December 31, 1996, the amount of dividends that Keyport could pay
without such approval was $42.5 million. However, Keyport has not paid any
dividends since its acquisition in December, 1988. The terms of Colonial's
existing senior credit facility place certain restrictions on Colonial's ability
to pay dividends. Under the terms of the facility (as amended in April 1997),
Colonial could pay dividends of up to $87.2 million as of March 31, 1997. No
assurances can be given that future

11
<PAGE>

regulatory changes and credit arrangements will not create additional
restrictions on the ability of the Company's subsidiaries to pay dividends. See
"PRICE RANGE OF COMMON STOCK AND DIVIDENDS" and "BUSINESS--Regulation."

Recent Accounting Proposal

In June 1996, the Financial Accounting Standards Board ("FASB") issued an
exposure draft of an accounting standard entitled "Accounting for Derivative
and Similar Financial Instruments and for Hedging Activities." This exposure
draft, if adopted in the form in which it was issued, would require companies
to report derivatives on the balance sheet at fair value with changes in fair
value recorded in income or equity. The exposure draft also would change the
accounting for derivatives used in hedging strategies from traditional deferral
accounting to a current recognition approach which could impact a company's
income statement and balance sheet and expand the definition of a derivative
instrument. Management expects that this accounting standard, in whatever form,
will not be effective until 1999. FASB's Rules of Procedure require that, prior
to approving a new accounting standard, extensive "due process" be followed.
FASB requests written comments from interested parties on an exposure draft and
also may hold public hearings. This exposure draft has drawn criticism
primarily because the required accounting treatment would not match the
perceived economic effect of such hedging strategies. As a result of, among
other things, the concerns and criticisms in comment letters and at public
hearings held on this exposure draft, the Company is unable to predict the form
that the final accounting standard, if adopted, may take and believes it would
be inappropriate to speculate on the effects of any such adoption at this time.

Regulation

The Company's business activities are extensively regulated. Keyport is
subject to comprehensive state laws and regulations throughout the United
States. Such laws and regulations, in addition to limiting the amounts of
dividends and other payments that can be paid by Keyport without prior
approval, impose restrictions on the amount and type of investments Keyport may
hold. These regulations also affect many other aspects of Keyport's business,
including risk-based capital requirements, the type and amount of required
asset valuation reserve accounts, the licensing of agents, the form and content
of statutory financial statements and policy forms. 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
NAIC, federal and state legislative bodies and state regulatory authorities. In
addition, the insurance laws and regulations of Rhode Island also may impede or
delay a business combination involving the Company or Keyport.

Keyport prepares its statutory-basis financial statements in accordance
with accounting practices prescribed or permitted by the Insurance Department
of the State of Rhode Island. Prescribed statutory accounting practices
generally include state laws, regulations and general administrative rules.
Permitted statutory accounting practices encompass all accounting practices
that are not prescribed; such practices may differ between the states and
companies within a state. The NAIC is currently in the process of codifying
statutory accounting practices, the result of which is expected to constitute
the only source of prescribed statutory accounting practices. That project,
when completed, may result in changes to the accounting practices that Keyport
uses to prepare its statutory-basis financial statements. The impact of any
such changes on Keyport's statutory surplus cannot be determined at this time.
No assurance can be given that such changes would not have a material adverse
effect on the Company.

The Company's investment management businesses are also subject to
extensive regulation, including the Exchange Act, the Investment Advisers Act
of 1940 (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. Certain of the
Company's subsidiaries are also subject to regulation by the National
Association of Securities Dealers, Inc. The Company cannot predict, and no
assurances can be given as to, the effect that any proposed or future
regulations or changes in the interpretation of existing regulations in any
area in which the Company or its subsidiaries is regulated, may have on the
financial condition or operations of Liberty Financial. See
"BUSINESS--Regulation."

National banks may become more significant competitors in the future as a
result of certain recent court decisions and regulatory actions. Also, several
proposals to repeal or modify the Glass-Steagall Act of 1933 (which restricts
banks from engaging in securities-related businesses) and the Bank Holding
Company Act of 1956 (which prohibits banks from being affiliated with insurance
companies) have been made by members of Congress (including

12
<PAGE>

a bill currently under consideration in the U.S. House of Representatives) and
the Clinton Administration. None of these proposals has yet been enacted, and
it is not possible to predict whether any of these proposals will be enacted
or, if enacted, what their potential effect will be on the Company. See
"BUSINESS--Regulation."

In the ordinary course of its investment management business, the Company
enters into investment advisory agreements with mutual funds and others. As
required by the Investment Company Act of 1940 (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 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 the completion of this
offering, additional sales by Liberty Mutual or other stockholders or new
issuances of capital stock by Liberty Financial, among other things, may raise
issues relating to assignments of the Company's investment advisory agreements.
The Restated Articles include provisions limiting the voting power of shares of
the Company's Voting Stock held by holders of 20% or more of such Voting Stock
in certain circumstances. These provisions do not apply to Liberty Mutual,
subsidiaries or affiliates of Liberty Mutual, direct or indirect subsidiaries
of the Company and certain employee plans established or to be established by
the Company. 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--Asset
Management Products" and "DESCRIPTION OF CAPITAL STOCK--Other Provisions
Pertaining to a Change in Control."

Tax Status of Insurance Products

Under the Internal Revenue Code (the "Code"), income tax payable by
annuity and life insurance policyholders on current investment earnings is
deferred during the accumulation period. Taxes, if any, are payable by the
policyholder on the accumulated tax-deferred earnings when the policy 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 investment earnings currently 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 the Company's retirement-oriented insurance
products, market demand for such products could be materially adversely
affected. Other possible legislation, such as a reduction in the tax rate
applicable to capital gains, could also adversely affect the Company's
business. A reduction of the capital gains rate could make annuities a less
attractive form of investment. It also could result in investors liquidating
their positions in the Company's retirement-oriented insurance products to take
advantage of such lower tax rate. See "BUSINESS--Retirement-Oriented Insurance
Products--Products."

Shares Eligible for Future Sale by Liberty Mutual

The sale of a substantial number of shares of Common Stock held directly or
indirectly by Liberty Mutual following this offering, or the perception that
such sales could occur, could materially adversely affect the prevailing market
price of the Common Stock. It could also make it more difficult for the Company
to sell newly issued equity securities in the future at a time and price which
it deems appropriate. On the date of this Prospectus, Liberty Mutual will hold
indirectly 21,753,656 shares of Common Stock (giving effect to the sale pursuant
to this Prospectus of 1,868,475 shares held indirectly by Liberty Mutual), all
of which will be eligible for future sale in the public market in accordance
with Rule 144 under the Securities Act. The Company 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,
as well as so-called "piggy-back" registrations. See "CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS--Matters Pertaining to 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 additional
secondary offerings of significant share amounts by Liberty Mutual.

13
<PAGE>

PRICE RANGE OF COMMON STOCK AND DIVIDENDS

The Company's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "L". The Common Stock began trading on the NYSE on
March 27, 1995, following the Company's acquisition of Colonial. The Common
Stock is also listed on the Boston Stock Exchange. Prior to March 27, 1995,
there was no public market for the Company's Common Stock.

The following table sets forth the high and low closing sales price for
the Common Stock on the NYSE for each of the periods indicated below.

<TABLE>
<CAPTION>
1995 High Low
- --------------- -------- -------
<S> <C> <C>
First Quarter (from March 27, 1995) ......... $29 $27
Second Quarter .............................. 27-1/2 23-7/8
Third Quarter ................................. 29-1/4 25-3/8
Fourth Quarter .............................. 30-1/4 27-1/8

1996
- ---------------
First Quarter ................................. $32-3/8 $30
Second Quarter .............................. 34 30-3/4
Third Quarter ................................. 33-7/8 29-1/8
Fourth Quarter .............................. 39 30-7/8

1997
- ---------------
First Quarter .............................. $45-5/8 $38-5/8
Second Quarter .............................. 51-1/4 37-3/4
Third Quarter (through July 17, 1997) ....... 56-1/8 49-3/4

</TABLE>

On July 17, 1997, the last reported sale price for the Common Stock, as
reported on the NYSE, was $54-3/4. The approximate number of stockholders of
record of the Company's Common Stock as of July 17, 1997 was 160.

Since the second quarter of 1995, the Company has paid quarterly cash
dividends of $0.15 per share. The declaration and payment of any dividends on
the Common Stock are dependent upon the Company's results of operations,
financial condition, cash requirements, capital requirements, regulatory
considerations and other relevant factors, and in all events are subject to the
discretion of the Board of Directors and to any preferential dividend rights of
the outstanding Series A Convertible Preferred Stock ("Preferred Stock") of
Liberty Financial. The holders of the issued and outstanding shares of
Preferred Stock are entitled to receive cumulative cash dividends at the rate
of $2.875 per annum per share, payable in equal quarterly installments. The
terms of the Preferred Stock preclude the payment of any dividends on the
Common Stock unless cumulative dividends on the outstanding Preferred Stock
have been paid or declared in full. Accordingly, there is no requirement, and
no assurance can be given, that dividends will be paid on the Common Stock.

The Company's Board of Directors has established an optional dividend
reinvestment plan ("DRIP") for holders of Common Stock and Preferred Stock. LFC
Holdings, Inc. has participated in the DRIP since 1995 and, prior to 1997, was
the only participant. LFC Holdings, Inc.'s participation 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
Common Stock may be dependent upon LFC Holdings, Inc.'s continued participation
in the DRIP. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION--Liquidity and Capital Resources."

As a holding company, the Company's ability to pay dividends depends
largely upon the ability of its subsidiaries to make distributions to it.
Payments by Keyport to the Company are restricted by the insurance laws of the
State of Rhode Island, Keyport's state of domicile. See "INVESTMENT
CONSIDERATIONS--Holding Company Structure; Dividend Restrictions." As of
December 31, 1996, 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 $42.5 million. However, Keyport has not paid any dividends
since its acquisition in 1988. The terms of Colonial's existing senior credit
facility place certain limitations on Colonial's ability to pay dividends.
Under the terms of the facility (as amended in April 1997), Colonial could pay
dividends of up to $87.2 million as of March 31, 1997. See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION--Liquidity and Capital Resources" and "BUSINESS--Regulation--Annuity
Insurance."

14
<PAGE>

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following selected consolidated financial data as of and for the years
ended December 31, 1996, 1995, 1994, 1993 and 1992 have been derived from the
Company's Consolidated Financial Statements, which have been audited by the
Company's independent auditors. The balance sheet data as of March 31, 1997 and
1996 and the income statement data for the three months ended March 31, 1997
and 1996 have been derived from unaudited financial statements of the Company
also appearing herein and which, in the opinion of management, include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the financial position and the results of operations for
the unaudited interim periods. The results of operations for the three months
ended March 31, 1997 are not necessarily indicative of the results that may be
expected for the full year or for any future period. The data presented below
includes data for acquired entities from and after the applicable acquisition
date (the most significant being Colonial, which was acquired on March 24,
1995). The data presented should be read in conjunction with the Consolidated
Financial Statements of the Company and Notes thereto and other financial
information included herein. See the Consolidated Financial Statements and
Notes thereto and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE RESULTS OF
OPERATIONS AND FINANCIAL CONDITION."

<TABLE>
<CAPTION>
As of or for the
Three Months Ended As of or for the
March 31, 1997 Year Ended December 31,
----------------------- ---------------------------------------------------------
(unaudited)
1997 1996 1996 1995 1994 1993(1) 1992(2)
----------- ----------- ----------- ----------- ----------- ----------- ---------
(in millions, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Investment income ........................... $ 208.0 $ 189.2 $ 796.4 $ 761.8 $ 695.1 $ 675.3 $ 710.0
Interest credited to policyholders ......... (147.3) (138.1) (572.7) (555.8) (481.9) (504.2) (571.0)
------- -------- -------- -------- -------- -------- --------
Investment spread ........................... 60.7 51.1 223.7 206.0 213.2 171.1 139.0
------- -------- -------- -------- -------- -------- --------
Net realized investment gains (losses) ...... 12.9 3.8 8.0 (4.0) (8.2) 11.4 3.1
------- -------- -------- -------- -------- -------- --------
Fee income:
Investment advisory and administrative
fees ....................................... 53.1 46.4 196.4 155.8 95.9 98.9 88.0
Distribution and service fees ............... 12.1 10.6 44.9 28.9 -- -- --
Transfer agency fees ........................ 11.8 10.4 43.9 30.8 4.0 5.4 5.0
Surrender charges and net commissions ...... 8.5 7.7 34.7 23.4 20.0 22.9 24.2
Separate account fees ..................... 3.9 3.5 16.0 13.2 12.5 8.0 5.0
------- -------- -------- -------- -------- -------- --------
Total fee income ........................... 89.4 78.6 335.9 252.1 132.4 135.2 122.2
------- -------- -------- -------- -------- -------- --------
Expenses:
Operating expenses(1, 2) ..................... (75.8) (65.9) (277.9) (225.1) (174.9) (178.9) (175.8)
Amortization of deferred policy
acquisition costs ........................ (16.3) (14.1) (60.2) (58.5) (52.2) (41.0) (17.0)
Amortization of deferred
distribution costs ........................ (8.2) (6.8) (33.9) (18.8) -- -- --
Amortization of value of insurance
in force ................................. (3.2) (1.7) (10.2) (9.5) (17.0) (22.4) (32.4)
Amortization of intangible assets(2) ......... (3.2) (3.7) (15.4) (12.2) (5.8) (15.0) (42.3)
Interest expense ........................... (4.5) (5.0) (19.7) (16.2) (4.2) -- --
------- -------- -------- -------- -------- -------- --------
Total expenses ........................... (111.2) (97.2) (417.3) (340.3) (254.1) (257.3) (267.5)
-------- -------- -------- -------- -------- -------- --------
Pretax income (loss) ........................ 51.8 36.3 150.3 113.8 83.3 60.4 (3.2)
Income tax expense ........................... (16.8) (12.5) (49.6) (39.9) (32.5) (29.1) (9.3)
-------- -------- -------- -------- -------- -------- --------
Net income (loss) ........................... $ 35.0 $ 23.8 $ 100.7 $ 73.9 $ 50.8 $ 31.3 $ (12.5)
======== ======== ======== ======== ======== ======== ========
Per Share Data:
Net income (loss) ........................... $ 1.14 $ 0.81 $ 3.36 $ 2.64 $ 2.15 $ 1.32 $ (0.55)
Dividends on common stock(3).................. 0.15 0.15 0.60 0.45 -- -- --
Dividends on convertible preferred stock ..... 0.72 0.72 2.88 2.21 -- -- --
Book value ................................. 36.08 33.78 36.63 34.55 27.38 28.00 26.87
</TABLE>

15
<PAGE>

- ----------------

(1) In 1993, the Company recognized a $22.1 million option plan compensation
charge, which primarily reflected a revision in the benefit plan formula
from an earnings-based formula to one based upon 104% of book value.

(2) In 1992, the Company changed its estimate of the carrying value of certain
intangible assets in its asset management business, resulting in
additional amortization expense of $21.0 million. In addition, in 1992 the
Company accrued $28.2 million for anticipated guaranty fund assessments in
its annuity insurance business in connection with the failure of certain
unaffiliated insurance companies.

(3) The amount for 1995 does not include a non-cash dividend of $30.0 million
paid to an affiliate of Liberty Mutual. See Note 5 of Notes to the
Consolidated Financial Statements.

(4) Net operating income (loss) is defined as net income (loss), excluding net
realized investment gains and losses, net of related income taxes.

16
<PAGE>

MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Results of Operations

Comparison of Three Months Ended March 31, 1997 and 1996

Net Income was $35.0 million or $1.14 per share in the first quarter of
1997 compared to $23.8 million or $0.81 per share in the first quarter of 1996.
The improvement of $11.2 million in 1997 compared to 1996 resulted from higher
investment spread, higher fee income and higher net realized investment gains.
Partially offsetting these items were increased operating expenses,
amortization expense and income tax expense.

Pretax Income was $51.8 million in the first quarter of 1997 compared to
$36.3 million in the first quarter of 1996. The higher pretax income in 1997
compared to 1996 resulted from higher investment spread, higher fee income and
higher net realized investment gains. Partially offsetting these increases were
the higher expenses referred to above.

Investment Spread is the amount by which investment income earned on the
Company's investments exceeds interest credited on policyholder balances.
Investment spread was $60.7 million in the first quarter of 1997 compared to
$51.1 million in the first quarter of 1996. The amount by which the average
yield on investments exceeds the average interest credited rate on policyholder
balances is the investment spread percentage. Such investment spread percentage
in the first quarter of 1997 was 1.90% compared to 1.82% in the first quarter
of 1996.

Investment income was $208.0 million in the first quarter of 1997 compared
to $189.2 million in the first quarter of 1996. The increase of $18.8 million
in 1997 compared to 1996 primarily relates to a $27.4 million increase as a
result of the higher level of average invested assets, partially offset by an
$8.6 million decrease resulting from a lower average investment yield. The
average investment yield was 6.94% in the first quarter of 1997 compared to
7.27% in the first quarter of 1996.

Interest credited to policyholders totaled $147.3 million in the first
quarter of 1997 compared to $138.1 million in the first quarter of 1996. The
increase of $9.2 million in 1997 compared to 1996 primarily relates to a $19.5
million increase as a result of a higher level of average policyholder
balances, partially offset by a $10.3 million decrease resulting from a lower
average interest credited rate. Policyholder balances averaged $11.7 billion in
the first quarter of 1997 compared to $10.2 billion in the first quarter of
1996. The average interest credited rate was 5.04% in the first quarter of 1997
compared to 5.45% in the first quarter of 1996.

Average Investments (computed without giving effect to SFAS 115--see Note
1 of Notes to the Consolidated Financial Statements), including a portion of
the Company's cash and cash equivalents, were $12.0 billion in the first
quarter of 1997 compared to $10.4 billion in the first quarter of 1996. The
increase of $1.6 billion in 1997 compared to 1996 primarily relates to the 100
percent coinsurance agreement with respect to a $954.0 million block of SPDAs
entered into with Fidelity & Guaranty Life Insurance Company ("F&G Life")
during the third quarter of 1996 and the investment of portfolio earnings for
the twelve months ended March 31, 1997 of $0.8 billion. Under the F&G Life
transaction, the investment risk of the policies was transferred to Keyport,
while F&G Life continues to administer the policies.

Net Realized Investment Gains were $12.9 million in the first quarter of
1997 compared to $3.8 million in the first quarter of 1996. Sales of fixed
maturity investments generally are made to maximize total return. In 1997 net
realized investment gains included gains on the sales of fixed maturity
investments of $6.3 million and gains on redemption of seed money investments
made by the Company in separate account mutual funds sponsored by the Company of
$6.6 million. The net realized investment gains in 1996 were attributable to
sales of fixed maturity investments.

Investment Advisory and Administrative Fees are based on the market value
of assets managed for mutual funds, wealth management and institutional
investors. Investment advisory and administrative fees were $53.1 million in
the first quarter of 1997 compared to $46.4 million in the first quarter of
1996. The increase of $6.7 million in 1997 compared to 1996 primarily reflects
a higher level of average fee-based assets under management.

Average fee-based assets under management were $35.8 billion in the first
quarter of 1997 compared to $32.5 billion in the first quarter of 1996. The
increase of $3.3 billion during the first quarter of 1997 compared to the first
quarter of 1996 resulted primarily from market appreciation of $1.8 billion and
net sales of $1.2 billion for

17
<PAGE>

the twelve months ended March 31, 1997. In addition, approximately $0.3 billion
in fee-based assets under management were acquired during this twelve month
period. Investment advisory and administrative fees were 0.59% of average
fee-based assets under management in the first quarter of 1997 and 0.57% in the
first quarter of 1996. This increase in the effective fee rate in the first
quarter of 1997 was primarily due to the increased proportion of assets under
management in mutual funds with relatively higher fees.

The amount of fee-based assets under management is affected by product
sales and redemptions and by changes in the market values of such assets under
management. Fee-based assets under management and changes in such assets are
set forth in the tables below (in billions).

Fee-Based Assets Under Management

<TABLE>
<CAPTION>
As of March 31,
----------------
1997 1996
------- ------
<S> <C> <C>
Mutual funds:
Intermediary-distributed ..................... $15.6 $15.7
Direct-marketed .............................. 6.2 5.4
Closed-end .................................... 1.9 1.8
Variable annuity .............................. 1.1 1.0
------ ------
24.8 23.9
Wealth management .............................. 5.5 4.4
Institutional asset management .................. 4.5 4.4
------ ------
Total fee-based assets under management* ...... $34.8 $32.7
====== ======
</TABLE>

- ----------------
* As of March 31, 1997 and 1996, Keyport's insurance assets of $12.2 billion
and $10.6 billion, respectively, bring total assets under management to
$47.0 billion and $43.3 billion, respectively.

Changes in Fee-Based Assets Under Management

<TABLE>
<CAPTION>
Three Months
Ended
March 31,
-----------------------
1997 1996
---------- ----------
<S> <C> <C>
Fee-based assets under management--beginning ......... $ 35.9 $ 31.9
Sales and reinvestments .............................. 1.9 1.9
Redemptions and withdrawals ........................... (2.1) (1.2)
Market appreciation (depreciation) .................. (0.9) 0.1
------ ------
Total fee-based assets under management--ending ...... $ 34.8 $ 32.7
====== ======
</TABLE>

Changes in the financial markets, including significant increases or
decreases in interest rates or stock prices, can increase or decrease
redemptions. The competitiveness of the Company's investment management
products is also dependent on the relative attractiveness of their underlying
investment philosophies and methods under prevailing market conditions. The
increased redemptions in the first quarter of 1997 reflect weak performance of
the securities markets relative to their performance in the comparable period
of 1996. In addition, in the first quarter of 1997 the Company experienced the
loss of a $0.3 billion institutional fixed income sub-advisory relationship.

Distribution and Service Fees are based on the market value of the
Company's intermediary-distributed mutual funds. Distribution fees of up to
0.75% are earned on the average assets attributable to such funds sold with
contingent deferred sales charges. Service fees of up to 0.25% (net of amounts
passed on to selling brokers) are earned on average assets of all
intermediary-distributed mutual funds. These fees totaled $12.1 million in the
first quarter of 1997 compared to $10.6 million in the first quarter of 1996.
The increase of $1.5 million in 1997 compared to 1996 was primarily attributable
to the higher asset levels of mutual funds with contingent deferred sales
charges. As a percentage of the corresponding weighted average assets,
distribution and service fees approximated 0.71% in 1997 and 0.70% in 1996.

Transfer Agency Fees are based on the market value of assets managed in the
Company's intermediary-distributed and direct marketed mutual funds. Such fees
were $11.8 million on average assets of $23.6 billion in the first quarter of
1997 and $10.4 million on average assets of $21.8 billion in the first quarter
of 1996. The increase

18
<PAGE>

of $1.4 million in 1997 compared to 1996 was primarily due to higher average
assets in direct-marketed mutual funds. As a percentage of average mutual fund
assets under management, transfer agency fees were approximately 0.20% and
0.19% in the first quarters of 1997 and 1996, respectively.

Surrender Charges and Net Commissions are revenues earned on: (a) the early
withdrawal of annuity policyholder balances and redemptions of the
intermediary-distributed mutual funds which were sold with contingent deferred
sales charges; (b) the distribution of the Company's intermediary-distributed
mutual funds (net of the substantial portion of such commissions that is passed
on to the selling brokers); and (c) the sales of non- proprietary products in
the Company's bank marketing businesses (net of such commissions that are paid
to the Company's client banks and brokers). Total surrender charges and net
commissions were $8.5 million in the first quarter of 1997 compared to $7.7
million in the first quarter of 1996.

Surrender charges on fixed and variable annuity withdrawals generally are
assessed at declining rates applied to policyholder withdrawals during the
first five to seven years of the contract; contingent deferred sales charges on
mutual fund redemptions are assessed at declining rates on amounts redeemed
during the first six years. Such charges totaled $4.8 million and $4.9 million
in the first quarters of 1997 and 1996, respectively. Annuity withdrawals
represented 11.2% and 9.8% of the total average annuity policyholder and
separate account balances in the first quarters of 1997 and 1996, respectively.
The percentage increase in 1997 was primarily attributable to surrenders of
annuities acquired in the F&G Life transaction; excluding these surrenders, the
withdrawal percentage in 1997 would have been 9.4%.

Net commissions were $3.7 million in the first quarter of 1997 and $2.8
million in the first quarter of 1996. The increase in 1997 compared to 1996 was
primarily attributable to the acquisition in March 1996 of Independent.

Separate Account Fees are primarily mortality and expense charges earned
on variable annuity and variable life policyholder balances. These fees, which
are based on the market values of the assets supporting the contracts in
separate accounts, were $3.9 million in the first quarter of 1997 compared to
$3.5 million in the first quarter of 1996. Such fees represented 1.55% and
1.52% of average variable annuity and variable life separate account balances
in 1997 and 1996, respectively.

Operating Expenses primarily represent compensation, marketing, and other
general and administrative expenses. These expenses were $75.8 million in the
first quarter of 1997 compared to $65.9 million in the first quarter of 1996.
The increase in 1997 compared to 1996 was primarily due to increases in
compensation of $6.3 million, in marketing expenses of $1.4 million relating to
mutual fund sales and to the acquisition of Independent which increased
operating expenses by $1.6 million, partially offset by a first quarter 1996
$1.9 million restructuring charge. Operating expenses expressed as a percent of
average total assets under management were 0.63% and 0.60% in the first
quarters of 1997 and 1996, respectively.

Amortization of Deferred Policy Acquisition Costs relates to the costs of
acquiring new business which vary with, and are primarily related to, the
production of new annuity business. Such costs include commissions, costs of
policy issuance and underwriting and selling expenses. Amortization was $16.3
million in the first quarter of 1997 compared to $14.1 million in the first
quarter of 1996. The increase in amortization in the first quarter of 1997
compared to 1996 was primarily due to the growth of business in force
associated with annuity sales. Amortization expense represented 0.62% and 0.64%
of the total average policyholder and separate account balances in 1997 and
1996, respectively.

Amortization of Deferred Distribution Costs relates to the deferred sales
commissions acquired in connection with the Colonial acquisition in the first
quarter of 1995 and the distribution of mutual fund shares sold with contingent
deferred sales charges. Amortization was $8.2 million in the first quarter of
1997 compared to $6.8 million in the first quarter of 1996. The increase in
1997 was primarily attributable to the continuing sales of such fund shares
during 1997 and 1996.

Amortization of Value of Insurance in Force relates to the
actuarially-determined present value of projected future gross profits from
policies in force at the date of acquisition. Amortization was $3.2 million in
the first quarter of 1997 compared to $1.7 million in the first quarter of
1996. The increase in amortization in 1997 compared to 1996 was primarily due
to $1.5 million of amortization relating to the F&G Life transaction.

Amortization of Intangible Assets relates to goodwill and certain
identifiable intangible assets arising from business combinations accounted for
as purchases. Amortization was $3.2 million in the first quarter of 1997

19
<PAGE>

compared to $3.7 million in the first quarter of 1996. The decrease in 1997 was
primarily attributable to certain assets becoming fully amortized in the third
quarter of 1996 which reduced amortization by $1.0 million, partially offset by
an increase of $0.4 million in amortization relating to the acquisition of
Independent.

Interest Expense was $4.5 million in the first quarter of 1997 compared to
$5.0 million in the first quarter of 1996. The decrease of $0.5 million is
principally due to higher interest income which is netted against interest
expense.

Income Tax Expense was $16.8 million or 32.4% of pretax income in the
first quarter of 1997 compared to $12.5 million, or 34.3% of pretax income in
the first quarter of 1996. The low effective tax rates in 1997 and 1996 were
attributable primarily to reductions in the deferred tax asset valuation
reserve. There was no such reduction prior to the acquisition of Colonial in
1995. Substantially all the federal income tax expense related to the Company's
annuity insurance business.

Comparison of Years Ended December 31, 1996, 1995 and 1994

Net Income was $100.7 million or $3.36 per share in 1996 compared to $73.9
million or $2.64 per share in 1995 and $50.8 million or $2.15 per share in
1994. The improvement of $26.8 million in 1996 compared to 1995 resulted from
higher investment spread, higher fee income and net realized investment gains
in 1996 compared to net realized investment losses in 1995. Partially
offsetting these items were increased operating expenses, amortization expense,
interest expense and income tax expense. The full-period consolidation of the
1995 Colonial and Newport acquisitions resulted in an $8.9 million increase in
1996 net income compared to 1995. The improvement of $23.1 million in 1995
compared to 1994 resulted primarily from higher fee income associated with the
Colonial and Newport acquisitions and lower net realized investment losses in
1995. Partially offsetting these items were decreased investment spread and
increased operating expenses, amortization expense, interest expense and income
tax expense.

Pretax Income was $150.3 million in 1996 compared to $113.8 million in
1995 and $83.3 million in 1994. The higher pretax income in 1996 compared to
1995 resulted from higher investment spread, higher fee income, and net
realized investment gains in 1996 compared to net realized investment losses in
1995. The full-period consolidation of the 1995 Colonial and Newport
acquisitions resulted in an $11.9 million increase in 1996 pretax income
compared to 1995. The higher pretax income in 1995 compared to 1994 was
primarily due to the Colonial and Newport acquisitions, and to lower net
realized investment gains. Partially offsetting these increases in both years
were the higher expenses referred to above.

Investment Spread was $223.7 million in 1996 compared to $206.0 million in
1995 and $213.2 million in 1994. Investment spread percentage was 1.89% in 1996
compared to 1.90% in 1995 and 2.17% in 1994.

Investment income was $796.4 million in 1996 compared to $761.8 million in
1995 and $695.1 million in 1994. Investment income increased in 1996 compared
to 1995 primarily as a result of the higher level of average invested assets,
partially offset by a decrease in the average investment yield. The average
investment yield was 7.21% in 1996 compared to 7.57% in 1995. The decreased
investment yield in 1996 reflects the lower interest rates prevailing during
the latter half of 1995 and early 1996 and amortization of S&P 500 call
options, relating to equity-indexed annuities. Investment income increased in
1995 compared to 1994 primarily as a result of the higher level of average
invested assets. The investment yield increased slightly during 1995. The
average investment yield was 7.53% in 1994.

Interest credited to policyholders totaled $572.7 million in 1996 compared
to $555.8 million in 1995 and $481.9 million in 1994. Interest credited to
policyholders increased in 1996 compared to 1995 primarily as a result of a
higher level of average policyholder balances, partially offset by a decrease
in the average interest credited rate. Policyholder balances averaged $10.8
billion in 1996 compared to $9.8 billion in 1995. The average interest credited
rate was 5.32% in 1996 compared to 5.67% in 1995. Interest credited to
policyholders increased in 1995 compared to 1994 primarily as a result of the
higher level of average policyholder balances and to an increase in the average
interest credited rate. Policyholder balances averaged $9.8 billion in 1995
compared to $9.0 billion in 1994. The average interest credited rate was 5.36%
in 1994.

Average Investments (computed without giving effect to SFAS 115--See Note
1 of Notes to the Consolidated Financial Statements), including a portion of
the Company's cash and cash equivalents, were $11.0 billion in 1996 compared to
$10.1 billion in 1995 and $9.2 billion in 1994. The increase of $0.9 billion in
1996 compared to 1995 was primarily due to the F&G Life transaction and sales
of the Company's fixed and indexed annuities offset, in part, by withdrawals of
$1.1 billion. Fixed and indexed annuity premiums totaled $1.2 billion for 1996
compared to $1.1 billion for 1995 and $1.2 billion in 1994. The increase in
premiums in 1996 compared to 1995 was primarily attributable to

20
<PAGE>

the sales of equity-indexed annuities which were introduced during 1995. Sales
of equity-indexed annuities in 1996 totaled $655.2 million compared to $83.9
million in 1995. The decrease in total premiums in 1995 compared to 1994 was
primarily due to lower interest rates prevailing during the latter half of
1995, making fixed income products, such as the Company's SPDAs, less
competitive.

Net Realized Investment Gains were $8.0 million in 1996 compared to net
realized investment losses of $4.0 million in 1995 and net realized investment
losses of $8.2 million in 1994. The net realized investment gains in 1996 were
primarily attributable to sales of Keyport fixed maturity investments and sales
of investments received in the F&G Life transaction which were made to maximize
total return. The net realized investment losses in 1995 were attributable to
sales of Keyport fixed maturity investments which were made to maximize total
return. The net realized investment losses in 1994 were primarily due to
write-downs of investments whose declines in value were determined to be other
than temporary.

Investment Advisory and Administrative Fees were $196.4 million in 1996
compared to $155.8 million in 1995 and $95.9 million in 1994. The increase of
$40.6 million in 1996 compared to 1995 primarily reflects a higher level of
average fee-based assets under management due to the full year consolidation of
Colonial and Newport. A substantial portion of the $59.9 million increase in
1995 compared to 1994 was related to the fee income attributable to the assets
acquired in the Colonial acquisition in March 1995 and the Newport acquisition
in April 1995.

Average fee-based assets under management were $33.9 billion in 1996
compared to $27.2 billion in 1995 and $19.7 billion in 1994. The increase of
$6.7 billion during 1996 compared to 1995 was primarily due to the full year
inclusion of the assets acquired in the Colonial and Newport acquisitions, net
mutual fund sales and market appreciation. The increase of $7.5 billion in 1995
compared to 1994 was due to the Colonial and Newport acquisitions and to market
appreciation. Investment advisory and administrative fees were 0.58% of average
fee-based assets under management in 1996, 0.57% in 1995 and 0.49% in 1994.
These increases in the effective fee rate in 1996 and 1995 were primarily due to
the increased proportion of assets under management in mutual funds with
relatively higher fees.

Fee-based assets under management and changes in such assets are set forth
in the tables below (in billions).

Fee-Based Assets Under Management

<TABLE>
<CAPTION>
As of December 31,
--------------------------
1996 1995 1994
------- ------- ------
<S> <C> <C> <C>
Mutual funds:
Intermediary-distributed ..................... $16.1 $15.7 $ 1.3
Direct-marketed .............................. 6.6 4.8 4.5
Closed-end .................................... 1.9 1.8 0.8
Variable annuity .............................. 1.1 1.0 0.8
------ ------ ------
25.7 23.3 7.4
Wealth management .............................. 5.3 4.5 4.1
Institutional asset management .................. 4.9 4.1 4.8
------ ------ ------
Total fee-based assets under management* ...... $35.9 $31.9 $16.3
====== ====== ======
</TABLE>

- ----------------
* As of December 31, 1996, 1995 and 1994, Keyport's insurance assets of $12.1
billion, $10.6 billion and $9.3 billion, respectively, bring total assets
under management at those dates to $48.0 billion, $42.5 billion and $25.6
billion, respectively.

Changes in Fee-Based Assets Under Management

<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Fee-based assets under management--beginning ...... $ 31.9 $ 16.3 $ 21.7
Sales and reinvestments ........................... 7.5 4.8 2.6
Redemptions and withdrawals ........................ (5.7) (8.5) (6.7)
Acquisitions ....................................... 0.3 14.9 --
Market appreciation (depreciation) ............... 1.9 4.4 (1.3)
------ ------ ------
Fee-based assets under management--ending ......... $ 35.9 $ 31.9 $ 16.3
====== ====== ======
</TABLE>

21
<PAGE>

Redemptions and withdrawals during 1996, 1995 and 1994 include $1.0
billion, $4.6 billion and $4.5 billion, respectively, of withdrawals of assets
by wealth management and institutional asset management clients. In 1995,
redemptions also increased due to the $14.9 billion increase in the total
assets under management as a result of the acquisitions of Colonial and
Newport.

Distribution and Service Fees totaled $44.9 million in 1996 compared to
$28.9 million in 1995. There were no such fees prior to the acquisition of
Colonial. The increase of $16.0 million in 1996 compared to 1995 was primarily
attributable to the higher asset levels of mutual funds with contingent
deferred sales charges. As a percentage of weighted average assets,
distribution and service fees approximated 0.69% in each of 1996 and 1995.

Transfer Agency Fees were $43.9 million on average intermediary-distributed
and direct-marketed mutual funds assets of $22.6 billion in 1996, $30.8 million
on average assets of $17.4 billion in 1995 and $4.0 million on average assets of
$5.6 billion in 1994. The increase of $13.1 million in 1996 compared to 1995 was
primarily due to higher average assets in direct-marketed mutual funds. The
increase of $26.8 million in 1995 compared to 1994 was due to the acquisition of
Colonial. As a percentage of average mutual fund assets under management,
transfer agency fees were approximately 0.19%, 0.18% and 0.07% in 1996, 1995 and
1994, respectively.

Surrender Charges and Net Commissions were $34.7 million in 1996 compared
to $23.4 million in 1995 and $20.0 million in 1994.

Contingent deferred sales charges totaled $19.8 million, $18.4 million and
$11.5 million in 1996, 1995 and 1994, respectively. The increase in 1996
compared to 1995 was primarily attributable to the full-period consolidation of
Colonial. The increase in 1995 compared to 1994 was attributable to the
Colonial acquisition and higher earlier withdrawals subject to surrender
charges for annuity policyholders. Total fixed, indexed and variable annuity
withdrawals represented 11.6%, 9.9%, and 12.6% of the total average annuity
policyholder and separate account balances in 1996, 1995 and 1994,
respectively.

Net commissions were $14.9 million in 1996, $5.0 million in 1995 and $8.5
million in 1994. The increase in 1996 compared to 1995 was primarily
attributable to the acquisition of Independent in March 1996. The decrease in
1995 compared to 1994 was primarily attributable to lower sales of investment
and insurance products in the Company's bank marketing business.

Separate Account Fees were $16.0 million in 1996 compared to $13.2 million
in 1995 and $12.5 million in 1994. Such fees represented 1.68%, 1.61%, and
1.63% of average variable annuity and variable life separate account balances
in 1996, 1995 and 1994, respectively.

Operating Expenses were $277.9 million in 1996 compared to $225.1 million
in 1995 and $174.9 million in 1994. The increase in 1996 compared to 1995 was
primarily due to increases in compensation and marketing expenses relating to
mutual fund sales and to the acquisition of Independent. The increase in 1995
compared to 1994 includes $66.5 million of operating expenses related to
Colonial and Newport, offset, in part, by decreases in guaranty fund
association expense, stock option plan compensation expense and certain other
operating expenses. Operating expenses expressed as a percent of average total
assets under management were 0.61%, 0.59% and 0.59% in 1996, 1995, and 1994,
respectively.

Amortization of Deferred Policy Acquisition Costs was $60.2 million in
1996 compared to $58.5 million in 1995 and $52.2 million in 1994. The increase
in amortization in 1996 compared to 1995 was primarily due to a decrease in
estimated amortization periods determined in the last quarter of 1995 due to
shorter average policy lives, and to the growth of business in force associated
with fixed, indexed and variable annuity sales. The increase in 1995 compared
to 1994 was primarily attributable to a decrease in the estimated amortization
periods and lower projected fixed annuity surrender charges; in addition, this
increase was attributable to the growth in business in force during 1995 and
1994. Amortization expense represented 0.51%, 0.55% and 0.53% of the total
average policyholder and separate account balances in 1996, 1995 and 1994,
respectively.

Amortization of Deferred Distribution Costs was $33.9 million in 1996
compared to $18.8 million in 1995. There was no such expense prior to the
acquisition of Colonial. The increase in 1996 was primarily attributable to the
full period consolidation of Colonial, the continuing sales of mutual fund
shares with contingent deferred sales charges during 1996 and 1995 and a $3.8
million charge in the fourth quarter of 1996 relating to a reduction in the
amortization period.

22
<PAGE>

Amortization of Value of Insurance in Force was $10.2 million in 1996
compared to $9.5 million in 1995 and $17.0 million in 1994. The increase in
amortization in 1996 compared to 1995 was primarily due to $2.7 million of
amortization recorded in 1996 relating to the F&G Life transaction, partially
offset by lower amortization in 1996 due to an increase in estimated
amortization periods in the last quarter of 1995 of the Company's closed block
of single premium whole life insurance ("SPWLs"). The decrease in amortization
in 1995 compared to 1994 of $7.5 million was primarily related to the actual
persistency experience and higher expected future profits relating to the
Company's closed block of SPWLs.

Amortization of Intangible Assets was $15.4 million in 1996 compared to
$12.2 million in 1995 and $5.8 million in 1994. These increases were
attributable to the acquisitions of Independent, Colonial and Newport.

Interest Expense was $19.7 million in 1996 compared to $16.2 million in
1995 and $4.2 million in 1994. These increases are 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 to an affiliate of Liberty Mutual. See
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS--Matters Pertaining to Liberty
Mutual--Certain Other Transactions Involving Liberty Mutual."

Income Tax Expense was $49.6 million or 33.0% of pretax income in 1996
compared to $39.9 million, or 35.1% of pretax income in 1995, and $32.5
million, or 39.0% of pretax income in 1994. The lower effective tax rates in
1996 and 1995 were attributable primarily to reductions in the deferred tax
asset valuation reserve. For all periods, substantially all the federal income
tax expense related to the Company's annuity insurance business.

Financial Condition

Stockholders' Equity as of March 31, 1997 was $1.04 billion compared to
$1.05 billion and $0.96 billion, respectively, as of December 31, 1996 and
December 31, 1995. Net income in the first quarter of 1997 and in 1996 was $35.0
million and $100.7 million, respectively, and cash dividends on the Company's
preferred and common stock totaled $1.0 million and $3.9 million, respectively.
During the first quarter of 1997, Common Stock totaling $1.3 million was issued
in connection with the exercise of stock options. During 1996, Common Stock
totaling $8.5 million and $2.4 million was issued in connection with the
acquisition of Independent and upon the exercise of stock options, respectively.
A decrease in net unrealized investment gains, net of taxes and adjustments to
deferred policy acquisition costs and value of insurance in force, during the
first quarter of 1997 decreased stockholders' equity by $43.7 million. A
decrease in net unrealized investment gains, net of the same items referred to
in the previous sentence, during 1996 decreased stockholders' equity by $12.7
million. For a discussion of adjustments to stockholders' equity based upon net
unrealized investment gains and losses, see Note 1 of Notes to the Consolidated
Financial Statements.

Book Value Per Share amounted to $36.08 at March 31, 1997 compared to
$36.63 and $34.55 at December 31, 1996 and December 31, 1995, respectively.
Excluding net unrealized gains on investments, net of taxes and adjustments to
deferred policy acquisition costs and value of insurance in force, book value
per share would have amounted to $35.01, $34.04 and $31.40 at March 31, 1997,
December 31, 1996 and December 31, 1995, respectively. As of March 31, 1997,
there were 28.9 million shares of Common Stock outstanding compared to 28.7 and
27.7 million shares as of December 31, 1996 and December 31, 1995,
respectively.

Investments not including cash and cash equivalents totaled $11.5 billion
at March 31, 1997 and December 31, 1996 compared to $10.1 billion at December
31, 1995. The increase from December 31, 1995 reflects the investments acquired
in the F&G Life transaction, fixed and indexed annuity sales in 1996,
withdrawals and a decrease in net unrealized investment gains.

The Company manages a substantial portion of its invested assets
internally. The Company's general investment policy is to hold fixed maturity
assets for long-term investment and, accordingly, the Company does not have a
trading portfolio. To provide for maximum portfolio flexibility and appropriate
tax planning, the Company classifies its entire fixed maturities investments as
"available for sale" and accordingly carries such investments at fair value.

23
<PAGE>

The Company's total investments at March 31, 1997 and December 31, 1996
reflected net unrealized gains of $78.3 million and $229.8 million,
respectively, relating to its fixed maturity and equity portfolios. At December
31, 1995, such net unrealized investment gains were $308.5 million. The
decrease in net unrealized gains in 1996 principally reflects the higher
interest rates prevailing at the end of 1996.

Approximately $10.3 billion, or 81.9%, of the Company's general account
investments at March 31, 1997, was rated by Standard & Poor's Corporation,
Moody's Investors Service, Inc. or under comparable statutory rating guidelines
established by the NAIC. At March 31, 1997, the carrying value of investments
in below investment grade securities totaled $991.5 million, or 7.9% of general
account investments of $12.6 billion. Below investment grade securities
generally provide higher yields and involve greater risks than investment grade
securities because their issuers typically are more highly leveraged and more
vulnerable to adverse economic conditions than investment grade issuers. In
addition, the trading market for these securities may be more limited than for
investment grade securities. See "INVESTMENT CONSIDERATIONS--Investment
Portfolio Risk."

Management of the Company's Investments

Asset-liability management is utilized by the Company to minimize the
risks of interest rate fluctuations and policyholder withdrawals. The Company
believes that its fixed and indexed policyholder balances should be backed by
investments, principally comprised of fixed maturities, that generate
predictable rates of return. The Company does not have a specific target rate
of return. Instead, its rates of return vary over time depending on current
interest rates, the slope of the yield curve and the excess at which fixed
maturities are priced over the yield curve. Its portfolio strategy is designed
to achieve acceptable risk-adjusted returns by effectively managing portfolio
liquidity and credit quality.

The Company conducts its investment operations to closely match the
duration of the assets in its investment portfolio to its policyholder
balances. The Company seeks to achieve an acceptable spread between what it
earns on its assets and interest credited on its policyholder balances by
investing principally in fixed maturities. The Company's fixed-rate products
incorporate surrender charges to encourage persistency and make the cost of its
policyholder balances more predictable. Approximately 85.0% of the Company's
fixed annuity policyholder balances were subject to surrender charges at March
31, 1997. During the remaining nine months of 1997, and during 1998 and 1999,
policies having aggregate balances of $697.6 million, $993.8 million and $1.2
billion, respectively, were scheduled as of March 31, 1997 to come off the
surrender charge period.

As part of its asset-liability management discipline, the Company conducts
detailed computer simulations that model its fixed-maturity assets and
liabilities under commonly used stress-test interest rate scenarios. Based on
the results of these computer simulations, the investment portfolio has been
constructed with a view toward maintaining a desired investment spread between
the yield on portfolio assets and the interest credited on policyholder
balances under a variety of possible future interest rate scenarios. At March
31, 1997, the effective duration of the Company's fixed maturities investments
(including certain cash and cash equivalents) was approximately 2.8 years.

As a component of its investment strategy and to reduce its exposure to
interest rate risk in the event of an increasing interest rate environment, the
Company utilizes interest rate swap agreements ("swap agreements") to match
assets more closely to liabilities. Swap agreements are agreements to exchange
with a counterparty interest rate payments of differing character (e.g.,
fixed-rate payments exchanged for variable-rate payments) based on an
underlying principal balance (notional principal) to hedge against interest
rate changes. The Company currently utilizes swap agreements to reduce asset
duration and to better match interest rates earned on longer-term fixed rate
assets with interest credited to policyholders. At March 31, 1997, the Company
had 41 outstanding swap agreements with an aggregate notional principal amount
of $2.3 billion. These agreements mature in various years through 2001. In
addition, with respect to the Company's equity-indexed annuity, the Company
buys call options on the S&P 500 index to manage its obligation to provide
returns based upon this index. At March 31, 1997, the Company had call options
with a market value of $131.2 million.

There are risks associated with some of the techniques the Company uses to
match its assets and liabilities. The primary risk associated with swap and
call option agreements is counterparty nonperformance. The Company believes
that the counterparties to its swap and call option agreements are financially
responsible and that the counterparty risk associated with these transactions
is minimal. In addition, swap agreements have interest rate risk and call
options have stock market risk. However, the swap agreements hedge fixed-rate
assets; the Company expects that any interest rate movements that adversely
affect the market value of swap agreements would be offset

24
<PAGE>

by changes in the market values of such fixed rate assets. Similarly, the call
options hedge the Company's obligations to provide returns on equity-indexed
annuities based upon the S&P 500 index, and the Company believes that any stock
market movements that adversely affect the market value of S&P call options
would be substantially offset by a reduction in policyholder liabilities.
However, there can be no assurance that these hedges will be effective in
offsetting the potentially adverse effects of changes in S&P 500 index levels.
Keyport's profitability could be adversely affected if the value of its S&P 500
call options increase less than (or decrease more than) the value of the
guarantees made to equity-indexed policyholders.

The Company routinely reviews its portfolio of investment securities. The
Company identifies monthly any investments that require additional monitoring,
and carefully reviews the carrying value of such investments at least quarterly
to determine whether specific investments should be placed on a nonaccrual
basis and to determine declines in value that may be other than temporary.
There were no non-income producing investments in the Company's fixed maturity
portfolio at March 31, 1997 or December 31, 1996. In making these reviews, the
Company principally considers the adequacy of collateral (if any), compliance
with contractual covenants, the borrower's recent financial performance, news
reports, and other externally generated information concerning the borrower's
affairs. In the case of publicly traded fixed maturities investments,
management also considers market value quotations if available.

Liquidity and Capital Resources

The Company is a holding company whose liquidity needs include the
following: (i) operating expenses; (ii) debt service; (iii) dividends on the
preferred stock and Common Stock; (iv) acquisitions; and (v) working capital
where needed to fund its operating subsidiaries. The Company's principal
sources of cash are dividends from its operating subsidiaries and, in the case
of funding for acquisitions and certain long-term capital needs of its
subsidiaries, long-term borrowings (which to date have been from affiliates of
Liberty Mutual).

Current Rhode Island insurance law applicable to Keyport permits the
payment of dividends or distributions, which, together with dividends and
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 is approved by the Commissioner of
Insurance of the State of Rhode Island. As of December 31, 1996, the amount of
dividends that Keyport could pay without such approval was $42.5 million.
However, Keyport has not paid any dividends since its acquisition in 1988. The
terms of Colonial's existing senior credit facility place certain limitations
on Colonial's ability to pay dividends. Under the terms of the facility (as
amended in April 1997), Colonial could pay dividends of up to $87.2 million as
of March 31, 1997.

Based upon the historical cash flow of the Company, the Company's current
financial condition, 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 and the assumption that LFC
Holdings, Inc. will continue to participate in the DRIP, 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 its intentions to pay
dividends on the Common Stock. See "PRICE RANGE OF COMMON STOCK AND DIVIDENDS."
The Company anticipates that it would require external sources of liquidity in
order to finance material acquisitions where the purchase price is not paid in
equity.

Each of the Company's business segments has its own liquidity needs and
financial resources. In the Company's annuity insurance operations, liquidity
needs and financial resources pertain to the management of the general account
assets and policyholder balances. In the Company's asset management business,
liquidity needs and financial resources pertain to the investment management
and distribution of mutual funds, wealth management and institutional accounts.
The Company expects that, based upon their historical cash flow and current
prospects, its operating subsidiaries will be able to meet their liquidity
needs from internal sources and, in the case of Colonial, from its credit
facility used to finance sales of mutual fund shares sold with contingent
deferred sales charges.

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 annuity premiums and deposits, net
investment income and from maturities of fixed investments. Annuity premiums,
maturing investments and net investment income have historically been
sufficient to meet Keyport's cash requirements. Keyport monitors cash

25
<PAGE>

and cash equivalents in an effort to maintain sufficient liquidity and has
strategies in place designed 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, 1997, $9.3 billion, or 73.4%, of
Keyport's general account investments are considered readily marketable. See
"BUSINESS--Keyport--General Account Investments."

To the extent that unanticipated surrenders cause Keyport to sell for
liquidity purposes a material amount of securities prior to their maturity,
such surrenders could have a material adverse effect on the Company. See
"INVESTMENT CONSIDERATIONS--Interest Rate Risk." Although no assurances can be
given, Keyport believes that liquidity to fund anticipated withdrawals would be
available through incoming cash flow, the sale of short-term or floating-rate
instruments or investment securities in its short duration portfolio, thereby
precluding the sale of fixed maturity investments in a potentially unfavorable
market.

Effects of Inflation

Inflation has not had a material effect on the Company's consolidated
results of operations to date. The Company manages its investment portfolio in
part to reduce its exposure to interest rate fluctuations. In general, the
market value of the Company's fixed maturity portfolio increases or decreases
in inverse relationship with fluctuations in interest rates, and the Company's
net investment income increases or decreases in direct relationship with
interest rate changes. For example, if interest rates decline the Company's
fixed maturity investments generally will increase in market value, while net
investment income will decrease as fixed maturity investments mature or are
sold and the proceeds are reinvested at reduced rates. 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 February 1997, FASB issued Statement of Financial Accounting Standards
No. 128, "Earnings per Share" ("SFAS 128"), which is required to be adopted for
periods ending after December 15, 1997. SFAS 128 replaces primary and fully
diluted earnings per share with basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed similarly to fully diluted
earnings per share. Assuming that SFAS 128 had been implemented, basic earnings
per share would have been $1.21 and $0.85 for the first quarters of 1997 and
1996, respectively. The calculation of diluted earnings per share under SFAS
128 for these quarters would not materially differ from the calculation of
fully diluted earnings per share.

Recent Accounting Proposal

In June 1996, FASB issued an exposure draft of an accounting standard
entitled "Accounting for Derivative and Similar Financial Instruments and for
Hedging Activities." This exposure draft, if adopted in the form in which it
was issued, would require companies to report derivatives on the balance sheet
at fair value with changes in fair value recorded in income or equity. The
exposure draft also would change the accounting for derivatives used in hedging
strategies from traditional deferral accounting to a current recognition
approach which could impact a company's income statement and balance sheet and
expand the definition of a derivative instrument. Management expects that this
accounting standard, in whatever form, will not be effective until 1999. FASB's
Rules of Procedure require that, prior to approving a new accounting standard,
extensive "due process" be followed. FASB requests written comments from
interested parties on an exposure draft and also may hold public hearings. This
exposure draft has drawn criticism primarily because the required accounting
treatment would not match the perceived economic effect of such hedging
strategies. As a result of, among other things, the concerns and criticisms in
comment letters and at public hearings held on this exposure draft, the Company
is unable to predict the form that the final accounting standard, if adopted,
may take and believes it would be inappropriate to speculate on the effects of
any such adoption at this time.

26
<PAGE>

BUSINESS

Liberty Financial is a leading asset accumulation and management company.
The Company is a leader in each of its two core product lines--retirement-
oriented insurance products and investment management products. Retirement-
oriented insurance products consist substantially of annuities, and investment
management products consist of mutual funds, wealth management and institutional
asset management. The Company sells its products through multiple distribution
channels, including brokerage firms, banks and other depository institutions,
financial planners and insurance agents, as well as directly to investors. The
Company's net operating income (i.e., net income excluding net realized
investment gains and losses, net of related income taxes) was $26.7 million in
the first quarter of 1997, and $94.8 million, $76.5 million and $56.2 million
and in 1996, 1995 and 1994, respectively. The following table sets forth the
Company's assets under management as of March 31, 1997 and December 31, 1996,
1995 and 1994:

Multiple Asset Accumulation Products. The Company sells a full range of
retirement-oriented insurance products, grouped by whether they provide fixed,
indexed or variable returns to policyholders. Substantially all of these
products currently are annuities that are written by Keyport, one of the
country's leading and most innovative annuity companies. Annuities are
insurance products which provide a tax-deferred means of accumulating savings
for retirement needs, as well as a tax-efficient source of income in the payout
period. The Company's principal fixed annuity products are SPDAs, which
represented $8.6 billion of policyholder liabilities as of March 31, 1997. In
addition to SPDAs, Keyport also sells equity-indexed and variable annuities.
Equity-indexed annuities are an innovative product first introduced to the
marketplace by the Company when it began selling its KeyIndex[RegTM] product in
1995. An equity-indexed annuity credits interest to the policyholder at a
"participation rate" equal to a portion of the change in value of a specified
equity index (in the case of KeyIndex, the Standard & Poor's 500 Composite
Stock Index).

The Company has four operating units engaged in investment management:
Colonial, Stein Roe, Newport and LAMCO, each of which carries strong brand name
recognition in the markets it serves. As of the date of this Prospectus, the
Company sponsored 67 open-end mutual funds, as well as seven closed-end funds.
The open-end funds consist of 36 intermediary-distributed Colonial mutual
funds, 20 direct-marketed Stein Roe funds and 11 other funds included among the
investment options available under the Company's variable annuities. The
closed-end funds consist of five Colonial funds and two LAMCO funds. Forty-nine
of the Company's 67 open-end mutual funds are long-term funds (defined as
open-end funds having at least a three-year performance record, excluding funds
that invest solely in money market securities). Thirty-eight of those 49 funds
(representing 68% of the total assets in those 49 funds as of May 31, 1997),
were ranked by Lipper Analytical Services, Inc. in the top two quartiles of
their respective peer groups for the three-year period ended that date.

27
<PAGE>

March 31, 1997 and during 1996, 53% and 61%, respectively, of sales were made
through intermediary distributors, with the balance made directly to the
investor. Over 35,000 individual brokers and other intermediaries sold Liberty
Financial products in 1996.

Business Strategy. The Company's business strategy has four interrelated
elements:

[bullet] Innovation. Liberty Financial believes that product and
distribution innovations are essential in order to grow its asset base
and meet the ever changing financial needs of its customers. The Company
believes that it has an impressive track record in such innovations. For
example, Newport created the first U.S.-based mutual fund to focus
exclusively on the "Tiger" countries of Asia. This fund had $1.7
billion of assets under management as of March 31, 1997. The Stein Roe
Young Investor Fund was the first mutual fund to be coupled with an
educational program to teach young people about investing, while
offering parents an excellent device to save for educational and other
family needs. The Stein Roe Young Investor Fund had $330.3 million of
assets under management and over 85,000 shareholders of record as of
March 31, 1997. The Company introduced the first equity-indexed
annuity product to the marketplace. At March 31, 1997 and December 31,
1996, the Company's equity-indexed annuity policyholder balances were
$926.8 million and $787.8 million, respectively. The Company's
equity-indexed annuity sales during the three months ended March 31,
1997 and during 1996 were $123.4 million and $655.2 million,
respectively. The Company is also recognized as a leader in electronic
commerce on the Internet. For example, in early 1997, the Company
introduced a new Web site for Stein Roe funds which incorporates
state-of-the-art security and customization features.

[bullet] Acquisitions. Where appropriate, the Company seeks acquisitions
that provide additional assets, new and complementary investment
management capabilities, distribution capabilities or other integration
or diversification opportunities in its core product areas. Acquisitions
are an integral part of Liberty Financial's business strategy. Stein Roe
(acquired in 1986), Keyport (acquired in 1988), Colonial (acquired in
1995), Newport (acquired in 1995) and major components of the Company's
bank distribution unit (including Independent, acquired in 1996) all
joined Liberty Financial by acquisition. The Company has also made asset
acquisitions, including most recently a coinsurance agreement with
respect to a $954.0 million block of SPDAs entered into in August, 1996.
Current areas of focus for the Company's acquisition efforts include the
following: mutual funds, with particular focus on equities and foreign
markets; other new or complementary investment skills; additional
distribution capabilities; wealth management firms that can be
integrated into Stein Roe and can leverage and expand Stein Roe's
franchise in the wealth management market; and blocks of annuity assets
that can be purchased or

28
<PAGE>

coinsured. While the Company is constantly evaluating acquisition
opportunities, as of the date of this Prospectus the Company has not
entered into any definitive agreement for a material acquisition.

Retirement-Oriented Insurance Products

The Company sells a full range of retirement-oriented insurance products,
grouped by whether they provide fixed, indexed or variable returns to
policyholders. Substantially all of these products are annuities that are
written by Keyport. Annuities are insurance products designed to offer
individuals protection against the risk of outliving their financial assets
during retirement. Annuities offer a tax-deferred means of accumulating savings
for retirement needs and provide a tax-efficient source of income in the payout
period. The Company earns spread income from fixed and indexed annuities;
variable annuities primarily produce fee income for the Company.

Products

The Company's principal retirement-oriented insurance products are
categorized as follows:

[bullet] Fixed Annuities. The Company's principal fixed annuity products
are SPDAs. An SPDA policyholder typically makes a single premium payment
at the time of issuance. The Company obligates itself to credit interest
to the policyholder's account at a rate that is guaranteed for an initial
term (typically one year) and is reset annually thereafter, subject to a
guaranteed minimum rate. Interest crediting continues until the policy is
surrendered or the policyholder retires or turns age 90.

[bullet] Equity-Indexed Annuities. Equity-indexed annuities are an
innovative product first introduced to the marketplace in 1995 by the
Company when it began selling its KeyIndex product. An equity-indexed
annuity credits interest to the policyholder at a "participation rate"
equal to a portion (ranging for existing policies from 60% to 95%) of the
change in value of a specified equity index. KeyIndex is currently
offered for one, five and seven-year terms with interest earnings based
on a percentage of the increase in the S&P 500 Index. With the five and
seven-year terms, the interest earnings are based on the highest policy
anniversary date value of the S&P 500 Index during the term. KeyIndex
also provides a guarantee of principal at the end of the term. Thus,
unlike a direct equity investment, even if the S&P 500 Index declines
there is no risk to the policyholder's principal. In late 1996, the
Company introduced a market value adjusted ("MVA") annuity product, sales
of which have not been material to date, which offers a choice between an
equity-indexed account similar to KeyIndex and a fixed annuity-type
interest account. The MVA product offers terms for each equity-indexed
account of one, three, five, six and seven years, as well as a 10-year
term for the fixed interest account. The MVA shifts some investment risk
to the policyholder, since surrender of the policy before the end of the
policy term will result in increased or decreased account values based on
the change in rates of designated Treasury securities since the beginning
of the term. The Company is continuing to develop new versions of its
equity-indexed annuities, including versions registered under the
Securities Act which are designed to be sold through major national
brokerage firms.

[bullet] Variable Annuities. Variable annuities offer a selection of
underlying investment alternatives which may satisfy a variety of
policyholder risk/return objectives. In a variable annuity, the
policyholder has the opportunity to select separate account investment
options (consisting of underlying mutual funds) which pass the investment
risk directly to the policyholder in return for the potential of higher
returns. Guaranteed fixed interest options also are available. The
Company's Keyport Advisor variable annuity currently offers 17 separate
account investment choices (substantially all of the assets of which are
managed by the Company) and four guaranteed fixed-interest options.

While the Company currently does not offer traditional life insurance
products, it manages a closed block of SPWLs, a retirement-oriented
tax-advantaged life insurance product. The Company discontinued sales of SPWLs
in response to certain tax law changes in the 1980s. The Company had SPWL
policyholder balances of $2.0 billion as of March 31, 1997 and December 31,
1996.

29
<PAGE>

Under the Code, returns credited on annuities and life insurance policies
during the accumulation period (the period during which interest or other
returns are credited) are not subject to federal or state income tax. Proceeds
payable on death from a life insurance policy are also free from such taxes. At
the maturity or payment date of an annuity policy, the policyholder is entitled
to receive the original deposit plus accumulated returns. The policyholder may
elect to take this amount in either a lump sum or an annuitized series of
payments over time. The return component of such payments is taxed at the time
of receipt as ordinary income at the recipient's then applicable tax rate. The
demand for the Company's retirement-oriented insurance products could be
adversely affected by changes in this tax treatment. See "INVESTMENT
CONSIDERATIONS--Tax Status of Insurance Products."

The Company's mix of annuity products is designed to include products in
demand under a variety of economic and market conditions. Sales of SPDAs tend
to be sensitive to prevailing interest rates. Sales can be expected to increase
and surrenders to decrease in interest rate environments when SPDA rates are
higher than rates offered by competing conservative fixed return investments,
such as bank certificates of deposit. SPDA sales can be expected to decline and
surrenders to increase in interest rate environments when this differential in
rates is not present. SPDA sales also can be adversely affected by low interest
rates. The Company believes that the recent decline in the sale of the
Company's SPDAs has resulted from this type of low interest rate environment.
The sales trend of the Company's equity-indexed products declined during the
first quarter of 1997 from the sales levels the Company experienced in 1996.
The Company believes that the decline is due to an increase in the number of
firms offering competing products and lower participation rates offered by the
Company resulting from increased volatility in the S&P 500.

The following table sets forth certain information regarding Keyport's
retirement-oriented insurance products and its reserves for the periods
indicated.

<TABLE>
<CAPTION>
As of or for
the Three As of or for the Year Ended
Months Ended December 31,
March 31, ----------------------------
1997 1996 1995 1994
------------- --------- --------- ---------
(dollars in millions, except policy data)
<S> <C> <C> <C> <C>
Policy and Separate Account Liabilities:
Fixed annuities ........................ $ 8,564 $ 8,641 $ 7,772 $ 7,072
Indexed annuities ..................... 927 788 84 --
Variable annuities ..................... 1,101 1,083 950 812
Life insurance ........................ 2,133 2,142 2,168 2,224
-------- -------- -------- --------
Total ................................. $12,725 $12,654 $10,974 $10,108
======== ======== ======== ========
Number of In Force Policies:
Fixed annuities ........................ 232,255 236,574 224,238 212,390
Indexed annuities ..................... 27,804 24,174 2,778 --
Variable annuities ..................... 25,314 25,177 25,037 25,400
Life insurance ........................ 26,413 26,850 28,489 30,465
-------- -------- -------- --------
Total ................................. 311,786 312,775 280,542 268,255
======== ======== ======== ========
Average In Force Policy Amount:
Fixed annuities ........................ $36,808 $36,479 $34,611 $33,247
Indexed annuities ..................... $33,335 $32,591 $30,207 --
Variable annuities ..................... $43,502 $43,035 $37,941 $31,985
Life insurance ........................ $79,917 $79,207 $75,728 $72,756
</TABLE>

30
<PAGE>

<TABLE>
<CAPTION>
As of or for
the Three
Months Ended As of or for the Year Ended
March 31, December 31,
-------------- ----------------------------------
1997 1996 1995 1994
-------------- -------- ------------ ------------
(dollars in millions, except policy data)
<S> <C> <C> <C> <C>
Premiums (statutory basis):
Fixed annuities ................................. $ 68 $ 493 $ 977 $1,156
Indexed annuities .............................. 123 655 84 --
Variable annuities .............................. 31 97 80 156
Life insurance (net of reinsurance) ............ -- -- (1) (1)
------ ------ ------- -------
Total .......................................... $ 222 $1,245 $1,140 $1,311
====== ====== ======= =======
New Contracts and Policies:
Fixed annuities ................................. 2,419 11,358 30,043 45,557
Indexed annuities .............................. 3,620 21,396 2,778 --
Variable annuities .............................. 631 1,814 1,789 4,117
------ ------ ------- -------
Total .......................................... 6,670 34,568 34,610 49,674
====== ====== ======= =======
Aggregate Amount Subject to Surrender Charges and
Similar Penalties:
Fixed annuities ................................. $7,323 $7,371 $6,904 $6,168
Indexed annuities .............................. $ 927 $ 788 $ 84 --
Withdrawals and Terminations (statutory basis):
Fixed Annuities:
Death .......................................... $ 11 $ 25 $ 15 $ 16
Maturity ....................................... $ 26 $ 87 $ 76 $ 65
Surrender .................................... $ 241 $ 966 $ 693 $ 826
Indexed Annuities:
Death .......................................... $ 0.3 $ 0.1 -- --
Maturity ....................................... -- -- -- --
Surrender ....................................... $ 3 $ 3 -- --
Variable Annuities:
Death .......................................... $ 2 $ 2 $ 0.4 $ 0.6
Maturity ....................................... $ 6 $ 21 $ 14 $ 16
Surrender .................................... $ 23 $ 77 $ 92 $ 76
Life Insurance:
Death .......................................... $ 18 $ 53 $ 54 $ 49
Surrender ....................................... $ 25 $ 98 $ 95 $ 89
Surrender Rates:
Fixed annuities ................................. 11.19% 11.79% 9.34% 12.34%
Indexed annuities .............................. 1.52% 0.69% 0.12% --
Variable annuities .............................. 8.48% 7.55% 10.46% 9.54%
Life insurance ................................. 4.60% 4.58% 4.36% 3.73%
</TABLE>

Sales and Asset Retention

Product sales are influenced primarily by overall market conditions
impacting the attractiveness of the Company's retirement-oriented insurance
products, and by product features, including interest crediting and
participation rates, and innovations and services that distinguish the
Company's products from those of its competitors.

The Company's insurance products include important features designed to
promote both sales and asset retention, including crediting rates and surrender
charges. Initial interest crediting and participation rates on fixed and
indexed products significantly influence the sale of new policies. Resetting of
rates on SPDAs impacts retention of SPDA assets, particularly on policies where
surrender penalties have expired. At March 31, 1997, crediting rates

31
<PAGE>

on 93.0% of the Company's in force SPDA policy liabilities were subject to
reset during the succeeding 12 months. In setting crediting and participation
rates, the Company takes into account yield characteristics on its investment
portfolio, surrender rate assumptions and competitive industry pricing.
Interest crediting rates on the Company's in force SPDAs ranged from 4.0% to
8.0% at March 31, 1997. Such policies had guaranteed minimum rates ranging from
3.0% to 4.5% as of such date. Initial interest crediting rates on new policies
issued in 1996 and on new policies issued in the three months ended March 31,
1997 ranged from 4.65% to 7.15% and from 5.15% to 6.86%, respectively.
Guaranteed minimum rates on new policies ranged from 3.0% to 4.5% issued during
1996 and the three months ended March 31, 1997.

All of the Company's insurance products permit the policyholder at anytime
to withdraw all or any part of the accumulated policy value. Premature
termination of a policy results in the loss by the Company of anticipated
future earnings related to the premium deposit and the accelerated recognition
of the expenses related to policy acquisition (principally commissions), which
otherwise are deferred and amortized over the life of the policy. Surrender
charges provide a measure of protection against premature withdrawal of policy
values. Substantially all of the Company's insurance products currently are
issued with surrender charges or similar penalties. Such surrender charges for
all policies except KeyIndex typically start at 7% of the policy premium and
then decline to zero over a five- to seven-year period. KeyIndex imposes a
penalty on surrender of up to 10% of the premium deposit for the life of the
policy. At March 31, 1997, 85.0% of the Company's SPDAs remained in the
surrender charge period. Surrender charges generally do not apply to
withdrawals by policyholders of, depending on the policy, either up to 10% per
year of the then accumulated value or the accumulated returns. In addition,
certain policies may provide for charge-free withdrawals in certain
circumstances and at certain times. All policies except for certain variable
annuities also are subject to "free look" risk (the legal right of the
policyholder to cancel the policy and receive back the initial premium deposit,
without interest, for a period ranging from 10 days to one year, depending upon
the policy). To the extent a policyholder exercises the "free look" option, the
Company 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. While SPWLs also permit withdrawal, the withdrawal
generally would produce significant adverse tax consequences to the
policyholder. See "INVESTMENT CONSIDERATIONS--Other Factors Affecting Product
Sales and Asset Retention" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE
RESULTS OF OPERATIONS AND FINANCIAL CONDITION."

Keyport's strong financial ratings are important to its ability to
accumulate and retain assets. Keyport is rated "A+" (Superior) by A.M. Best,
"AA-" (excellent financial security) by S&P, "A1" (good financial strength) by
Moody's and AA- (very high claims paying ability) by Duff & Phelps. "A+" is
A.M. Best's second highest rating. The S&P and Duff & Phelps "-" modifier
signifies that Keyport is at the lower end of the AA category. These ratings
are based upon information supplied to the rating agency by Keyport. These
ratings reflect the opinion of the rating agency as to the relative financial
strength of Keyport and Keyport's ability to meet its contractual obligations
to its policyholders. Such ratings are not "market" ratings or recommendations
to use or invest in Keyport or Liberty Financial and should not be relied upon
when making a decision to invest in the Common Stock. 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, the level of surrenders on existing policies and the Company's
relationships with distributors could be materially adversely affected. No
assurance can be given that Keyport will be able to maintain its financial
ratings. See "INVESTMENT CONSIDERATIONS--Importance of Credit Ratings for
Annuities."

Customer service also is essential to asset accumulation and retention.
The Company believes Keyport has a reputation for excellent service to its
distributors and its policyholders. Keyport has developed advanced technology
systems for immediate response to customer inquiries, and rapid processing of
policy issuances and commission payments (often at the point of sale). These
systems also play an important role in controlling costs. Keyport's annualized
operating expenses for 1996 were 0.44% of assets, making Keyport a low cost
operator.

General Account Investments

Premium deposits on fixed and indexed annuities are credited to Keyport's
general account investments (which at March 31, 1997 totaled $12.6 billion). To
maintain its investment spreads at acceptable levels, the Company must earn
returns on its general account sufficiently in excess of the fixed or indexed
returns credited to policyholders. The key element of this investment process
is asset/liability management. Successful asset/liability management

32
<PAGE>

requires both a quantitative assessment of overall policy liabilities
(including maturities, surrenders and crediting of interest) and prudent
investment of general account assets. The two most important tools in managing
policy liabilities are setting crediting rates and establishing surrender
periods. The investment process requires portfolio techniques that earn
acceptable yields while effectively managing both interest rate risk and credit
risk. The Company emphasizes a conservative approach to asset/liability
management, which is oriented toward reducing downside risk in adverse markets,
as opposed to maximizing spread in favorable markets. The approach is also
designed to reduce earnings volatility. Various factors can impact the
Company's investment spread, including changes in interest rates and other
factors affecting the Company's general account investments. There can be no
assurances that Keyport will continue to realize investment spreads at levels
necessary for the Company to remain profitable. See "INVESTMENT
CONSIDERATIONS--Interest Rate Risk" and "--Investment Portfolio Risks."

The bulk of the Company's general account is invested in fixed maturity
securities (84.9% at March 31, 1997). The Company's principal strategy for
managing interest rate risk is to closely match the duration of its investment
portfolio and its policyholder balances. At March 31, 1997, the duration of its
fixed income portfolio was approximately 2.8 years. The Company also employs
hedging strategies to manage this risk, including interest rate swaps and caps.
In the case of equity-indexed products, the Company purchases S&P 500 call
options to hedge its obligations to provide participation rate returns. Credit
risk is managed by careful credit analysis and monitoring. At March 31, 1997,
the Company's fixed maturity portfolio had an overall average S&P rating of A+
and 92.1% of the Company's general account investments consisted of investment
grade securities. The balance was invested in below investment grade securities
to enhance overall portfolio yield. Below investment grade securities pose
greater risks than investment grade securities. The Company actively manages
its below investment grade portfolio in an effort to optimize its risk/return
profile. There were no non-income producing investments in the Company's fixed
maturity portfolio at March 31, 1997 or December 31, 1996. For a more detailed
description of the management of the Company's general account investments see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL
CONDITION--Management of the Company's Investments."

Stein Roe manages a substantial portion ($9.3 billion at March 31, 1997)
of Keyport's general account assets. In addition, several unaffiliated parties
manage portions of the general account in order to obtain diversification of
investment styles and asset classes. Keyport continuously reevaluates the
allocation of assets among the managers and has determined that it will increase
its allocation to the unaffiliated managers during the second half of 1997. Such
reallocation is not expected to have any material effect on the Company's
investment spread.

Investments and certain cash and cash equivalents, all of which pertain to
the Company's annuity insurance operations, were comprised of the following as
of the dates indicated (in millions):

<TABLE>
<CAPTION>
As of
As of December 31,
March 31, ------------------------
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Fixed maturities available for sale ...... $10,683.7 $10,718.6 $ 9,536.0
Mortgage loans ........................... 65.3 67.0 74.5
Policy loans .............................. 538.8 532.8 498.3
Other invested assets ..................... 216.3 183.6 10.7
Equity securities ........................ 37.4 35.9 25.2
---------- ---------- ----------
Investments ........................... 11,541.5 11,537.9 10,144.7
Cash and cash equivalents ............... 1,036.5 767.4 777.4
---------- ---------- ----------
General account investments ............ $12,578.0 $12,305.3 $10,922.1
========== ========== ==========
</TABLE>

33
<PAGE>

The amortized cost, gross unrealized gains and losses and fair value of
fixed maturity securities by types of securities were as follows as of the
dates indicated (in millions):

<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
March 31, 1997 Cost Gains Losses Value
--------------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities .............................. $ 35.3 $ 0.1 $ (0.7) $ 34.7
Mortgage backed securities of U.S. government
corporations and agencies ........................... 1,641.5 28.0 (18.1) 1,651.4
Obligations of states and political subdivisions ...... 41.2 0.2 (0.3) 41.1
Debt securities issued by foreign governments ......... 177.1 5.8 (1.1) 181.8
Corporate securities ................................. 4,325.7 97.6 (42.1) 4,381.2
Other mortgage backed securities ..................... 2,350.3 43.9 (35.6) 2,358.6
Asset backed securities .............................. 1,776.3 7.2 (18.5) 1,765.0
Senior secured loans ................................. 269.9 --- --- 269.9
---------- ----------- ---------- ----------
Total fixed maturities .............................. $10,617.3 $ 182.8 $ (116.4) $10,683.7
========== =========== ========== ==========
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1996 Cost Gains Losses Value
---------- ----------- ---------- ---------
U.S. Treasury securities .............................. $ 35.3 $ 0.2 $ (0.1) $ 35.4
Mortgage backed securities of U.S. government
corporations and agencies ........................... 1,666.1 41.4 (8.6) 1,698.9
Obligations of states and political subdivisions ...... 23.9 0.4 (0.1) 24.2
Debt securities issued by foreign governments ......... 246.3 11.7 (0.5) 257.5
Corporate securities ................................. 4,093.5 153.4 (12.3) 4,234.6
Other mortgage backed securities ..................... 2,413.0 47.6 (24.0) 2,436.6
Asset backed securities .............................. 1,736.0 15.5 (6.4) 1,745.1
Senior secured loans ................................. 286.3 -- -- 286.3
---------- ----------- ---------- ----------
Total fixed maturities ............................... $10,500.4 $ 270.2 $ (52.0) $10,718.6
========== =========== ========== ==========
Gross Gross
Amortized Unrealized Unrealized Fair
December 31, 1995 Cost Gains Losses Value
---------- ----------- ---------- ---------
U.S. Treasury securities .............................. $ 360.2 $ 9.0 $ (0.2) $ 369.0
Mortgage backed securities of U.S. government
corporations and agencies ........................... 1,585.5 58.8 (5.2) 1,639.1
Obligations of states and political subdivision ...... 26.7 1.3 -- 28.0
Debt securities issued by foreign governments ......... 57.4 4.3 -- 61.7
Corporate securities ................................. 3,479.6 224.3 (7.3) 3,696.6
Other mortgage backed securities ..................... 1,951.5 66.6 (71.8) 1,946.3
Asset backed securities .............................. 1,543.9 29.8 (1.5) 1,572.2
Senior secured loans ................................. 223.1 -- -- 223.1
---------- ----------- ---------- ----------
Total fixed maturities ............................... $ 9,227.9 $ 394.1 $ (86.0) $ 9,536.0
========== =========== ========== ==========
</TABLE>

The amortized cost and fair value of fixed maturities by contractual
maturity as of March 31, 1997 are as follows (in millions):

<TABLE>
<CAPTION>
Amortized Fair
March 31, 1997 Cost Value
----------- ----------
<S> <C> <C>
Due in one year or less ..................... $ 306.8 $ 307.4
Due after one year through five years ...... 1,606.0 1,624.8
Due after five years through ten years ...... 2,181.4 2,206.1
Due after ten years ........................... 755.0 770.4
---------- ----------
4,849.2 4,908.7
Mortgage and asset backed securities ......... 5,768.1 5,775.0
---------- ----------
Total fixed maturities ..................... $10,617.3 $10,683.7
========== ==========
</TABLE>

34
<PAGE>

As of March 31, 1997, Keyport owned approximately $4.0 billion of MBSs
(31.9% of its general account investments), 96.9% of which were investment
grade. MBSs are subject to significant prepayment and extension risks, since
the underlying mortgages may be repaid more or less rapidly than scheduled. See
"INVESTMENT CONSIDERATIONS--Investment Portfolio Risks."

As of March 31, 1997, approximately $3.3 billion (26.6% of the Company's
general account investments) were invested in securities which were sold
without registration under the Securities Act and were not freely tradeable
under the Securities Act or which were otherwise illiquid. These securities may
be resold pursuant to an exemption from registration under the Securities Act.
If the Company 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 levels. See "INVESTMENT
CONSIDERATIONS--Investment Portfolio Risks."

Investment Management

Liberty Financial has three types of investment management products:
mutual funds, wealth management, and institutional asset management. The
Company has four separate operating units engaged in investment management:
Colonial, Stein Roe, Newport and LAMCO.

Products and Services

[bullet] Mutual Funds. The Company sponsors 67 open-end mutual funds, as well
as seven closed-end funds. The open-end funds include the 36
intermediary-distributed Colonial mutual funds, 20 direct-marketed
Stein Roe funds and 11 other funds included among the investment
options available under the Company's variable annuities. The
closed-end funds include five Colonial funds and two LAMCO funds. At
March 31, 1997 and December 31, 1996, total mutual fund assets were
$24.8 billion and $25.7 billion, respectively. At March 31, 1997, 46.5
% of these assets were invested in equity funds, 27.4% in taxable
fixed income funds and 26.1% in tax-exempt fixed income funds. The
Company seeks to increase equity mutual fund assets, which generally
carry higher fees than funds that invest in fixed income securities.

[bullet] Wealth Management. At March 31, 1997, the Company managed $5.5 billion
in investment portfolios for high net worth individuals and families
and smaller institutional investors, all of which are managed by Stein
Roe.

[bullet] Institutional Asset Management. At March 31, 1997, the Company managed
$4.5 billion of investment portfolios for institutional investors such
as insurance companies, public and private retirement funds,
endowments, foundations and other institutions. Most of these assets
are managed by Stein Roe. Stein Roe also manages a substantial
portion of Keyport's general account assets supporting Keyport's
insurance products.

The Company's investment management business focuses on managing the
investments of each client's portfolios in accordance with the client's
investment objectives and policies. The Company also provides related
administrative and support services to clients, such as portfolio pricing,
accounting and reporting. Investment management fees and related administrative
and support fees generally are charged as a percentage of assets under
management. Client accounts are managed pursuant to a written agreement which,
with limited exceptions, is terminable at any time upon relatively short notice
(typically 30-60 days).

In the case of mutual fund clients, all services provided by the Company
are subject to the supervision of the fund's Board of Trustees. Additional
administrative services provided to mutual funds include provision of office
space, other facilities and personnel, marketing and distribution services, and
transfer agency and other shareholder support services. Investment management
fees paid by a mutual fund must be approved annually by the fund's Board of
Trustees, including a majority of the independent Trustees. Any increases in
such fees also must be approved by fund shareholders. Most of the Company's
mutual fund assets are held in open-end funds. Shareholders of open-
end funds generally can redeem their shares on a daily basis.

The Company's direct-market mutual funds are sold without a sales load.
Most of the Company's intermediary-distributed mutual 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 contingent
deferred sales charge, 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.
Most funds also offer a level-load option, in which the investor pays a small
initial

35
<PAGE>

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. Colonial is a party to a
revolving credit facility with certain lenders, pursuant to which such lenders
have agreed to lend up to $60.0 million to Colonial to finance the sale of
shares of the mutual funds sponsored by Colonial which have contingent deferred
sales charges.

The following tables present certain information regarding the Company's
assets under management as of or for the three month period ended March 31,
1997 and as of or for each year in the three-year period ended December 31,
1996. Such information includes Keyport's assets (including its general account
assets managed by Stein Roe, as well as loans to policyholders and Keyport's
general account assets managed by unaffiliated investment managers). In
addition, certain information is provided separately for mutual fund assets.

<TABLE>
<CAPTION>
Total Assets Under Management
---------------------------------------------
As of December 31,
--------------------------
As of
March 31, 1997 1996 1995 1994
---------------- ------- ------- ------
(dollars in
billions)
<S> <C> <C> <C> <C>
Mutual funds:
Intermediary-distributed .................. $15.6 $16.1 $15.7 $ 1.3
Direct-marketed ........................... 6.2 6.6 4.8 4.5
Closed-end ................................. 1.9 1.9 1.8 0.8
Variable annuity ........................... 1.1 1.1 1.0 0.8
------ ------ ------ ------
Total mutual funds ........................ 24.8 25.7 23.3 7.4
Wealth management ........................... 5.5 5.3 4.5 4.1
Institutional asset management .............. 4.5 4.9 4.1 4.8
Retirement-oriented insurance products ...... 12.2 12.1 10.6 9.3
------ ------ ------ ------
Total ................................. $47.0 $48.0 $42.5 $25.6
====== ====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
Total Assets Under Management
By Asset Class (1)
---------------------------------------------
As of December 31,
--------------------------
As of
March 31, 1997 1996 1995 1994
---------------- ------- ------- ------
(dollars in
billions)
<S> <C> <C> <C> <C>
Fee-based assets:
Equity .................................... $15.5 $16.1 $11.4 $ 7.2
Fixed-income .............................. 19.3 19.8 20.5 9.1
------ ------ ------ ------
Total fee-based assets ..................... 34.8 35.9 31.9 16.3
Retirement-oriented insurance products ...... 12.2 12.1 10.6 9.3
------ ------ ------ ------
Total .................................... $47.0 $48.0 $42.5 $25.6
====== ====== ====== ======
</TABLE>

- ----------------
(1) Balanced funds are classified as equity funds; all categories include cash
and other short-term investments in applicable portfolios.

<TABLE>
<CAPTION>
Total Mutual Fund Assets Under Management
By Asset Class (1)
--------------------------------------------
As of December 31,
-------------------------
As of
March 31, 1997 1996 1995 1994
---------------- ------- ------- -----
(dollars in
billions)
<S> <C> <C> <C> <C>
Equity funds ...... $11.5 $12.1 $ 8.6 $3.6
Fixed-income funds:
Taxable ......... 6.8 7.0 7.4 2.5
Tax-exempt ...... 6.5 6.6 7.3 1.3
------ ------ ------ -----
Total ............ $24.8 $25.7 $23.3 $7.4
====== ====== ====== =====
</TABLE>

- ----------------
(1) Balanced funds are classified as equity funds; all categories include cash
and other short-term investments in applicable portfolios.

36
<PAGE>

<TABLE>
<CAPTION>
Total Assets Under Management
Asset Flow Summary
-------------------------------------------------
For the For the Year Ended December 31,
Three Months --------------------------------
Ended
March 31, 1997 1996 1995 1994
---------------- ---------- ---------- ----------
(dollars in billions)
<S> <C> <C> <C> <C>
Assets under management--beginning ... $ 48.0 $ 42.5 $ 25.6 $ 30.6
Sales and reinvestments ............... 2.1 8.6 5.8 3.7
Redemptions and withdrawals ......... (2.4) (6.9) (9.4) (7.7)
Asset acquisitions .................. -- 1.2 14.9 --
General account investment earnings ... 0.3 0.7 0.6 0.5
Market appreciation (depreciation) ... (1.0) 1.9 5.0 (1.5)
------ ------ ------ ------
Assets under management--ending ...... $ 47.0 $ 48.0 $ 42.5 $ 25.6
====== ====== ====== ======
</TABLE>

Sales and Asset Retention

The Company's financial objectives with respect to its investment
management businesses are to increase assets under management in each of its
three core products, and to improve operating margins through increasing scale
and cost savings produced by integration. As a result of its acquisitions of
Colonial and Newport and subsequent integration steps, the Company generated
annual cost savings of $13.5 million through the consolidation of various
support and service functions in its mutual fund business.

The Company believes that the most important factors in accumulating and
retaining investment management assets are investment performance, customer
service and brand name recognition. Strong investment performance is crucial to
asset accumulation and retention, regardless of the product or distribution
channel. Performance is particularly important for mutual funds, whether
intermediary-distributed or direct-marketed. Forty-nine of the Company's 67
open-end mutual funds are long-term funds (defined as open-end funds having at
least a three-year performance record, excluding funds that invest solely in
money market securities). Thirty-eight of those 49 funds (representing 68% of
the total assets in those 49 funds as of May 31, 1997) were ranked by Lipper
Analytical Services, Inc. in the top two quartiles of their respective peer
groups for the three-year period ended that date. The Company believes that
over time, more sophisticated tools, such as those employed by consultants to
institutional investors, will become available for analyzing mutual fund
performance and risk. The Company's investment performance must remain
competitive for the Company to continue to grow investment management product
sales and assets.

Excellent service to investors and distributors is a prerequisite to asset
retention. Excellent service to its distributors was a factor in the Company's
decision to acquire Colonial. In November, 1996, Dalbar, Inc., an independent
research and publishing company covering the mutual fund industry, named
Colonial the top-ranked mutual fund group for marketing and operational support
in its annual survey of broker-dealers.

The Company believes that, in light of the proliferation of mutual funds
and investment managers, strong brand name recognition in relevant distribution
channels is essential to asset accumulation and retention, particularly with
respect to mutual funds. The Company believes that the Colonial name carries
strong brand name recognition among brokers and other intermediaries selling
mutual funds, and that the Stein Roe name carries similar recognition in the
direct sales channel. Similarly, the Company believes that Stein Roe has a
franchise presence in the wealth management market and that Newport is a
recognized leader in investments in the Asian markets.

Sales of mutual funds and other investment management products are subject
to market forces, such as changes in interest rates and stock market
performance. Sales of the Company's equity mutual funds benefited in 1996 from
the continued strong performance of the U.S. stock market. Sales of the
Company's fixed income mutual funds were more modest in 1996, given prevailing
market conditions. Changes in the financial markets, including significant
increases or decreases in interest rates or stock prices, can increase or
decrease fund sales and redemptions, as well as the values of assets in such
portfolios, all of which impact investment management fees.

Distribution

Liberty Financial sells its products through multiple distribution
channels. Total product sales for the three months ended March 31, 1997 and
during 1996 were $2.1 billion and $8.6 billion, respectively (including $0.2
billion and $1.0 billion, respectively, of reinvested dividends and similar
reinvested returns). During the three

37
<PAGE>

months ended March 31, 1997 and during 1996, 53% and 61%, respectively, of
these sales were made through intermediary distributors, with the balance made
directly to the investor. Over 35,000 individual brokers and other
intermediaries sold Liberty Financial products in 1996.

Distribution Through Intermediaries

The Company sells both annuities and mutual funds through various
intermediaries, including national and regional brokerage firms, banks,
financial planners and insurance agents. The Company's annuities and mutual
funds are most often sold to middle and upper-middle class investors and
savers. Many of these individuals seek the help of an investment professional
in selecting investment and retirement income and savings products. In each of
these intermediary channels, the Company provides products, as well as
promotional materials and other support services.

Reflecting its diversification strategy, the Company maintains
distribution relationships with several different types of intermediaries.
Intermediary-distributed mutual funds and annuities historically have been
distributed through brokerage firms and insurance agents. In recent years banks
and financial planners also have become significant distributors of these
products.

The Company employs wholesalers and other sales professionals to promote
sales of its intermediary-distributed products. These representatives meet with
intermediaries' sales forces to educate them on matters such as product
objectives, features, performance records and other key selling points. The
Company also produces marketing material designed to help intermediaries sell
the Company's products, and provides after-sale support to both the
intermediaries and their customers. The degree and mix of these services vary
with the requirements of the particular intermediary.

The Company was a pioneer in selling through banks, both in terms of
helping banks develop marketing programs and in establishing wholesaling
relationships with banks. Liberty Financial operates a sales unit, Independent,
that sells mutual funds and annuities through banks. The Company acquired
Independent in March, 1996. Since the acquisition, the Company has consolidated
its prior bank sales unit, the Liberty Financial Bank Group, with Independent.
These businesses design and implement programs that sell mutual funds and
annuities through their client banks, license and train sales personnel, and
provide related financial services and administrative support. Program
structures and the degree of the Company's involvement vary widely depending
upon the particular needs of each bank. In some cases, the bank provides space
in its branches and the Company places its own sales representatives in that
space and fully operates the program. Products sold include the Company's
proprietary products, as well as non-proprietary products (including in some
cases the bank's proprietary mutual funds). In other cases, the Company's role
may be limited to functions such as licensing and training the bank's employees
and wholesaling products. At March 31, 1997, Independent had over 150 bank
relationships involving over 3,100 registered salespersons.

The proliferation of competing products requires the Company to compete to
establish and maintain distribution relationships and to maintain "shelf space"
with distributors. In response to the proliferation of available investment
products, many of the larger distributors have begun to reduce the number of
companies for whom they distribute. Product features, relative performance,
pricing and support services to distributors and their customers are important
factors in competing for distribution relationships. An interruption in the
Company's continuing relationship with certain of these distributors could
materially adversely affect the Company's ability to sell its products. There
can be no assurance that the Company would be able to find alternative sources
of distribution in a timely manner. Some distributors have begun to assess fee
sharing payments or similar charges as additional compensation for fund sales.
The Company can be confronted with the choice of absorbing these charges or
limiting its access to certain distributors. See "INVESTMENT
CONSIDERATIONS--Industry and Competitive Factors."

The sales practices and support needs of the Company's distributors are
constantly evolving. The Company must respond to these changes in order to
maintain and grow its intermediary distribution relationships. Pricing
structures in these channels, particularly with respect to mutual funds, have
expanded in recent years from one-time up-front sales loads to add options that
shift investors' payments over time and move toward fee-based pricing. The
Company's intermediary-distributed mutual funds now are sold with alternate
pricing structures. Intermediaries also increasingly demand that product
providers supply new value-added services. The Company is developing innovative
new technology-based service and support tools, such as interactive asset
allocation models and on-line customer account management systems, designed to
provide value-added services to intermediaries and their customers.

38
<PAGE>

Direct Distribution

The Company's direct-marketed mutual funds, as well as its wealth
management and institutional asset management services, are sold directly to
investors. The Company's directed-marketed mutual funds are purchased
predominantly by middle and upper-middle class investors and savers who choose
to select their own funds and who wish to avoid paying sales loads and similar
fees. Wealth management clients typically are high net worth individuals and
families and smaller institutional investors. Institutional asset management
clients typically are larger institutional investors managed by in-house
professional staffs that select and oversee asset managers, often with the
advice of third party consultants.

In each of the direct sales markets served by the Company, investment
performance is essential to generating sales and retaining customers. Mutual
fund sales also require robust marketing campaigns using print, radio and
television advertising and direct mail that highlight performance and other
selling points. The Company believes that certain of the technology-based
customer service and support tools it is developing, such as on-line account
access and interactive illustrative investment tools, can become important
devices in accumulating and retaining assets in the direct distribution
channels. Stein Roe's reputation as a high quality asset manager is the most
important factor in generating new wealth and institutional asset management
clients. Active management of the client relationship, including frequent
personal contacts, is necessary to retain these clients.

So-called "mutual fund supermarkets," such as Charles Schwab & Co., Inc.'s
OneSource, have become an important source of customers for direct-marketed
mutual funds. During the three months ended March 31, 1997 and during 1996, 59%
and 63%, respectively, of the total new sales of the Stein Roe mutual funds
were through mutual fund supermarkets and similar arrangements. To gain access
to these marketplaces, the Company pays the supermarket sponsor a fee based
upon a percentage of mutual fund assets held by supermarket customers in return
for certain services provided by the supermarket sponsor, such as omnibus
shareholder accounting. Financial planners and similar unaffiliated advisors
sometimes serve as sources of referrals for wealth management clients, in some
cases in return for referral fees or other compensation.

Industry Segment Information

Liberty Financial conducts its business in two industry segments: annuity
insurance and asset management. Annuity insurance operations relate primarily
to the Company's fixed, indexed and variable annuities and its closed-
block of SPWLs. Asset management operations relate to its mutual funds, wealth
management and institutional asset management products. For information on
these industry segments, see Note 11 of Notes to the Consolidated Financial
Statements.

Regulation

Overview

The Company's business activities are extensively regulated. The following
briefly summarizes the principal regulatory requirements and certain related
matters. The regulatory requirements applicable to the Company include, among
other things, (i) regulation of the form and in certain cases the content of
the Company's products, (ii) regulation of the manner in which those products
are sold and (iii) compliance oversight of the Company's business units,
including frequent reporting obligations to and inspections by regulators.
Changes in or the failure by the Company to comply with applicable law and
regulations could have a material adverse effect on the Company.

Annuity Insurance

The Company's retirement-oriented insurance products generally are issued
as individual policies. The policy is a contract between the issuing insurance
company and the policyholder. Policy forms, including all principal contract
terms, are regulated by state law. In most cases, the policy form must be
approved by the insurance department or similar agency of a state in order for
the policy to be sold in that state.

Keyport issues most of the Company's retirement-oriented insurance
products. Independence Life & Annuity Company ("Independence Life"), a Keyport
subsidiary, also issues certain policies. Keyport and Independence Life are
each chartered in the state of Rhode Island, and the Rhode Island Department of
Business Regulation is their primary oversight regulator. Keyport and
Independence Life also must be licensed by the state insurance regulators in
each other jurisdiction in which they conduct business. They currently are
licensed to conduct business in 49 states (the exception being New York), and
in the District of Columbia. State insurance laws generally provide

39
<PAGE>

regulators with broad powers related to issuing licenses to transact business,
regulating marketing and other trade practices, operating guaranty
associations, regulating certain premium rates, regulating insurance holding
company systems, establishing reserve requirements, prescribing the form and
content of required financial statements and reports, performing financial and
other examinations, determining the reasonableness and adequacy of statutory
capital and surplus, regulating the type and amount of investments permitted,
limiting the amount of dividends that can be paid and the size of transactions
that can be consummated without first obtaining regulatory approval, and other
related matters. The 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.

Prescribed statutory accounting practices generally include state laws,
regulations and general administrative rules. Permitted statutory accounting
practices encompass all accounting practices that are not prescribed; such
practices may differ between the states and companies within a state. Keyport
prepares its statutory-basis financial statements in accordance with accounting
practices prescribed or permitted by the Insurance Department of the State of
Rhode Island. The NAIC is currently in the process of codifying statutory
accounting practices, the result of which is expected to constitute the only
source of prescribed statutory accounting practices. That project, which is
expected to be completed in 1997 or 1998 may result in changes to the
accounting practices that Keyport uses to prepare its statutory-basis financial
statements. The impact of any such changes on Keyport's statutory surplus
cannot be determined at this time. No assurance can be given that such changes
would not have a material adverse effect on the Company.

Risk-Based Capital Requirements. In recent years, various states have
adopted new quantitative standards promulgated by the NAIC. These standards are
designed to reduce the risk of insurance company insolvencies, in part by
providing an early warning of financial or other difficulties. These standards
include the NAIC's risk-based capital ("RBC") requirements. RBC requirements
attempt to measure statutory capital and surplus needs based on the risks in a
company's mix of products and investment portfolio. The requirements provide
for four different levels of regulatory attention which implement increasing
levels of regulatory control (ranging from development of an action plan to
mandatory receivership). As of December 31, 1996, Keyport's capital exceeded
the level at which the least severe of these regulatory attention levels would
be triggered.

Guaranty Fund Assessments. Under the insurance guaranty fund laws existing
in each state, insurers can be assessed for certain obligations of insolvent
insurance companies to policyholders and claimants. Because assessments
typically are not made for several years after an insurer fails, Keyport cannot
accurately determine the precise amount or timing of its exposure to known
insurance company insolvencies at this time. For certain information regarding
Keyport's historical and estimated future assessments in respect of insurance
guaranty funds, see Note 15 to the Notes to the Consolidated Financial
Statements. The insolvency of large life insurance companies in future years
could result in material assessments to Keyport by state guaranty funds.

Insurance Holding Company Regulation. Current Rhode Island insurance law
imposes prior approval requirements for certain transactions with affiliates and
generally regulates dividend payments by a Rhode Island- chartered insurance
subsidiary to its parent company. Keyport may not make distributions or dividend
payments, together with distributions and dividends paid during the preceding 12
months, 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 Rhode Island Department of
Business Regulation. As of December 31, 1996, such restriction would limit
dividends without such approval to $42.5 million. However, Keyport has not paid
any dividends since its acquisition in December, 1988. In addition, no person or
group may acquire, directly or indirectly, 10% or more of the voting stock or
voting power of Liberty Financial unless such person has provided such required
information to the Rhode Island Department of Business Regulation and such
acquisition is approved by the Department.

General Regulation at Federal Level and Certain Related Matters. Although
the federal government generally does not directly regulate the insurance
business, federal initiatives often have an impact on the business in a variety
of ways. Current and proposed federal measures that may significantly affect the
insurance business include limitations on antitrust immunity, minimum solvency
requirements and the removal of barriers restricting banks from engaging in the
insurance business. In particular, several proposals to repeal or modify the
Bank Holding Company Act of 1956 (which prohibits banks from being affiliated
with insurance companies) have been made by members of Congress (including a
bill currently under consideration in the U.S. House of Representatives) and the
Clinton Administration. Moreover, the United States Supreme Court held on
January 18, 1995 in NationsBank of North Carolina v. Variable Annuity Life
Insurance Company that annuities are

40
<PAGE>

not insurance for purposes of the National Bank Act. In addition, the Supreme
Court also held on March 26, 1995 in Barnett Bank of Marion City v. Nelson that
state laws prohibiting national banks from selling insurance in small town
locations are preempted by federal law. The Office of the Comptroller of the
Currency also adopted a ruling in November 1996 that permits national banks,
under certain circumstances, to expand into other financial services, thereby
increasing competition for the Company. At present, the extent to which banks
can sell insurance and annuities without regulation by state insurance
departments is being litigated in various courts in the United States. Although
the effect of these recent developments on the Company and its competitors is
uncertain, there can be no assurance that such developments would not have a
material adverse effect on the Company's business, financial condition and
results of operations.

Asset Management Products

The primary sources of regulation of the Company's asset management
operations are the federal securities laws. Asset management products are
subject to the Advisers Act. The mutual funds and closed-end funds sponsored by
the Company also are subject to the Investment Company Act. Mutual fund shares
are securities, and, as such, must be registered under the federal securities
laws. The foregoing laws impose various restrictions on the Company's asset
management products, including fee structures, the timing and content of
advertising, and, in the case of the funds, certain investment restrictions.
Mutual funds also must be managed to comply with certain other investment
restrictions imposed by the Code. Accounts subject to the Employee Retirement
Income Security Act of 1974 ("ERISA") must comply with certain investment and
other restrictions imposed by ERISA.

The Company's subsidiaries directly engaged in asset management (including
Colonial, Stein Roe, Newport and LAMCO) are registered with the Commission as
investment advisers under the Advisers Act. They are subject to the Investment
Company Act insofar as it relates to investment advisers to registered
investment companies. These securities laws and the regulations of the
Commission require reporting, maintenance of books and records in prescribed
forms, mandatory custodial arrangements, approval of employees and
representatives and other compliance procedures. Possible sanctions 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 registrations, censures and fines.

In the ordinary course of its investment management business, the Company
enters into investment advisory agreements with mutual funds and others. 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 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 the completion of this offering, additional
sales by Liberty Mutual or other stockholders or new issuances of capital stock
by Liberty Financial, among other things, may raise issues relating to
assignments of the Company's investment advisory agreements. The Restated
Articles include provisions limiting the voting power of shares of the
Company's Voting Stock held by holders of 20% or more of such Voting Stock in
certain circumstances. These provisions do not apply to Liberty Mutual,
subsidiaries or affiliates of Liberty Mutual, direct or indirect subsidiaries
of the Company and certain employee plans established or to be established by
the Company or certain of its subsidiaries. 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.

Several proposals to repeal or modify the Glass-Steagall Act of 1933 (which
restricts banks from engaging in securities-related businesses) have been made
by members of Congress (including a bill currently under consideration in the
U.S. House of Representatives) and the Clinton Administration. Although the
effect that any such proposals if adopted would have on the Company and its
competitors is uncertain, there can be no assurance that such proposals if
adopted would not have a material adverse effect on the Company's business,
financial condition and results of operations.

Distribution

Sales of the Company's annuities and mutual funds are also subject to
extensive regulation. Annuities must be sold through an entity registered as an
insurance agency in the particular state. The sales person must be properly
licensed under state insurance law. Variable annuities and certain indexed
annuities also require the sales person

41
<PAGE>

to be registered with the National Association of Securities Dealers ("NASD")
and the applicable state securities commission. Mutual fund shares must be sold
through an entity registered as a broker-dealer under the Exchange Act and
applicable state law. The sales person must be registered with the NASD and the
applicable state securities commission.

Various business units of the Company are registered as broker-dealers.
These include certain units which operate the Company's bank marketing
business, as well as other units through which mutual fund and certain annuity
sales are processed. Certain bank marketing units also are registered as
insurance agencies in states where they sell annuities. These laws regulate the
licensing of sales personnel and sales practices. They impose minimum net
capital requirements. They also impose reporting, records maintenance, and
other requirements, and provide for penalties in the event of non-compliance,
similar in scope to the regulations applicable to asset managers.

Securities sales through the Company's bank marketing units are conducted
in accordance with the provisions of a "no-action" letter issued by the staff
of the Commission requiring, among other things, that securities sales
activities be conducted by sales personnel who are registered representatives
of the Company and are subject to its supervision and control. The letter
limits the functions of non-registered bank personnel to ministerial duties.
The letter is not binding, however, on the courts and no assurance can be given
that the Commission will not change its position. Banks are an important
distribution channel for the Company's annuities and mutual funds. The recent
growth in sales of mutual funds, annuities and other investment and insurance
products through or at banks and similar institutions has prompted increased
scrutiny by federal bank regulators, the Commission and other regulators.
Regulations promulgated by federal banking authorities impose additional
restrictions and duties with respect to bank sales practices, including
obligations to disclose that the products are not subject to deposit insurance.

Competition

The Company's businesses operate in extremely competitive markets. These
markets are highly fragmented, although in the case of annuities and mutual
funds, a few companies do have relatively substantial market shares. Certain of
the Company's competitors are significantly larger and have access to
significantly greater financial and other resources.

The Company's products compete with every other investment or savings
vehicle available to a prospective customer, including those offered by other
insurance companies, investment management firms and banks. The Company
believes that the most important competitive factor affecting the marketability
of its products is the degree to which they meet customer expectations, both in
terms of returns (after fees and expenses) and service. These competitive
pressures apply to competition for customers in general, as well as competition
to access and maintain distribution relationships, in the case of products sold
through intermediaries. Product and service innovations also are important
devices for generating new sales and maintaining distribution relationships.
Sales of particular products may be affected by conditions in the financial
markets, such as increases or decreases in interest rates or stock prices. See
"INVESTMENT CONSIDERATIONS--Industry and Competitive Factors."

Product features of particular relevance to annuities include interest
crediting and participation rates, surrender charges and innovation in product
design. Maintenance of Keyport's financial ratings also is important. The
Company believes that the most important factors affecting competition for
investment management clients are investment performance, customer service and
brand name recognition. Pricing policies and product innovations also are
important competitive factors. The Company's ability to increase and retain
clients' assets could be materially adversely affected if client accounts
underperform the market or competing products or if key investment managers
leave the Company. The ability of the Company's management subsidiaries to
compete with other asset management products also is dependent, in part, on the
relative attractiveness of their underlying investment philosophies and methods
under prevailing market conditions.

Employees

As of March 31, 1997, the Company had 1,986 full-time employees summarized
by activity as follows: 366 in annuity insurance operations; 1,138 in asset
management activities; 429 employees in marketing and distribution operations;
and 53 in general corporate. The Company provides its employees with a broad
range of employee benefit programs. The Company believes that its relations
with its employees are excellent.

42
<PAGE>

Properties

As of March 31, 1997, the Company leased its various office facilities.
The Company's principal leasing arrangements can be summarized as follows: the
Company's principal executive offices occupy approximately 30,300 square feet
in a single facility in downtown Boston pursuant to a lease which expires in
2002. Keyport leases approximately 76,000 square feet in a single facility in
downtown Boston pursuant to a lease which expires in 2002. Colonial leases
approximately 149,000 square feet of office space in a single facility in
downtown Boston under a lease which expires in 2006 and approximately 21,700
square feet in Aurora, Colorado under a lease which expires in November, 2000.
Stein Roe leases 142,000 square feet in downtown Chicago pursuant to a lease
which expires in 2009. Independent leases approximately 23,200 square feet in
Purchase, New York under a lease which expires in 2007.

Legal Proceedings

On April 24, 1997, several unitholders of Liberty High Income Plus Limited
Partnership ("LHIP") filed a lawsuit seeking certification as a class action in
the Superior Court for the State of California for the County of Los Angeles
against certain limited partnerships and other defendants, including Liberty
Securities Corporation, which is an indirect wholly-owned subsidiary of the
Company, Liberty Mutual and a former subsidiary of the Company (Liberty Real
Estate Corporation) transferred to a subsidiary of Liberty Mutual in 1990.
Liberty Real Estate Corporation had sponsored the public offerings of LHIP and
such other limited partnerships. Liberty Securities Corporation had acted as
dealer manager in connection with the public offerings of LHIP and certain of
the other limited partnerships. The Company itself is not named as a defendant.
The plaintiffs allege, among other things, securities fraud, breach of fiduciary
duties and violations of the partnership agreements governing the partnerships
and seek damages in an amount to be proved at trial and various other remedies,
including punitive damages. The Company is in the early stages of evaluating
this litigation's potential impact, if any, on the Company and, accordingly,
cannot predict the outcome with any degree of certainty. However, based upon all
of the facts presently under consideration by management, the Company does not
believe that any likely outcome will have a material adverse effect on the
Company's financial condition or results of operations.

The Company is from time to time involved in other litigation incidental
to its businesses. In the opinion of Liberty Financial's management, the
resolution of such other litigation is not expected to have a material adverse
effect on the Company's financial condition or results of operations.

43
<PAGE>

MANAGEMENT

Executive Officers of the Registrant

The following table sets forth certain information regarding the executive
officers of Liberty Financial.

Name Age Position
- --------------------------- ----- --------------------------------------------------
<S> <C> <C>
Gary L. Countryman 57 Chairman and Director
Kenneth R. Leibler 48 Chief Executive Officer, President and Director
John A. Benning 63 Senior Vice President, General Counsel and Clerk
Harold W. Cogger 61 Executive Vice President
Lindsay Cook 45 Executive Vice President
Stephen E. Gibson 43 President, The Colonial Group, Inc.
J. Scott Hansen 44 Senior Vice President, Corporate Development
J. Andy Hilbert 39 Senior Vice President and Chief Financial Officer
Denis Kaplan 53 Chief Executive Officer of Independent
C. Allen Merritt, Jr. 57 Executive Vice President and Treasurer
Porter P. Morgan 57 Senior Vice President, Marketing
John W. Rosensteel 57 President and Chief Executive Officer of Keyport
Hans P. Ziegler 56 Chief Executive Officer of Stein Roe
</TABLE>

The following table sets forth certain information regarding the directors
of Liberty Financial.

<TABLE>
<CAPTION>
Expiration of
Name Age Term of Office
- ------------------------------- ----- ---------------
<S> <C> <C>
Gregory H. Adamian (2) 70 1998
Gerald E. Anderson 66 1998
Michael J. Babcock (2) 55 2000
Harold W. Cogger (1) 61 2000
Gary L. Countryman (1)(2) 57 2000
Paul J. Darling, II (2) 59 1999
David F. Figgins (3) 68 1999
John B. Gray (3) 69 1999
John P. Hamill (2) 57 2000
Marian L. Heard 56 2000
Raymond H. Hefner, Jr. 69 1999
Edmund F. Kelly (1) 52 1998
Kenneth R. Leibler (1) 48 1998
Sabino Marinella(1) 67 2000
Ray B. Mundt (2) 68 1998
Glenn P. Strehle (1)(3) 61 1998
Stephen J. Sweeney (3) 68 1999
Michael von Clemm 62 1998
</TABLE>

- ----------------
(1) Member of the Executive Committee
(2) Member of the Compensation and Stock Option Committee
(3) Member of the Audit Committee

Mr. Countryman has been Chief Executive Officer of Liberty Mutual and
Liberty Mutual Fire Insurance Company (an affiliate of Liberty Mutual)
("Liberty Fire") since 1986, and has been Chairman of both companies since
1991. He currently serves as a director of the Company, Liberty Mutual and
certain of its affiliates, BankBoston Corporation, The First National Bank of
Boston, Boston Edison Company and Harcourt General, Inc.

44
<PAGE>

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. Mr. Leibler
currently serves as a director of the Company and the Boston Stock Exchange.

Mr. Benning has been Senior Vice President, General Counsel and Clerk of
Liberty Financial since October, 1989.

Mr. Cogger became an Executive Vice President and director of Liberty
Financial at the time it acquired Colonial in March, 1995. He was President of
Colonial from November, 1994 to December, 1996 and Chief Executive Officer from
March, 1995 to December, 1996. He was President of its principal subsidiary,
Colonial Management Associates, Inc. from 1993 to December, 1996, and Chief
Executive Officer from March, 1995 to December, 1996.

Mr. Cook became an Executive Vice President of Liberty Financial in
February, 1997. He became a Senior Vice President of Liberty Financial in
February, 1994, having been a Vice President prior to that time.

Mr. Gibson joined Colonial in July, 1996 as Executive Vice President,
becoming President and Chief Executive Officer in December, 1996. Prior to
joining Colonial, Mr. Gibson held various senior marketing positions at Putnam
Investments.

Mr. Hansen became Senior Vice President, Corporate Development in May,
1996. Prior to that time he was Vice President, Corporate Development.

Mr. Hilbert joined the Company as Senior Vice President and Chief
Financial Officer in March, 1997. From October, 1995 until that time, he was
Senior Vice President and Chief Financial Officer of Paul Revere Corporation, a
life insurance company. Prior to joining Paul Revere, Mr. Hilbert was a partner
at Price Waterhouse LLP.

Mr. Kaplan has been Chief Executive Officer of Independent since 1990.

Mr. Merritt became an Executive Vice President of Liberty Financial in
February, 1997. From March, 1993 until that time, he was Senior Vice President
of Liberty Financial. Prior to that time, he served as Senior Vice President of
its subsidiary, Liberty Financial Services, Inc.

Mr. Morgan has been Senior Vice President, Marketing of Liberty Financial
since 1991.

Mr. Rosensteel joined Keyport in 1992 as Chief Operating Officer. He was
appointed President and Chief Executive Officer of Keyport effective January 1,
1993.

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. Prior to joining Stein Roe, Mr. Ziegler was President
and Chief Executive Officer of the Pitcairn Trust Company.

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 and Liberty Fire.

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 and Liberty Fire.

Mr. Babcock is a private investor. He was President and Chief Operating
Officer of Leslie Fay Companies, Inc., an apparel manufacturer, from January,
1993 to January, 1995. He currently serves as a director of Liberty Mutual and
Liberty Fire. On April 5, 1993, Leslie Fay Companies, Inc. filed for protection
from creditors under Chapter 11 of the federal Bankruptcy Code.

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 cold finished steel bars and a metal service center.
He currently serves as a director of Liberty Mutual, Liberty Fire and Unisource
World Wide, Inc.

Mr. Figgins was elected to the Board of Directors in May, 1991. From 1993
until his retirement in 1994, Mr. Figgins served as Chairman, and from 1991 to
1993 was President, of Trafalgar House Construction, Inc., a

45
<PAGE>

construction company. Mr. Figgins currently serves as a director of Liberty
Mutual, Liberty Fire, and First Bell Bancorp, Inc.

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 Fire,
EG&G Inc. and Stackpole Corporation.

Mr. Hamill was elected to the Board of Directors in May, 1991. He has been
President of Fleet Bank of Massachusetts, N.A. since October, 1992. Mr. Hamill
currently serves as a director of Liberty Mutual and Liberty Fire.

Mrs. Heard was elected to the Board of Directors in November, 1994. She
has been President and Chief Executive Officer of the United Way of
Massachusetts Bay since February, 1992. She currently serves as a director of
Liberty Mutual, Liberty Fire and numerous national and local non-profit
organizations.

Mr. Hefner was elected to the Board of Directors in May, 1991. He has
served as President of Bonray, Inc., an oil and gas exploration company since
1992. He currently serves as a director of Liberty Mutual, Liberty Fire, Gulf
Canada Resources Limited and Liberty Bancorp, Inc. (which is not an affiliate
of Liberty Financial or Liberty Mutual).

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 Fire. Mr. Kelly is a director of Liberty Mutual and certain of its
affiliates.

Mr. Marinella has been Vice Chairman of Liberty Financial since January,
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.

Mr. Mundt was elected to the Board of Directors in May, 1991. Since
August, 1996, Mr. Mundt has been Chairman and Chief Executive Officer of
Unisource World Wide, Inc., a paper supply and systems company. From 1985 until
September, 1993, Mr. Mundt served as Chairman and Chief Executive Officer and,
from September, 1993 until August, 1996, 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 Fire, Corestates
Bank, Alco Standard Corporation and Nocopi International Technologies, Inc.

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 and Liberty
Fire 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 Fire, Boston Edison Company, the
Boston Stock Exchange, Uno Restaurants, Inc. and Microscript, Inc.

Dr. von Clemm was elected to the Board of Directors in February, 1993. Dr.
von Clemm has been President of Templeton College, Oxford University since
1996. He was Executive Vice President of Merrill Lynch & Co. from March, 1986
until his retirement at the end of 1992. He currently serves as a director of
Liberty Mutual, Liberty Fire, Nycomed AS, Eastman Chemical Company and Molson
Companies Limited Montreal.

46
<PAGE>

PRINCIPAL AND SELLING SHAREHOLDERS

The following table sets forth certain information with respect to the
beneficial ownership of Common Stock by LFC Holdings (the only person or entity
known to Liberty Financial to be the beneficial owner of 5% or more of Common
Stock), the other Selling Shareholders, each of the five most highly compensated
executive officers of Liberty Financial for 1996, each Director of Liberty
Financial who owns beneficially any shares of Common Stock, and all Directors
and executive officers as a group, in each case as of July 15, 1997. LFC
Holdings, Inc. has advised the Company that its decision to participate as a
Selling Shareholder in this offering was made principally with a view toward
increasing the public float and liquidity of the Company's Common Stock and
expanding research coverage in respect thereof. LFC Holdings, Inc. has consented
to the participation of the other Selling Shareholders in this offering to
further such purposes. Except as noted in the footnotes to such table, based on
information provided by such persons, each holder of Common Stock has or will
have sole voting and investment power with respect to the shares of Common Stock
set forth below. Unless otherwise indicated below, the address of each such
person is: c/o Liberty Financial Companies, Inc., 600 Atlantic Avenue, Boston,
Massachusetts 02210.

<TABLE>
<CAPTION>
Shares Beneficially Shares to be
Owned Beneficially
Prior to Offering(1) Owned After Offering
------------------------ (1)(2)
-----------------------
Number of Number of Number of
Name Shares Percent Shares Offered Shares Percent
- ------------------------------------- ------------ --------- ---------------- ------------ --------
<S> <C> <C> <C> <C> <C>
LFC Holdings, Inc.
c/o Liberty Mutual
175 Berkeley Street
Boston, MA 02117 .................. 23,622,131 81.1% 1,868,475 21,753,656 74.7%
John A. McNeice, Jr.
c/o One Financial Center
12th Floor
Boston, MA 02110(3) ............... 1,118,077 3.8% 300,000 818,077 2.8%
C. Herbert Emilson
236 Corn Hill Lane
P.O. Box 128
North Marshfield, MA 02059(4) 208,831 * 50,000 108,831 *
Pauline V. Emilson
236 Corn Hill Lane
P.O. Box 128
North Marshfield, MA 02059(5) 208,831 * 50,000 108,831 *
Finplan of America, Inc.
c/o McCarthy, Fingar, Donovan,
Drazen & Smith L.L.P.
11 Martine Avenue
White Plains, NY 10606 ............ 94,804 * 94,804 -- --
Kenneth R. Leibler (6) ............ 350,916 1.2% -- 350,916 1.2%
Harold W. Cogger (7)(8) ............ 135,077 * -- 135,077 *
John W. Rosensteel (6) ............ 67,488 * -- 67,488 *
C. Allen Merritt, Jr. (6) ......... 91,372 * -- 91,372 *
John A. Benning (6) ............... 104,089 * -- 104,089 *
Dr. Gregory H. Adamian ............ 1,000 * -- 1,000 *
Gerald E. Anderson .................. 500 * -- 500 *
Paul J. Darling II .................. 1,000 * -- 1,000 *
John B. Gray ........................ 200 * -- 200 *
Sabino Marinella (6) ............... 459,214 1.6% 136,721 322,493 1.1%
Glenn P. Strehle .................. 500 * -- 500 *
Stephen J. Sweeney .................. 100 * -- 100 *
All executive officers and director
as a group (28 persons) (9) ...... 1,479,479 4.9% 136,721 1,342,758 4.4%
</TABLE>

- ----------------

*Less than 1%

(1) Percentages are calculated pursuant to Rule 13d-3 under the Exchange Act.
Percentage calculations assume, for each person and group, that all shares
which may be acquired by such person or group (i) pursuant to options

47
<PAGE>

currently exercisable or which become exercisable within 60 days following
July 15, 1997 or (ii) upon conversion of shares of Preferred Stock are
outstanding for the purpose of computing the percentage of Common Stock
owned by such person or group. However, those unissued shares of Common
Stock described above are not deemed to be outstanding for the purpose of
calculating the percentage of Common Stock owned by any other person.

(2) Assumes no exercise of the Underwriters' over-allotment option.

(3) Includes 155,761 shares of Common Stock issuable upon conversion of 147,515
shares of Preferred Stock held in trust under the Irrevocable Trust
Agreement for Children dated September 24, 1985 (of C. Herbert Emilson),
536 shares of Common Stock held in trust under the C. Herbert Emilson and
Pauline V. Emilson Charitable Remainder Unitrust and 3,779 shares of
Common Stock held in trust under the C. Herbert Emilson and Pauline V.
Emilson Charitable Annuity Trust, as to which Mr. McNeice, as a co-trustee
of each such trust, shares voting and investment power and disclaims any
beneficial ownership.

(4) Includes 95,692 shares of Common Stock owned of record by Pauline V.
Emilson (Mr. Emilson's spouse), as to which Mr. Emilson disclaims any
beneficial ownership (50,000 of which are being sold in this offering).
Also includes (i) 536 shares of Common Stock held in trust under the C.
Herbert and Pauline V. Emilson Charitable Remainder Unitrust and 3,779
shares of Common Stock held in trust under the C. Herbert Emilson and
Pauline V. Emilson Charitable Annuity Trust, as to which Mrs. Emilson (as
a co-trustee of each such trust) shares voting and investment power, and
as to which Mr. Emilson disclaims beneficial ownership, and (ii) 489 shares
held by Mr. and Mrs. Emilson as joint tenants.

(5) Includes 108,335 shares of Common Stock owned of record by C. Herbert
Emilson (Mrs. Emilson's spouse), as to which Mrs. Emilson disclaims any
beneficial ownership (50,000 of which are being sold in this offering).
Also includes (i) 536 shares of Common Stock held in trust under the C.
Herbert Emilson and Pauline V. Emilson Charitable Remainder Unitrust and
3,779 shares of Common Stock held in trust under the C. Herbert Emilson
and Pauline V. Emilson Charitable Annuity Trust, as to which Mrs. Emilson
(as a co-trustee of each such trust) shares voting and investment power,
and (ii) 489 shares held by Mr. and Mrs. Emilson as joint tenants.

(6) Except as indicated below, consists of options to purchase shares of Common
Stock which are presently exercisable or which become exercisable within
60 days following July 15, 1997. Also includes 19,100 shares owned by Mr.
Leibler, 9,800 shares owned by Mr. Rosensteel, 10,000 shares owned by Mr.
Merritt, 10,585 shares owned by Mr. Benning and 24,910 shares owned by Mr.
Marinella.

(7) Includes options to purchase 66,300 shares all of which are fully vested
and exercisable.

(8) Includes 66,263 shares of Common Stock issuable upon conversion of 62,755
shares of Preferred Stock owned by Mr. Cogger.

(9) Includes (without duplication), (i) the option shares referenced in notes 6
and 7 above and (ii) Mr. Cogger's shares referenced in note 8 above. Also
includes options to purchase an additional 181,501 shares of Common Stock
held by unnamed executive officers which are presently exercisable or
which become exercisable within 60 days following July 15, 1997.

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<PAGE>

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Matters Pertaining to Liberty Mutual

General

Prior to the acquisition of Colonial in March, 1995, Liberty Financial was
an indirect wholly owned subsidiary of Liberty Mutual. Upon completion of this
offering, based upon shares outstanding as of July 15, 1997, Liberty Mutual
will own, indirectly through LFC Holdings, Inc., approximately 74.7% of the
outstanding shares of Common Stock and approximately 73.8% of the combined
voting power of the outstanding Common Stock and Preferred Stock (approximately
73.4% and 72.6%, respectively, if the over-allotment option granted to the
Underwriters is exercised in full).

Liberty Mutual is a Massachusetts-chartered property and casualty mutual
insurance company with more than $22.7 billion in assets and $5.6 billion in
surplus at December 31, 1996. The principal business activities of Liberty
Mutual's subsidiaries and affiliates (other than Liberty Financial) are
property-casualty insurance, insurance services and life insurance (including
group life and health insurance products) marketed through its own sales force.

Although at present 15 of Liberty Financial's 18 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, strategic planning,
marketing, finance, administration, human resources, accounting, legal and
other management functions.

Reimbursement of Certain Direct Costs and Intercompany Agreement

Liberty Mutual from time to time has provided management, legal, internal
audit and treasury services to Liberty Financial, as well as to other Liberty
Mutual subsidiaries, which services are of the type normally performed by a
parent company's corporate staff. In connection with the Colonial acquisition,
Liberty Financial and Liberty Mutual entered into an Intercompany Agreement
(the "Intercompany Agreement") governing ongoing services provided by Liberty
Mutual to Liberty Financial. Under the Intercompany Agreement, such services
are provided only as requested by Liberty Financial and may include legal, tax,
treasury and certain other services. Liberty Financial pays Liberty Mutual a
fee based upon Liberty Mutual's direct costs allocable to the services
provided, and reimburses Liberty Mutual for all associated out of pocket fees
and expenses incurred by it. The Intercompany Agreement provides for estimated
quarterly payments and subsequent adjustments thereto based upon actual
experience. For 1996, 1995 and 1994, Liberty Financial paid Liberty Mutual
$624,000, $864,000 and $865,000, respectively, for these services.

The Intercompany Agreement also provides 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 results in its own financial
statements, Liberty Financial must obtain Liberty Mutual's prior written
consent to any significant changes in accounting principles of Liberty
Financial.

In addition, the Intercompany Agreement provides that the Company will
indemnify Liberty Mutual, its subsidiaries (other than the Company 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 the Company or its subsidiaries (including
without limitation liabilities under the Securities Act, the Exchange Act and
other securities laws) and (ii) any other acts or omissions arising out of
performance of the Intercompany Agreement.

Tax Sharing Agreement

Liberty Financial and its subsidiaries (except for Keyport and its
subsidiaries, each of which filed a separate federal income tax return through
1993) have been included in the consolidated federal income tax return filed by
Liberty Mutual. With respect to all periods through the date of this Prospectus
(during which time Liberty Mutual owned at least 80% of the outstanding stock
of Liberty Financial), Liberty Mutual, in accordance with the Code, included
Liberty Financial and its subsidiaries in its consolidated federal income tax
return. Prior to 1994, when

49
<PAGE>

Keyport and its subsidiaries became eligible for inclusion in Liberty Mutual's
consolidated tax return, each of Keyport and its subsidiaries determined
separately its liability for federal income taxes.

Liberty Financial and Liberty Mutual have entered 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 between Liberty Financial and Liberty Mutual, with respect to
periods for which Liberty Mutual files consolidated returns, of the liability
for 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 with respect
to such taxes.

The Tax Sharing Agreement generally provides, among other things, that
Liberty Financial will pay to Liberty Mutual an amount for federal income tax
purposes determined as if Liberty Financial filed a separate consolidated
federal income tax return for Liberty Financial and its subsidiaries (i.e., as
if Liberty Financial 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 and its subsidiaries). The
determination of the amounts to be paid by Liberty Financial pursuant to the
Tax Sharing Agreement generally take into account carryovers and carrybacks of
net operating losses and other attributes, again as if Liberty Financial and
its subsidiaries (other than Keyport and its subsidiaries for periods prior to
1994) independently filed a consolidated federal income tax return.

The Tax Sharing Agreement further provides that Liberty Financial 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 and/or any of its subsidiaries (with subsequent adjustments
as appropriate, however, to be taken into account where tax payments have been
so 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 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 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.

For 1996 and 1995, Liberty Financial paid Liberty Mutual $39.9 million and
$38.7 million, respectively, pursuant to the Tax Sharing Agreement.

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 in any and all matters relating to the U.S. income
tax liability of Liberty Financial, it has sole and exclusive responsibility
for the preparation and filing of the U.S. consolidated federal income tax
return for such affiliated group, 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.

Upon the consummation of this offering, if not sooner, Liberty Mutual's
ownership of the outstanding capital stock of the Company will fall below 80%
(the "Deconsolidation Date"). As a result, the Company will no longer be
included in the consolidated federal and certain other income tax returns filed
by Liberty Mutual. Upon such event, the Tax Sharing Agreement will no longer be
in effect except for certain provisions that may affect carryovers and
carrybacks of net operating losses or other tax attributes and subsequent
examination adjustments by taxing authorities. Liberty Mutual's 1997
consolidated federal income tax return will include Liberty Financial and its
subsidiaries until the Deconsolidation Date. Subsequently, the Company and its
subsidiaries will file consolidated federal income tax returns, exclusive of
Keyport and Keyport's subsidiaries. For the remainder of 1997 and the five full
tax years subsequent, Keyport and its subsidiaries will file separately from
the Company, after which period Keyport and its subsidiaries can be included in
the Company's consolidated federal income tax returns.

50
<PAGE>

Registration Rights Agreement

In connection with the Colonial acquisition, Liberty Financial and Liberty
Mutual entered into a Registration Rights Agreement (the "Liberty Mutual
Registration Rights Agreement") which, among other things, provides that
Liberty Financial will, upon Liberty Mutual's request, register under the
Securities Act any of the shares of Common Stock at any time held directly or
indirectly by Liberty Mutual (including, therefore, all shares held by LFC
Holdings) 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, subject to certain minimum share
requirements. This offering is being made upon the request of Liberty Mutual
for purposes of the Liberty Mutual Registration Rights Agreement. Liberty
Mutual has agreed to pay the costs and expenses in connection with each such
registration of its shares. 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 such rights to require registration and other
actions under the agreement 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 that such registration would have other material adverse
consequences.

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 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.

Liberty Financial will indemnify Liberty Mutual, and its officers,
directors, controlling persons and affiliates (including LFC Holdings, Inc.)
against certain liabilities arising in respect of any untrue statement or
alleged untrue statement or omission or alleged omission of a material fact in
any registration statement or prospectus in connection with any registration or
other offering covered by the registration rights under the Liberty Mutual
Registration Rights Agreement, including this offering.

Certain Other Transactions Involving Liberty Mutual

Immediately prior to the Colonial acquisition, Liberty Mutual and two of
its affiliates loaned an aggregate of $100.0 million (collectively, the
"Colonial Acquisition Loan") to Liberty Financial, the proceeds of which were
used to fund the cash portion of the purchase price in the acquisition. The
Colonial Acquisition Loan is evidenced by notes in the aggregate principal
amount of $100.0 million bearing interest at 8.5% per annum, payable
semiannually. The entire principal amount of such notes is payable on the tenth
anniversary of issuance. Liberty Mutual and its affiliates have the right to
accelerate Liberty Financial's obligations under the Colonial Acquisition Loan
if Liberty Mutual ceases, for any reason, to own a majority of the outstanding
Common Stock. The Colonial Acquisition Loan is subject to a prepayment penalty
in the form of a "make whole" provision. Under the "make whole" provision, the
prepayment penalty would be an amount equal to the present value, as of the
prepayment date, of the loss of investment income resulting from the interest
rate differential on the principal amount prepaid between 8.5% and the yield to
maturity, as of such date, on U.S. Government Securities maturing on the due
date of the Colonial Acquisition Loan notes.

In January, 1995, a wholly owned subsidiary of Liberty Financial issued a
$30.0 million principal amount promissory note to LFC Holdings in the payment
of a dividend. This note bears 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.

In December, 1993, an affiliate of Liberty Mutual made a loan in the
principal amount of $75.0 million to Liberty Financial, the proceeds of which
were used in connection with a capital contribution to Keyport. In connection
with the financing for Liberty Financial's acquisition in April, 1995 of
Newport Pacific Management, Inc. ("Newport Pacific"), an affiliate of Liberty
Mutual loaned approximately $24.0 million to Liberty Financial. At that time,
both of these loans were combined into a single note in the principal amount of
$99.0 million which bears interest at 8.0% per annum. This note is due and
payable on March 31, 2000, and may be prepaid, without penalty or premium, at
any time.

Liberty Financial has made all required interest payments on the
above-described indebtedness to Liberty Mutual and its affiliates to date.

51
<PAGE>

Colonial is a party to a revolving credit agreement with The First
National Bank of Boston and certain other lenders pursuant to which the lenders
have agreed to lend up to $60.0 million to Colonial. The proceeds of the loans
made under this credit agreement are used to finance the sale of shares of the
mutual funds sponsored by Colonial which have contingent deferred sales
charges. Liberty Mutual has guaranteed such loans. As consideration for this
guarantee, Liberty Mutual receives a fee from Colonial equal to the sum of (i)
a percentage of any interest rate and other savings which Colonial receives as
a result of the guarantee, 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. The
aggregate guarantee fee paid in 1996 and 1995 by Colonial to Liberty Mutual was
$151,000 and $210,750, respectively.

Keyport has a sales arrangement with Liberty Life Assurance Company of
Boston ("Liberty Life"), a subsidiary of Liberty Mutual which is licensed to
sell variable annuity contracts in the State of New York. Liberty Life issues
variable annuity contracts in New York with substantially the same policy terms
and underlying investment options as Keyport's variable annuity products, the
premiums for which are deposited in a separate account of Liberty Life. Keyport
provides administrative services to Liberty Life with respect to such
annuities. 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 annuities, pays Keyport a fee designed to cover Keyport's expenses in
administering these annuities, and retains the balance. During 1996, 1995 and
1994, Liberty Life paid Keyport fees of $71,800, $60,000 and $81,000,
respectively, under these arrangements.

In October, 1996, the Company sold to a wholly owned subsidiary of Liberty
Mutual a wholly owned subsidiary of the Company, which had provided real estate
management services to certain affiliates of Liberty Mutual and certain third
parties. The sales price was $2.1 million, the net book value of the
transferred subsidiary.

The Company provides certain investment management services to Liberty
Mutual. Liberty Mutual paid the Company $841,000 and $63,000 for these services
in 1996 and 1995, 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
$727,200, $599,000 and $581,000, respectively, in 1996, 1995 and 1994.

As of December 31, 1996, Liberty Mutual and Liberty Fire owned
approximately 9.4% and 1.0%, respectively, of the outstanding shares of
beneficial interest of Liberty ALL-STAR Equity Fund, a closed-end fund listed
on the New York Stock Exchange. All of such shares were purchased in open
market transactions. LAMCO is the investment adviser to this fund.

In 1995 and prior years, the Company provided asset management services to
real estate limited partnerships for which an affiliate of Liberty Mutual
served as the general partner. These limited partnerships were liquidated in
1995. An affiliate of Liberty Mutual paid the Company fees for such services
which totaled approximately $6.7 million and $5.7 million in 1995 and 1994,
respectively.

Keyport holds mortgage notes in the original principal amount of $100.0
million on properties owned by certain indirect subsidiaries of Liberty Mutual.
The notes were purchased for a price equal to 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 December
31, 1996, the amount outstanding was $39.5 million.

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. 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. See "INVESTMENT CONSIDERATIONS--Control by Liberty
Mutual; Potential Conflicts of Interest."

Certain Other Transactions

In connection with the Colonial acquisition, Liberty Financial and C.
Herbert Emilson and John A. McNeice, Jr. entered into a Registration Rights
Agreement with respect to Common Stock of Liberty Financial obtained by Messrs.
Emilson and McNeice in the Colonial acquisition. Each of Mr. Emilson and Mr.
McNeice is a former Director of Liberty Financial. The agreement provides that
Messrs. Emilson and McNeice have the right, which

52
<PAGE>

they may exercise at any time and from time to time, to include the shares of
Common Stock held directly or indirectly by them in certain 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. Liberty
Financial will indemnify Messrs. Emilson and McNeice, and their affiliates,
against certain liabilities arising in respect of any untrue statement, alleged
untrue statement or omission or alleged omission of a material fact in any
registration statement or prospectus in connection with any registration or
other offering covered by the registration rights under such Registration
Rights Agreement. The participation of Messrs. Emilson and McNeice in this
offering is not subject to such Registration Rights Agreement.

Hans P. Ziegler, who is Chief Executive Officer of Stein Roe and an
executive officer of Liberty Financial, obtained interest-free loans from
Liberty Financial during 1995 in the aggregate principal amount of $583,411.
The loans were made on a limited recourse basis, with Mr. Ziegler's repayment
obligation limited to the sales proceeds to be received from certain
residential real estate owned by him. The loans were secured by mortgages on
this real estate. Liberty Financial extended these loans in fulfillment of a
commitment made to Mr. Ziegler at the time he was hired by Stein Roe to finance
his relocation and protect him on the sale of his former principal residence.
In 1996, the real estate securing these loans was sold for aggregate proceeds
of $353,634. This amount was credited to reduce the balance of these loans.
Pursuant to such commitment, the remaining balance of $229,777 was forgiven and
Liberty Financial paid a bonus in the amount of $212,111 to Mr. Ziegler in
respect of his estimated tax liabilities arising from imputed interest in
respect of such loans, such debt forgiveness and the payment of the bonus.

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<PAGE>

DESCRIPTION OF CAPITAL STOCK

Voting Rights

The Restated Articles provide that the holders of shares of 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 employee benefit plans established by
Liberty Financial or certain of its subsidiaries 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 Restated Articles and below). Accordingly, assuming
such 20% voting restriction does not apply, holders of a majority of the shares
of Common Stock entitled to vote in any election of directors may elect all of
the directors standing for election. Following the offering of Common Stock
pursuant to this Prospectus, based upon shares outstanding as of July 15, 1997,
Liberty Mutual (indirectly through LFC Holdings, Inc.) will own approximately
74.7% of the outstanding Common Stock (73.4% if over-allotment option granted
to the Underwriters is exercised in full).

The provisions in the 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 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 Restated Articles provide that a person or "group" (which
includes affiliates and associates of a person, as defined in the Restated
Articles) that owns (as defined in the 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 or
certain of its subsidiaries. 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 Common Stock. However, no assurances can be given that such an "assignment"
will not occur under these or other circumstances. See "INVESTMENT
CONSIDERATIONS--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 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 fact that Liberty Mutual owns, and will continue to own following the
offering contemplated in this Prospectus, more than 67% of the outstanding
Voting Stock, this effect is not considered significant.

Other Provisions Pertaining to a Change in Control

The Restated Articles and Restated By-Laws of Liberty Financial (the
"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. These provisions may serve to delay, defer or prevent a change in
control of Liberty Financial if the Board of Directors determines that such a
change in control is not in the Company's best interests. 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 Company has elected to be exempt from the statutory staggered
board provisions of Massachusetts General Laws, Chapter 156B ("Chapter 156B"),
[sec]50A, the Restated Articles provide that, except for Liberty Financial
directors elected by holders of shares of any outstanding series of Preferred
Stock having the right to elect directors, 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 being elected each year.

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<PAGE>

The Restated Articles and Restated By-Laws contain provisions concerning
the removal of directors and the filling of vacancies. Directors may be removed
only for cause (as defined in the 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
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 directors. No
decrease in the number of directors may reduce the term of any incumbent
director. A majority of the remaining directors then in office are empowered to
fill any vacancy on the Board of Directors.

The Restated Articles and Restated By-Laws establish procedures with
regard to the nomination of candidates for election as directors who have not
been nominated by the Company's Board of Directors. In general, notice must be
received by the Company not less than 60 days and no more than 90 days prior to
the applicable stockholder meeting and must contain certain specified
information concerning the persons to be nominated and the stockholder
submitting the proposal. In addition, any such nomination of candidates for
election as a director must be accompanied by a petition signed by at least 100
record holders of capital stock entitled to vote in the election of the
Company's directors, representing in the aggregate at least 1% of the
outstanding Liberty Financial capital stock entitled to vote thereon. The
Restated Articles and Restated By-Laws also establish procedures with regard to
stockholder proposals for bringing business for consideration at 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 the Company not less than 60 days and no more than 90 days prior
to the applicable stockholder meeting and must contain certain specified
information concerning the business desired to be brought before the meeting
and the stockholder submitting the proposal. The Restated By-Laws provide that
a special meeting of stockholders shall be called at the request of
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 directors.

The Board of Directors is permitted pursuant to Massachusetts law and the
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 the Company conducts its business, and its future prospects.

The affirmative vote of 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 Restated Articles
and Restated By-Laws, including the provisions discussed herein concerning the
inability to vote certain shares of Voting Stock defined as Excludable Shares,
the staggered term of the Board of Directors, the removal of directors, the
filling of vacancies on the Board of Directors and increasing and decreasing
the size of the Board of Directors, the regulation of stockholder nominations
of candidates for election as directors and of stockholder proposals, and the
special factors which may be considered by the Board of Directors in evaluating
tender or exchange offers or certain mergers or fundamental transactions. In
addition, the Restated Articles require the affirmative vote of stockholders
representing a majority of the combined voting power of the outstanding shares
of Voting Stock for adoption, amendment or repeal of the Restated By-laws by
the stockholders.

Exculpation and Indemnification for Officers and Directors

As permitted by Chapter 156B, the Restated Articles contain a provision
which eliminates the personal liability of directors of the Company for
monetary damages for breach of their fiduciary duty of care as a director.
Under current Massachusetts law and the Restated Articles, liability is not
eliminated for (i) any breach of the director's duty of loyalty to the Company
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 director derived an
improper personal benefit. The provision does not eliminate a stockholder's
right to seek non-monetary remedies, such as an injunction or rescission, which
are equitable, to redress action taken by directors. However, equitable
remedies may not be available in all situations, and there may be instances in
which no effective equitable remedy is available.

The Restated Articles provide that the Company 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

55
<PAGE>

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 the Company 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.

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.

Certain Other Massachusetts Law Provisions

The 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. Either
the Board of Directors of Liberty Financial, by majority vote, or the
stockholders by vote of 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 Restated By-laws at any time
to make the Company subject to this statute prospectively.

The 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. Under
Chapter 110F, the stockholders of the Company may, by amendment to the Restated
Articles or Restated By-Laws, provide that the provisions of Chapter 110F apply
to the Company.

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 plan, but may do so in the future.

General Provisions Regarding Common Stock and Preferred Stock

The authorized capital stock of Liberty Financial consists of 100,000,000
shares of Common Stock, $.01 par value per share, 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 Restated Articles and
Restated By-Laws do not grant the holders of 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 Preferred Stock, if any, holders of 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 Common
Stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors of the Company out of funds legally
available therefor, subject to any preferential dividend rights of then
outstanding Preferred

56
<PAGE>

Stock. Upon the liquidation, dissolution or winding up of the Company, the
holders of Common Stock are entitled to receive ratably the net assets of the
Company available after the payment of all debts and other liabilities and
subject to the prior rights of any outstanding Preferred Stock. The rights,
preferences and privileges of holders of Common 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 Restated Articles, the Board of Directors of the Company has the
authority, subject to any limitations prescribed by law, without further action
by or notice to the 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 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 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 its outstanding voting stock. Other than the Preferred
Stock described below issued in connection with the Company's acquisition of
Colonial, there are no outstanding shares of Preferred Stock and the Company
has no present plans to issue any of the Preferred Stock. Shares of Common
Stock or Preferred Stock may be issued in connection with acquisitions by the
Company.

Summary of Terms of Series A Convertible Preferred Stock

In connection with the Colonial acquisition, the Company issued an
aggregate of 328,209 shares of Series A Convertible Preferred Stock (the
"Series A Preferred Stock"), of which 327,006 remain outstanding on the date
hereof. The Series A Preferred Stock has 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
of Designation filed by the Company with the Massachusetts Secretary of State
and included as an Exhibit to the Registration Statement of which this
Prospectus is a part (the "Certificate")).

Dividends. The face amount of each share of Series A Preferred Stock is
$50.00. The holders of shares of the Series A Preferred Stock are entitled to
receive cumulative cash dividends at the rate of $2.875 per annum per share,
payable in equal quarterly installments. Such dividends shall be cumulative
from the date of original issue 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 whether or not such dividends
are declared and whether or not there are profits, surplus or other funds of
Liberty Financial legally available for the payment of dividends. No dividends
may be paid on the Common Stock and no Common Stock may be redeemed,
repurchased, or otherwise acquired by the Company or any of its subsidiaries
unless full cumulative dividends on the shares of Series A Preferred Stock have
been paid or declared in full and sums set aside for the payment thereof.

Redemption. The shares of the Series A Preferred Stock are redeemable at
the option of Liberty Financial and at the price set forth in the Certificate
by resolution of the Board of Directors, in whole or from time to time in part,
at any time on or after March 24, 1998; provided, however, that prior to March
24, 2000 a condition to any such redemption shall be that the Trading Price (as
defined in the Certificate) 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) 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.

Pursuant to a Stockholders Agreement entered into in connection with the
Colonial transaction, at any time during the first sixty days after March 24,
2000, the holder of any shares of Series A 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 Series A
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 person, as the purchaser of such
shares, in which event such person shall be required to pay the full purchase
price.

Voting Rights. Each share of Series A Preferred Stock is entitled to such
number of votes as equals the number of shares of Common Stock into which such
share is then convertible. Except as otherwise provided in the Certificate, or
by the Restated Articles, as amended from time to time, or by law, the shares
of Series A Preferred

57
<PAGE>

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.

Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the affairs of the Company, whether voluntary or otherwise, after
payment or provision for payment of its debts and other liabilities, the
holders of shares of the Series A 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 Series A 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 before the Company
shall redeem, repurchase or otherwise acquire any shares of Common Stock. After
the payment of the full preferential amounts to the holders of shares of the
Series A 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. Holders of shares of the Series A Preferred Stock have the
right, exercisable at any time and from time to time to convert all or any such
shares of the Series A Preferred Stock into shares of Common Stock at a rate of
1.0559 shares of Common Stock for each share of the Series A Preferred Stock so
converted, subject to anti-dilution adjustment from time to time as described
in detail in Section 6 of the Certificate.

Limitations. The Certificate provides that, in addition to any other
rights provided by applicable law, so long as any shares of the Series A
Preferred Stock are outstanding, the Company shall not, without the affirmative
vote of the holders of at least two-thirds of the outstanding shares of the
Series A 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 Preferred Stock; provided, however, that no such vote of the holders of the
Series A 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 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
Preferred Stock in accordance with the provisions of the Certificate.

Transfer Agent and Registrar

The transfer agent and the registrar for the Common Stock is Boston
EquiServe.

58
<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in the purchase agreement
(the "U.S. Purchase Agreement"), each of the Selling Shareholders has severally
agreed to sell to each of the underwriters named below (the "U.S.
Underwriters"), and each of the U.S. Underwriters, for whom Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Goldman, Sachs & Co., PaineWebber
Incorporated and Fox-Pitt, Kelton Inc. are acting as representatives (the "U.S.
Representatives"), severally has agreed to purchase from the Selling
Shareholders, the number of shares of Common Stock set forth opposite its name
below.

Number of
U.S. Underwriter Shares
- --------------------------------------------------------------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith 270,000
Incorporated ..................................... 270,000
Goldman, Sachs & Co. .................................. 270,000
PaineWebber Incorporated ............................ 270,000
Fox-Pitt, Kelton Inc. ............................... 270,000
A.G. Edwards & Sons, Inc. ............................. 80,000
Alex. Brown & Sons Incorporated ....................... 80,000
Donaldson, Lufkin & Jenrette Securities Corporation .. 80,000
Lehman Brothers Inc. ................................ 80,000
J.P. Morgan Securities Inc. .......................... 80,000
Morgan Stanley & Co. Incorporated .................... 80,000
Oppenheimer & Co., Inc. ............................. 80,000
Smith Barney Inc. ................................... 80,000
Wasserstein Perella Securities, Inc. ................. 80,000
Sanford C. Bernstein & Co., Inc. .................... 40,000
Dain Bosworth Incorporated .......................... 40,000
Furman Selz LLC ...................................... 40,000
The Robinson-Humphrey Company, Inc. ................. 40,000
M.J. Whitmann & Co., Inc. ............................. 40,000
----------

Total ........................................... 2,000,000
==========
</TABLE>

The Company and the Selling Shareholders have also entered into a purchase
agreement (the "International Purchase Agreement" and, together with the U.S.
Purchase Agreement, the "Purchase Agreements") with Merrill Lynch International,
Goldman Sachs International, PaineWebber International (U.K.) Ltd. and Fox-Pitt,
Kelton N.V., acting as lead managers (the "Lead Managers"), and certain other
underwriters outside the United States and Canada (the "International Managers"
and, together with the U.S. Underwriters, the "Underwriters"). Subject to the
terms and conditions set forth in the International Purchase Agreement, the
Company and the Selling Shareholders have agreed to sell to the International
Managers, and the International Managers have severally agreed to purchase, an
aggregate of 500,000 shares of Common Stock.

In each Purchase Agreement, the Underwriters named therein have agreed,
subject to the terms and conditions set forth in such Purchase Agreement, to
purchase all of the shares of Common Stock being sold pursuant to such Purchase
Agreement if any of the shares of Common Stock being sold pursuant to such
Purchase Agreement are purchased. Under certain circumstances, under the
Purchase Agreements, the commitments of non-defaulting Underwriters may be
increased. Each Purchase Agreement provides that the Selling Shareholders are
not obligated to sell, and the Underwriters named therein are not obligated to
purchase, the shares of Common Stock under the terms of such Purchase Agreement
unless all of the shares of Common Stock to be sold pursuant to each of the
Purchase Agreements are contemporaneously sold.

The U.S. Representatives have advised the Company that the U.S.
Underwriters propose to offer the shares of Common Stock in the U.S. Offering
to the public at the initial public offering price set forth on the cover page
of this Prospectus and to certain dealers at such price less a concession not
in excess of $1.50 per share. The U.S. Underwriters may allow, and such
dealers may re-allow, a concession not in excess of $.10 per share on sales
to other dealers. After the initial public offering, the public offering price
and the concessions may be changed.

The public offering price per share of Common Stock and the underwriting
discount per share of Common Stock are identical for both Offerings.

LFC Holdings, Inc. has granted to the U.S. Underwriters and the
International Managers options exercisable for 30 days from the date of this
Prospectus to purchase up to an additional 300,000 and 75,000 shares of Common
Stock, respectively, solely to cover over-allotments, if any, at the initial
public offering price less the underwriting discount set forth on the cover page
of this Prospectus. If the Underwriters exercise such options, each Underwriter
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the foregoing table bears to the 2,500,000
shares of Common Stock initially offered hereby.

The Company has been informed that the Underwriters have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Pursuant to the Intersyndicate Agreement, the U.S.
Underwriters and the International Managers are permitted to sell shares of
Common Stock to each other for purposes of resale at the public offering price,
less an amount not greater than the selling concession.

The Company has been informed that, under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and any dealer to whom they sell shares of
Common Stock will not offer to sell or resell shares of Common Stock

59
<PAGE>

to persons who are non-U.S. or non-Canadian persons or to persons they believe
intend to resell to persons who are non-U.S. or non-Canadian persons, and the
International Managers and any bank, broker or dealer to whom they sell shares
of Common Stock will not offer to sell or resell shares of Common Stock to U.S.
persons or to Canadian persons or to persons they believe intend to resell to
U.S. persons or to Canadian persons, except in the case of transactions pursuant
to the Intersyndicate Agreement which, among other things, permits the
Underwriters to purchase from each other and offer for resale such number of
shares of Common Stock as the selling Underwriter or Underwriters and the
purchasing Underwriter or Underwriters may agree.

The Company, the Selling Shareholders and certain officers and directors of
the Company have agreed not to sell or otherwise dispose of any Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock for
a period of 120 days after the date of this Prospectus, without the prior
written consent of Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill
Lynch"), except that certain officers of the Company may exercise up to an
aggregate of approximately 440,000 non-qualified stock options and sell the
shares of Common Stock issuable upon such exercise. Upon the consummation of
this offering, it is expected that such lock-up agreements will cover an
aggregate of approximately 22.6 million outstanding shares of Common Stock and
options to purchase an aggregate of approximately 1,170,000 shares Common Stock
(excluding those 440,000 options subject to the exception described above).
There are no known formal or informal plans, arrangements, agreements or
understandings regarding any intention to seek the consent of Merrill Lynch to
release any of the foregoing restrictions at this time. It is generally the
policy of Merrill Lynch to review any such requested consent on a case by case
basis in light of the applicable circumstances.

Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the U.S. Representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the U.S.
Representatives may reduce that short position by purchasing Common Stock in
the open market. The U.S. Representatives may also elect to reduce any short
position through the exercise of all or part of the over-allotment options
described above.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.

Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.

In the Purchase Agreements, the Company and the Selling Shareholders have
agreed to indemnify the several Underwriters against certain civil liabilities,
including liabilities under the Securities Act. Pursuant to the Liberty Mutual
Registration Rights Agreement, Liberty Financial will indemnify LFC Holdings,
Inc. and its officers, directors and controlling persons against certain
liabilities arising in respect of this offering. Consequently, it is anticipated
that, to the extent LFC Holdings, Inc. is required to pay any indemnification
claims to the Underwriters under the Purchase Agreements, the Company will be
obligated to reimburse LFC Holdings, Inc. for any amount paid.

60
<PAGE>

LEGAL OPINIONS

The validity of the Common Stock offered by this Prospectus will be passed
upon for the Company and the Selling Shareholders by Choate, Hall & Stewart (a
partnership including professional corporations), Boston, Massachusetts, and
for the Underwriters by Brown & Wood LLP, New York, New York.

EXPERTS

The consolidated financial statements of Liberty Financial Companies, Inc.
at December 31, 1996 and for the year then ended appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors and at December 31, 1995 and for each of the two years in the period
ended December 31, 1995 appearing in this Prospectus and Registration Statement
have been audited by KPMG Peat Marwick LLP, independent auditors, as set forth
in their respective reports thereon appearing elsewhere herein and are included
in reliance upon such reports given upon the authority of such firms as experts
in accounting and auditing.

<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Auditors ......................................................... F-2
Independent Auditors' Report ............................................................ F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 ........................... F-4
Consolidated Income Statements for the years ended December 31, 1996, 1995 and 1994 ... F-5
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996,
1995 and 1994 .......................................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994 ................................................................................... F-7
Notes to Consolidated Financial Statements ............................................. F-8
Consolidated Balance Sheets as of March 31, 1997 (unaudited) and December 31, 1996 ...... F-24
Consolidated Income Statements for the three months ended March 31, 1997 and 1996
(unaudited) ............................................................................ F-25
Consolidated Statements of Cash Flows for the three months ended March 31, 1997 and 1996
(unaudited)............................................................................. F-26
Consolidated Statements of Stockholders' Equity for the three months ended March 31, 1997
(unaudited) ............................................................................ F-27
Notes to Unaudited Consolidated Financial Statements ................................... F-28
</TABLE>

F-1
<PAGE>

REPORT OF INDEPENDENT AUDITORS

[LOGO] Ernst & Young LLP

Shareholders and Board of Directors
Liberty Financial Companies, Inc.

We have audited the accompanying consolidated balance sheet of Liberty
Financial Companies, Inc. as of December 31, 1996, and the related consolidated
statements of income, stockholders' equity, and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our 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 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 the significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Liberty Financial
Companies, Inc. at December 31, 1996, and the consolidated results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.

ERNST & YOUNG LLP

Boston, Massachusetts
February 5, 1997

F-2
<PAGE>

INDEPENDENT AUDITORS' REPORT

The Board of Directors
Liberty Financial Companies, Inc.

We have audited the accompanying consolidated balance sheet of Liberty
Financial Companies, Inc. as of December 31, 1995, and the related consolidated
statements of income, stockholders' equity, and cash flows for each of the
years in the two year period ended December 31, 1995. 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 the 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, 1995, and the results of their operations
and their cash flows for each of the years in the two year period ended
December 31, 1995 in conformity with generally accepted accounting principles.

KPMG Peat Marwick, LLP

Boston, Massachusetts
February 16, 1996

F-3
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
($ in millions)

<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
--------- ----------
<S> <C> <C>
ASSETS:
Investments ........................................................................ $11,537.9 $ 10,144.7
Cash and cash equivalents ............................................................ 875.8 875.3
Accrued investment income ............................................................ 146.8 132.9
Deferred policy acquisition costs ................................................... 250.4 179.7
Value of insurance in force ......................................................... 70.8 44.0
Deferred distribution costs ......................................................... 114.4 114.6
Intangible assets .................................................................. 205.4 192.3
Other assets ........................................................................ 134.7 106.7
Separate account assets ............................................................ 1,091.5 959.2
--------- ----------
$14,427.7 $ 12,749.4
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policy liabilities .................................................................. $11,637.5 $ 10,084.4
Notes payable to affiliates ......................................................... 229.0 229.0
Revolving credit facility ............................................................ 52.5 61.0
Payable for investments loaned ...................................................... 211.2 317.7
Other liabilities .................................................................. 172.1 149.2
Net deferred tax liability ......................................................... 42.5 49.6
Separate account liabilities ......................................................... 1,017.7 889.1
--------- ----------
Total liabilities ............................................................... 13,362.5 11,780.0
--------- ----------
Series A redeemable convertible preferred stock, par value $.01; authorized, issued and
outstanding 327,340 shares in 1996 and 327,741 shares in 1995 ........................ 13.8 13.0
--------- ----------
Stockholders' Equity:
Common stock, par value $.01, authorized 100,000,000 shares, issued and
outstanding 28,705,015 shares in 1996 and 27,682,536 shares in 1995 ............... 0.3 0.3
Additional paid-in capital ......................................................... 835.3 810.5
Net unrealized investment gains ...................................................... 74.4 87.1
Retained earnings .................................................................. 141.4 59.4
Unearned compensation ............................................................... -- (0.9)
--------- ----------
Total stockholders' equity ...................................................... 1,051.4 956.4
--------- ----------
$14,427.7 $ 12,749.4
========= ==========
</TABLE>

See accompanying notes to consolidated financial statements.

F-4
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED INCOME STATEMENTS
(in millions, except per share data)

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Investment income ....................................... $ 796.4 $ 761.8 $ 695.1
Interest credited to policyholders ..................... (572.7) (555.8) (481.9)
------- ------- -------
Investment spread ....................................... 223.7 206.0 213.2
------- ------- -------
Net realized investment gains (losses) .................. 8.0 (4.0) (8.2)
------- ------- -------
Fee income:
Investment advisory and administrative fees ............ 196.4 155.8 95.9
Distribution and service fees ........................... 44.9 28.9 --
Transfer agency fees .................................... 43.9 30.8 4.0
Surrender charges and net commissions .................. 34.7 23.4 20.0
Separate account fees ................................. 16.0 13.2 12.5
------- ------- -------
Total fee income .................................... 335.9 252.1 132.4
------- ------- -------
Expenses:
Operating expenses .................................... (277.9) (225.1) (174.9)
Amortization of deferred policy acquisition costs ...... (60.2) (58.5) (52.2)
Amortization of deferred distribution costs ............ (33.9) (18.8) --
Amortization of value of insurance in force ............ (10.2) (9.5) (17.0)
Amortization of intangible assets ..................... (15.4) (12.2) (5.8)
Interest expense ....................................... (19.7) (16.2) (4.2)
------- ------- -------
Total expenses ....................................... (417.3) (340.3) (254.1)
------- ------- -------
Pretax income .......................................... 150.3 113.8 83.3
Income tax expense ....................................... (49.6) (39.9) (32.5)
------- ------- -------
Net income ............................................. $ 100.7 $ 73.9 $ 50.8
======= ======= =======
Net income per share .................................... $ 3.36 $ 2.64 $ 2.15
======= ======= =======
</TABLE>

See accompanying notes to consolidated financial statements.

F-5
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(in millions)

<TABLE>
<CAPTION>
Net
Additional Unrealized Total
Common Paid-In Investment Retained Treasury Unearned Stockholders'
Stock Capital Gains Earnings Stock Compensation Equity
------ ---------- ---------- -------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1993 ......... $0.2 $659.8 $ 0.5 $ (21.7) $ 638.8
Adjustment to beginning balance
for change in accounting
principle, net of taxes ............ 41.6 41.6
Proceeds from exercise of stock
options ........................... 0.1 0.1
Change in net unrealized
investment gains .................. (106.6) (106.6)
Net income ........................... 50.8 50.8
---- ------ ------- ------- --------
Balance, December 31, 1994 ......... 0.2 659.9 (64.5) 29.1 624.7
Common stock issued in
Colonial merger ..................... 0.1 117.3 117.4
Proceeds from exercise of stock
options ........................... 0.7 0.7
Reclassification of accrued
option compensation liability . 22.4 $ (2.1) 20.3
Contribution of treasury stock ...... 7.1 $(7.1)
Unearned compensation ............... 1.2 1.2
Accretion to face value of
preferred stock ..................... (0.6) (0.6)
Common stock dividends ............... 3.1 (12.3) 7.1 (2.1)
Note issued in connection with
common stock dividend ............... (30.0) (30.0)
Preferred stock dividends ............ (0.7) (0.7)
Change in net unrealized
investment gains .................. 151.6 151.6
Net income ........................... 73.9 73.9
---- ------ ------- ------- ----- ------ --------
Balance, December 31, 1995 ......... 0.3 810.5 87.1 59.4 (0.9) 956.4
Common stock issued in
Independent acquisition ............ 8.5 8.5
Proceeds from exercise of stock
options ........................... 2.4 2.4
Unearned compensation ............... 0.9 0.9
Accretion to face value of
preferred stock ..................... (0.9) (0.9)
Common stock dividends ............... 13.9 (16.9) (3.0)
Preferred stock dividends ............ (0.9) (0.9)
Change in net unrealized
investment gains .................. (12.7) (12.7)
Net income ........................... 100.7 100.7
---- ------ ------- ------- ----- ------ --------
Balance, December 31, 1996 ......... $0.3 $835.3 $ 74.4 $ 141.4 $ -- $ -- $1,051.4
==== ====== ======= ======= ===== ====== ========
</TABLE>

See accompanying notes to consolidated financial statements.

F-6
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)

<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 100.7 $ 73.9 $ 50.8
Adjustments to reconcile net income to net cash
provided by operating activities: ...........................
Depreciation and amortization .............................. 74.3 51.6 30.9
Interest credited to policyholders ........................ 572.7 555.8 481.9
Net realized investment (gains) losses ..................... (8.0) 4.0 8.2
Net amortization (accretion) on investments ............... (29.1) 9.7 12.2
Change in deferred policy acquisition costs ............... (24.4) (24.6) (38.8)
Change in current and deferred income taxes ............... 4.9 13.3 7.7
Net change in other assets and liabilities, net of effects of
acquisitions ............................................. (81.8) (59.7) (16.1)
--------- --------- ---------
Net cash provided by operating activities .................. 609.3 624.0 536.8
--------- --------- ---------
Cash flows from investing activities:
Investments purchased held to maturity ........................ -- -- (277.6)
Investments purchased available for sale ..................... (4,493.2) (2,851.0) (2,625.4)
Investments sold held to maturity ........................... -- 14.9 10.6
Investments sold available for sale ........................... 1,714.0 605.2 950.9
Investments matured held to maturity ........................ -- 317.8 576.0
Investments matured available for sale ........................ 1,387.7 906.5 854.4
Increase in policy loans, net ................................. (34.5) (21.0) (35.1)
Decrease in mortgage loans, net .............................. 7.5 55.0 26.5
Acquisitions, net of cash acquired ........................... (41.5) (106.0) --
--------- --------- ---------
Net cash used in investing activities ..................... (1,460.0) (1,078.6) (519.7)
--------- --------- ---------
Cash flows from financing activities:
Withdrawals from policyholder accounts ........................ (1,154.1) (933.8) (1,034.5)
Deposits to policyholder accounts ........................... 2,134.5 1,116.9 1,202.1
Securities lending .......................................... (119.2) 317.7 --
Borrowings from affiliates .................................... -- 124.0 --
Repayments under revolving credit ........................... (8.5) (19.5) --
Exercise of stock options .................................... 2.4 0.7 --
Dividends paid ................................................ (3.9) (2.8) --
--------- --------- ---------
Net cash provided by financing activities .................. 851.2 603.2 167.6
--------- --------- ---------
Increase in cash and cash equivalents ........................ 0.5 148.6 184.7
Cash and cash equivalents at beginning of year ............... 875.3 726.7 542.0
--------- --------- ---------
Cash and cash equivalents at end of year ..................... $ 875.8 $ 875.3 $ 726.7
========= ========= =========
</TABLE>

Noncash Investing Activities: The Company made several acquisitions during
1995 using $106.0 million of cash, net of cash acquired. The fair value of
assets acquired was $352.6 million; total liabilities assumed were $108.8
million.

Noncash Financing Activities: Noncash financing activities relate to
dividends paid to an affiliate of Liberty Mutual in the amount of $13.9 million
and $10.2 million in 1996 and 1995, respectively, pursuant to the Company's
dividend reinvestment plan with Liberty Mutual and, in 1995, $30.0 million in
the form of an 8.0% note due in 2000.

See accompanying notes to consolidated financial statements.

F-7
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Accounting Policies

Organization

Liberty Financial Companies, Inc. ("the Company") is an asset accumulation
and management company providing investment management products and
retirement-oriented insurance products through multiple distribution channels.

The Company is a majority owned indirect subsidiary of Liberty Mutual
Insurance Company ("Liberty Mutual").

Principles of Consolidation

The consolidated financial statements include the accounts of the Company
and its subsidiaries, including Keyport Life Insurance Company ("Keyport"),
Stein Roe & Farnham Incorporated ("Stein Roe"), and, from the date of
acquisition: The Colonial Group, Inc. ("Colonial"), Newport Pacific Management,
Inc. ("Newport") and Independent Holdings, Inc. ("Independent"). All
significant intercompany balances and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.

Use of Estimates

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.

Investments

Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities." Investments in debt and equity securities classified as
available for sale are carried at fair value, and after-tax unrealized gains
and losses (net of adjustments to deferred policy acquisition costs and value
of insurance in force) are reported as a separate component of stockholders'
equity. Realized investment gains and losses are calculated on a first-in,
first-out basis.

On December 31, 1995, pursuant to the "Guide to Implementation of
Statement 115 on Accounting for Certain Investments in Debt and Equity
Securities," the Company made a one-time reclassification of certain fixed
maturity securities from held to maturity to available for sale. The amortized
cost of those securities at the time of transfer was $1.4 billion, and the
unrealized gain of $13.9 million was recorded net of taxes in stockholders'
equity.

For the mortgage-backed bond portion of the fixed maturity investment
portfolio, the Company recognizes income using a constant effective yield based
on anticipated prepayments over the estimated economic life of the security.
When actual prepayments differ significantly from anticipated prepayments, the
effective yield is recalculated to reflect actual payments to date and
anticipated future payments; and any resulting adjustment is included in
investment income.

Mortgage loans are carried at amortized cost. Policy loans are carried at
the unpaid principal balances plus accrued interest.

Fee Income

Fees from asset management and investment advisory services and from
transfer agent, bookkeeping, distribution and service fees are recognized as
revenues when services are provided. Revenues from single premium deferred
annuities and single premium whole life policies include mortality charges,
surrender charges, policy fees and contract fees and are recognized when earned
under the respective contracts. Net commission revenue is recognized on the
trade date.

F-8
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

Deferred Policy Acquisition Costs

Policy acquisition costs are the costs of acquiring new business which
vary with, and are primarily related to, the production of new annuity
business. Such costs include commissions, costs of policy issuance and
underwriting and selling expenses. These costs are deferred and amortized in
relation to the present value of estimated gross profits from mortality,
investment and expense margins. Deferred policy acquisition costs are adjusted
for amounts relating to unrealized gains and losses on fixed maturity and
equity securities the Company has designated as available for sale. This
adjustment, net of tax, is included with the change in net unrealized gains or
losses that is credited or charged directly to stockholders' equity. Deferred
policy acquisition costs were decreased by $103.7 million at December 31, 1996
and $151.4 million at December 31, 1995, respectively, relating to this
adjustment.

Value of Insurance in Force

Value of insurance in force represents the actuarially-determined present
value of projected future gross profits from policies in force at the date of
their acquisition. This amount is amortized in proportion to the projected
emergence of profits over periods not exceeding 15 years for annuities and 25
years for life insurance.

The value of insurance in force is adjusted for amounts relating to the
recognition of unrealized investment gains and losses. This adjustment, net of
tax, is included with the change in net unrealized gains or losses that is
credited or charged directly to stockholders' equity. Value of insurance in
force was decreased by $26.0 million and $32.5 million at December 31, 1996 and
1995, respectively, relating to this adjustment.

Deferred Distribution Costs

Sales commissions and other direct costs related to the sale of
Company-sponsored broker-distributed funds which do not charge front-end sales
commissions are recorded as deferred distribution costs. Amortization is
provided on a straight-line basis over periods up to six years to match the
estimated period in which distribution fees will be earned. Contingent deferred
sales charges (back-end loads) received are applied to deferred distribution
costs to the extent of the estimated unamortized portion of such costs, with
the remainder recognized as additional distribution fee income.

Intangible Assets

Intangible assets consist of goodwill and certain identifiable intangible
assets arising from business combinations accounted for as a purchase.
Amortization is provided on a straight-line basis over estimated lives of the
acquired intangibles which range from 5 to 25 years. The carrying value of
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 and Liabilities

The assets and liabilities resulting from variable annuity and variable
life policies are segregated in separate accounts. Separate account assets,
which are carried at fair value, consist principally of investments in mutual
funds. Investment income and changes in asset values are allocated to the
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. Keyport also classified as separate account
assets investments in Company-sponsored mutual funds of $73.8 million and $72.5
million at December 31, 1996 and 1995, respectively.

Policy Liabilities

Policy liabilities consist of deposits received plus interest credited,
less accumulated policyholder charges, assessments, and withdrawals related to
deferred annuities and single premium whole life policies. Policy benefits that
are charged to expense include benefit claims incurred in the period in excess
of related policy account balances.

F-9
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

Stock Options

The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations in accounting for its employee stock options because the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS
123") requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.

Income Taxes

The Company is included in the consolidated federal income tax return
filed by Liberty Mutual. Income taxes have been provided using the liability
method in accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," and are calculated as if the Company filed its
own consolidated income tax return.

Earnings Per Share

The calculation of earnings per share is based on the weighted average
number of shares of common stock and common stock equivalents outstanding
during each period as follows: 29.65 million in 1996, 27.70 million in 1995,
and 23.63 million in 1994.

Cash Equivalents

Short-term investments having an original maturity of three months or less
are classified as cash equivalents.

Recent Accounting Pronouncement

In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities" ("SFAS 125"). The
relevant provisions of SFAS 125 relating to securities lending, dollar rolls
and other similar secured transactions become effective after December 31,
1997. It is not expected that the adoption of SFAS 125 will have a material
effect on the Company's consolidated financial position or results of
operations.

2. Acquisitions

In March 1996, the Company acquired all the outstanding common stock of
Independent, a distributor of annuity and investment products through banks. In
April 1996, the Company acquired all the outstanding capital stock of KJMM
Investment Management Company, Inc., a registered investment advisor primarily
in the wealth management business. The purchase price for these two
transactions has totaled $18.7 million in cash and common stock, and the
Company may be obligated to make additional cash or stock payments through
approximately 2000 based upon the attainment of certain performance objectives.
These acquisitions are not material to the financial condition or results of
operation of the Company.

In March 1995, the Company completed the acquisition of Colonial, an
investment advisor, distributor and transfer agent to mutual funds. The
purchase price was $264.8 million, consisting of $100.0 million in cash,
328,209 shares of redeemable convertible preferred stock and 4,677,808 shares
of common stock.

In April 1995 and September 1995, respectively, the Company acquired
Newport and American Asset Management Company, each a registered investment
advisor. The purchase price for these two transactions has totaled $27.8
million in cash. In addition, at the time of the Newport acquisition the
Company made a capital contribution to Newport in the amount of $3.5 million.
The Company may be obligated in each transaction to make

F-10
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

contingent additional cash payments through approximately 1999 based upon the
attainment of certain performance objectives.

The above transactions were recorded using the purchase method of
accounting and resulted in the recording of intangible assets of $190.7
million, including goodwill of $92.1 million. Each company's results of
operations are included in the Company's consolidated financial statements from
the dates of their acquisition. The following table discloses 1995 pro forma
results of operations (in millions) for the Company had the 1995 acquisition
occurred as of January 1, 1995. These pro forma results of operations are not
necessarily indicative of actual results which might have occurred had the
Company owned these companies since those dates.

<TABLE>
<CAPTION>
Year Ended
December 31, 1995
-----------------
<S> <C>
Revenues .................. $ 1,044.5
Net income ............... 79.0
Net income per share ...... 2.72
</TABLE>

In addition to the above acquisitions, in August 1996, Keyport entered
into a 100 percent coinsurance agreement for a $954.0 million block of single
premium deferred annuities issued by Fidelity & Guaranty Life Insurance Company
("F&G Life"). Under this transaction, the investment risk of the annuity
policies was transferred to Keyport. However, F&G Life will continue to
administer the policies and will remain contractually liable for the
performance of all policy obligations. This transaction increased investments
by $923.1 million and value of insurance in force by $30.9 million.

3. Investments

Investments, all of which pertain to the Company's annuity insurance
operations, were comprised of the following (in millions):

<TABLE>
<CAPTION>
December 31,
-----------------------
1996 1995
--------- ---------
<S> <C> <C>
Fixed maturities ............ $10,718.6 $ 9,536.0
Mortgage loans ............ 67.0 74.5
Policy loans ............... 532.8 498.3
Other invested assets ...... 183.6 10.7
Equity securities ......... 35.9 25.2
--------- ---------
$11,537.9 $10,144.7
========= =========
</TABLE>

As of December 31, 1996, the Company did not have a material concentration
of financial instruments in a single investee, industry or geographic location
and no investment in any person or its affiliates (other than bonds issued by
agencies of the United States government) exceeded ten percent of stockholders'
equity.

As of December 31, 1996, $987.0 million of fixed maturities were below
investment grade. These securities represented 8.0% of the Company's total
investments, including certain cash and cash equivalents.

Fixed Maturities

As of December 31, 1996 and 1995, the Company did not hold any investments
in fixed maturities that were classified as held to maturity or as trading
securities. The amortized cost, gross unrealized gains and losses and fair
value of fixed maturity securities are as follows (in millions):

F-11
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

<TABLE>
<CAPTION>
December 31, 1996
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities ..................... $ 35.3 $ 0.2 $ (0.1) $ 35.4
Mortgage backed securities of U.S.
government corporations and agencies ......... 1,666.1 41.4 (8.6) 1,698.9
Obligations of states and political subdivisions 23.9 0.4 (0.1) 24.2
Debt securities issued by foreign governments 246.3 11.7 (0.5) 257.5
Corporate securities ........................... 4,093.5 153.4 (12.3) 4,234.6
Other mortgage backed securities ............... 2,413.0 47.6 (24.0) 2,436.6
Asset backed securities ........................ 1,736.0 15.5 (6.4) 1,745.1
Senior secured loans ........................... 286.3 -- -- 286.3
--------- ------ ------- ---------
Total fixed maturities ..................... $10,500.4 $270.2 $ (52.0) $10,718.6
========= ====== ======= =========
</TABLE>

<TABLE>
<CAPTION>
December 31, 1995
----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
U.S. Treasury securities ..................... $ 360.2 $ 9.0 $ (0.2) $ 369.0
Mortgage backed securities of U.S.
government corporations and agencies ......... 1,585.5 58.8 (5.2) 1,639.1
Obligations of states and political subdivisions 26.7 1.3 -- 28.0
Debt securities issued by foreign governments 57.4 4.3 -- 61.7
Corporate securities ........................... 3,479.6 224.3 (7.3) 3,696.6
Other mortgage backed securities ............... 1,951.5 66.6 (71.8) 1,946.3
Asset backed securities ........................ 1,543.9 29.8 (1.5) 1,572.2
Senior secured loans ........................... 223.1 -- -- 223.1
--------- ------ ------- ---------
Total fixed maturities ..................... $9,227.9 $394.1 $ (86.0) $9,536.0
========= ====== ======= =========
</TABLE>

At December 31, 1996, gross unrealized gains on equity securities,
interest rate cap agreements and investments in separate accounts aggregated
$29.9 million, and gross unrealized losses aggregated $5.3 million,
respectively. At December 31, 1995, gross unrealized gains on equity
securities, interest rate cap agreements and investments in separate accounts
aggregated $16.9 million, and gross unrealized losses aggregated $9.3 million,
respectively.

Contractual Maturities

The amortized cost and estimated fair value of fixed maturities by
contractual maturity as of December 31, 1996 are as follows (in millions):

<TABLE>
<CAPTION>
December 31, 1996
------------------------
Amortized Fair
Cost Value
--------- ---------
<S> <C> <C>
Due in one year or less ..................... $ 487.4 $ 489.1
Due after one year through five years ...... 1,522.4 1,559.8
Due after five years through ten years ...... 2,013.4 2,084.9
Due after ten years ........................ 662.1 704.1
--------- ---------
4,685.3 4,837.9
Mortgage and asset backed securities ......... 5,815.1 5,880.7
--------- ---------
$10,500.4 $10,718.6
========= =========
</TABLE>

F-12
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

Actual maturities may differ from those shown above because borrowers may
have the right to call or prepay obligations.

Net Investment Income

Net investment income is summarized as follows (in millions):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Fixed maturities .................................... $ 737.4 $ 682.0 $ 636.0
Policy loans ....................................... 30.2 28.5 26.3
Equity securities .................................... 4.5 4.8 2.1
Mortgage loans and other invested assets ............ 11.4 12.9 15.4
Cash and cash equivalents ........................... 36.1 41.6 20.7
------- ------- -------
Gross investment income ........................... 819.6 769.8 700.5
Investment expenses ................................. (6.7) (5.0) (4.6)
Amortization of options and interest rate caps ...... (16.5) (3.0) (0.8)
------- ------- -------
Net investment income .............................. $ 796.4 $ 761.8 $ 695.1
======= ======= =======
</TABLE>

There were no non-income producing fixed maturity investments as of
December 31, 1996 or 1995.

Net Realized Investment Gains (Losses)

Net realized investment gains (losses) on the investments in the Company's
annuity insurance operations are summarized as follows (in millions):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Fixed maturities held to maturity:
Gross gains ......................................................... $ -- $ 1.3 $ 3.5
Gross losses ......................................................... -- (0.1) (0.8)
Fixed maturities available for sale:
Gross gains ......................................................... 24.3 8.2 26.0
Gross losses ......................................................... (17.8) (16.0) (26.8)
Equity securities ................................................... 0.9 1.3 (0.8)
Interest rate swaps ................................................... -- (0.9) --
Other ............................................................... (0.2) -- (0.8)
Impairment writedowns ................................................ -- -- (11.5)
------ ------ ------
Gross realized investment gains (losses) .............................. 7.2 (6.2) (11.2)
------ ------ ------
Amortization adjustments of deferred policy acquisition costs and value
of insurance in force ................................................ (1.7) 2.2 3.0
------ ------ ------
Net realized investment gains (losses) .............................. $ 5.5 $ (4.0) $ (8.2)
====== ====== ======
</TABLE>

Proceeds from sales of fixed maturities available for sale were $1.7
billion, $565.4 million and $927.8 million in 1996, 1995 and 1994,
respectively.

In addition to the net realized investment gains (losses) shown above,
additional gains of $2.5 million were realized in 1996 relating to sales of
general corporate securities in the Company's asset management operations.

F-13
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

4. Off Balance Sheet Financial Instruments

The Company's primary objective in acquiring off balance sheet financial
instruments is the management of interest rate risk. Interest rate risk results
from a mismatch in the timing and amount of invested asset and policyholder
liability cash flows. The Company seeks to manage this risk through various
asset/liability management strategies such as the 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 primarily include managing the
effective duration of portfolio securities and utilizing interest rate swaps
and caps. Outstanding off balance sheet financial instruments, shown in
notional amounts along with their carrying value and estimated fair values, are
as follows (in millions):

<TABLE>
<CAPTION>
Assets (Liabilities)
Notional Amounts ---------------------------------------------
------------------- 1996 1995
December 31, --------------------- --------------------
------------------- Carrying Fair Carrying Fair
1996 1995 Value Value Value Value
------- ------- -------- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C>
Interest rate cap agreements ...... $ 450.0 $ 450.0 $ 6.2 $ 1.4 $ 8.8 $ 1.5
Interest rate swaps ............... 2,275.0 1,975.0 (8.8) (8.8) (64.1) (64.1)
Indexed call options ............... -- -- 109.6 109.6 7.8 7.8
</TABLE>

The interest rate cap agreements, which expire in 1997 through 2000,
entitle the Company to receive payments from the counterparties on specified
future dates, contingent on future interest rates. For each cap, the amount of
such payment, if any, is determined by the excess of a market interest rate
over a specified cap rate times the notional amount. The premium paid for the
interest rate caps is included in other invested assets and is being amortized
over the terms of the agreements and is included in net investment income.
Interest rate contracts relating to investments designated as available for
sale are adjusted to fair value with the resulting unrealized gains and losses
included in stockholders' equity. Fair values for these contracts are based on
current settlement values. The current settlement values are based on quoted
market prices and brokerage quotes, which utilize pricing models or formulas
using current assumptions.

The Company uses indexed call options for purposes of hedging its
equity-indexed products. The call options hedge the interest credited on these
1, 5 and 7 year term products, which is based on the changes in the Standard &
Poor's 500 Composite Stock Price Index ("S&P Index"). Premiums paid on the call
options are amortized to interest expense over the terms of the underlying
equity-indexed products using the straight line method. Gains and losses, if
any, resulting from the early termination of the call options are deferred and
amortized to interest credited over the remaining term of the underlying
equity-indexed products.

At December 31, 1996 the Company had approximately $73.1 million of
unamortized premium in call option contracts. The call options' maturities
range from 1997 to 2001. The Company carries its S&P Index call options at
market value.

Deferred losses of $7.9 million and $10.6 million as of December 31, 1996
and 1995, respectively, resulting from terminated interest rate swap agreements
are included with the related fixed maturity securities to which the hedge
applied and are being amortized over the life of such securities.

The Company is exposed to potential credit loss in the event of
nonperformance by counterparties on interest rate cap agreements and interest
rate swaps. Nonperformance is not anticipated and, therefore, no collateral is
held or pledged. The credit risk associated with these agreements is minimized
by purchasing such agreements from investment-grade counterparties.

F-14
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

5. Indebtedness

The Company has notes payable to affiliates as follows (in millions):

<TABLE>
<CAPTION>
December 31,
---------------
1996 1995
------ ------
<S> <C> <C>
8.0% promissory note due April 3, 2000 ................................... $ 99.0 $ 99.0
8.0% promissory note due March 31, 2000 ................................... 30.0 30.0
8.5% promissory note due March 24, 2005 ................................... 100.0 100.0
------ ------
$229.0 $229.0
====== ======
</TABLE>

The $100 million 8.5% promissory note becomes due and payable in the event
Liberty Mutual ceases to own more than a 50% interest in the Company. The $30
million 8.0% promissory note was issued in connection with the payment of a
dividend to an affiliate of Liberty Mutual.

The Company has available an $80.0 million revolving credit facility
(the "Facility") which is utilized to finance deferred sales commissions paid in
connection with the distribution of mutual fund shares sold with no up-front
sales charges. The Facility is subject to annual renewal. If not renewed,
effective April 11, 1997, the Facility converts to a term loan which matures on
April 11, 2002. As of December 31, 1996 and 1995, balances of $52.5 million and
$61.0 million were outstanding under the Facility. Upon conversion to a term
loan, minimum quarterly payments of principal equal to 5% of outstanding
borrowings as of the conversion date are required. Interest accrues on the
outstanding borrowings of the Facility at floating rates based upon LIBOR
options plus 0.225%. The Facility contains certain covenants. The Company was in
compliance with these covenants at December 31, 1996.

Interest paid was $22.9 million, $19.2 million and $4.6 million in 1996,
1995 and 1994, respectively.

6. Income Taxes

Income tax expense is summarized as follows (in millions):

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995 1994
------ ----- -----
<S> <C> <C> <C>
Current ......................................................... $ 54.8 $39.3 $18.5
Deferred ......................................................... (5.2) 0.6 14.0
------ ----- -----
$ 49.6 $39.9 $32.5
====== ===== =====
</TABLE>

A reconciliation of income tax expense with expected federal income tax
expense computed at the applicable federal income tax rate of 35% is as follows
(in millions):

<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Expected income tax expense ................................. $ 52.6 $ 39.9 $ 29.1
Increase (decrease) in income taxes resulting from:
Nontaxable investment income .............................. (1.2) (1.7) (2.2)
Change in deferred tax asset valuation allowance ......... (6.7) (8.3) 1.0
Amortization of goodwill and other intangible assets ...... 2.0 2.0 4.0
State taxes, net of federal tax benefit .................. 2.5 1.0 0.3
Stock option plan compensation ........................... 0.8 6.0 --
Other, net ................................................ (0.4) 1.0 0.3
------ ------ ------
Income tax expense .......................................... $ 49.6 $ 39.9 $ 32.5
====== ====== ======
</TABLE>

F-15
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

The components of deferred federal income taxes are as follows (in
millions):

<TABLE>
<CAPTION>
December 31,
---------------------
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets:
Policy liabilities ................................................ $ 171.3 $ 141.0
Guaranty fund expense ............................................. 6.3 7.7
Stock option plan compensation .................................... 3.8 4.9
Deferred compensation and other benefit plans ..................... 6.4 6.3
Excess of book over tax basis depreciation and amortization ...... 1.6 1.6
Deferred gain on interest rate swaps .............................. -- 0.3
Net operating loss carryforwards ................................. 27.6 26.0
Distribution fees ................................................ 14.8 10.9
Other ............................................................ 7.8 6.4
------- -------
Total deferred tax assets ....................................... 239.6 205.1
Less: valuation allowance ....................................... (17.0) (23.7)
------- -------
Net deferred tax assets .......................................... 222.6 181.4
------- -------
Deferred tax liabilities:
Deferred policy acquisition costs ................................. (63.1) (44.5)
Value of insurance in force and intangible assets ............... (20.5) (7.2)
Excess of book over tax basis of investments ..................... (125.7) (130.5)
Deferred loss on interest rate swaps .............................. -- (3.7)
Deferred revenue ................................................ (2.0) (1.5)
Amortization of deferred distribution costs ..................... (49.8) (41.9)
Other ............................................................ (4.0) (1.7)
------- -------
Total deferred tax liabilities ................................. (265.1) (231.0)
------- -------
Net deferred tax liability .................................... $ (42.5) $ (49.6)
======= =======
</TABLE>

As of December 31, 1996, the Company had net operating loss carryforwards
relating to certain of the Company's non-insurance operations of $71.1 million.
Utilization of these net operating losses is limited to use against future
taxable profits in these non-insurance operations. As of December 31, 1996, the
Company had approximately $7.6 million of purchased net operating loss
carryforwards (relating to an acquisition in its insurance operations).
Utilization of these net operating loss carryforwards, which expire through
2006, is limited to use against future profits in a component of the Company's
insurance operations. The Company believes that it is more likely than not that
it will realize the benefits of its net deferred tax asset.

Income taxes paid were $45.7 million, $43.2 million and $29.4 million in
1996, 1995 and 1994, respectively.

7. Redeemable Convertible Preferred Stock

The Series A Redeemable Convertible Preferred Stock (the "Preferred
Stock"), with a $50 face value, has an annual cumulative cash dividend rate of
$2.875 per share and is convertible into shares of Company Common Stock at a
rate of 1.0559 for each share of such Preferred Stock. The Preferred Stock is
redeemable at the option of the Company anytime after March 24, 1998 provided
that the market value of the Company's Common Stock exceeds a specified amount.
The Preferred Stock may also be put to the Company by the holders of such
Preferred Stock after March 24, 2000, for a period of sixty days, at face value
plus cumulative unpaid dividends. Each share of Preferred Stock is entitled to
that number of votes equal the number of common shares into which it is
convertible. The difference between the face value of the Preferred Stock and
its fair value at the time of its issuance is being added to the carrying value
of the Preferred Stock ratably over a five year period by a direct charge to
retained earnings.

F-16
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

8. Retirement Plans

The Company maintains a noncontributory defined benefit pension plan (the
"Plan") covering its employees (except employees of Stein Roe and Colonial, who
participate in separate profit sharing plans, and except employees of
Independent). It is the Company's practice to fund amounts for the Plan
sufficient to meet the minimum requirements of the Employee Retirement Income
Security Act of 1974. Additional amounts are contributed from time to time when
deemed appropriate by the Company. 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 also has an unfunded nonqualified Supplemental Pension
Plan ("Supplemental Plan"), collectively with the Plan (the "Plans"), to
replace benefits lost due to limits imposed on Plan benefits under the Internal
Revenue Code. Plan assets consist of investments in certain Company-sponsored
mutual funds.

The following table sets forth the Plans' funded status (in millions) as
of December 31, 1996 and 1995.

<TABLE>
<CAPTION>
December 31,
-------------------
1996 1995
------ ------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligations .......................................... $ 16.5 $ 13.7
Accumulated benefit obligation ....................................... 1.8 1.9
------ ------
$ 18.3 $ 15.6
====== ======
Projected benefit obligation .......................................... $ 23.4 $ 20.7
Plan assets at fair value ............................................. (11.7) (10.2)
------ ------
Projected benefit obligation in excess of the Plans' assets ......... 11.7 10.5
Unrecognized net actuarial loss ....................................... (2.0) (2.8)
Prior service cost not yet recognized in net periodic pension cost ... (3.1) (3.6)
Adjustment for minimum liability .................................... -- 1.3
------ ------
Accrued pension cost ................................................ $ 6.6 $ 5.4
====== ======
</TABLE>

Pension cost includes the following components (in millions):

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Service cost benefits earned during the period ............. $ 1.6 $ 1.3 $ 1.6
Interest cost on projected benefit obligation ............. 1.6 1.3 1.2
Actual return on Plan assets ............................... (1.3) (1.7) 0.1
Net amortization and deferred amounts ..................... 1.1 1.5 (0.1)
----- ----- -----
Total net periodic pension cost ........................... $ 3.0 $ 2.4 $ 2.8
===== ===== =====
</TABLE>

F-17
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

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,
-----------------------------
1996 1995 1994
----- ----- -----
<S> <C> <C> <C>
Discount rate ............................................... 7.50% 7.25% 8.25%
Rate of increase in compensation level ....................... 5.25% 5.25% 5.25%
Expected long-term rate of return on assets ................. 8.50% 8.50% 8.50%
</TABLE>

The Company provides various other funded and unfunded defined
contribution plans, which include savings and investment plans, supplemental
savings plans, profit sharing plans, and supplemental profit sharing plans.
Expenses related to these defined contribution plans totaled $7.6 million, $5.4
million and $3.8 million in 1996, 1995 and 1994, respectively.

9. Stock Option Plans

The Company has two stock-based compensation plans, the 1990 Stock Option
Plan (the "1990 Plan") and the 1995 Stock Incentive Plan (the "1995 Plan"). The
1990 Plan provided for grants of incentive and nonqualified stock options,
which were issued from 1990 through 1994. The 1995 Plan provides for grants of
incentive and nonqualified stock options, stock appreciation rights, restricted
stock, unrestricted stock and performance shares, as well as cash and other
awards. To date, only stock options have been granted under the 1995 Plan. A
maximum of 3,145,558 shares of the Company's common stock may be issued under
the 1990 and 1995 Plans. This amount does not include 607,800 nonqualified
options at prices ranging from $1.00 to $31.50 that were assumed by the Company
in connection with the Colonial acquisition.

All options granted under the 1990 Plan were granted at a price not less
than the fair market value of the Company's common stock (determined by the
valuation provisions of the 1990 Plan). All options granted under the 1995 Plan
have been granted at the market price of the Company's common stock on the
grant date. All granted options provide for vesting in four equal annual
installments, beginning one year after the date of grant, and expire 10 years
after the grant date. Compensation expense associated with these plans was $0.9
million, $1.3 million and $6.9 million in 1996, 1995 and 1994, respectively.

Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Company accounted for its employee stock options granted subsequent to
December 31, 1994 under the fair value method of that Statement. As provided
for under SFAS 123, the fair value for these options was estimated using a
Black-Scholes option pricing model with the following assumptions for 1996 and
1995: risk free interest rate--6.26%; dividend yield--1.99%; expected
volatility of the market price of the Company's common stock--15%; and the
weighted average life of the options--6 years.

For pro forma disclosure purposes, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows (in millions, except for earnings per share
information):

<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Pro forma net income ................................................. $ 99.3 $ 73.6
Pro forma net income per share ...................................... 3.33 2.63
</TABLE>

Because SFAS 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1998.

F-18
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

A summary of the stock option activity, and related information for the
years ended December 31 follows (in thousands, except price data):

<TABLE>
<CAPTION>
1996 1995 1994
----------------------- ----------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise- Exercise- Exercise-
Options Price Options Price Options Price
------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning of year ...... 2,755 $ 14.37 2,121 $ 11.96 2,282 $ 10.24
Granted .............................. 612 33.00 481 25.75 306 22.96
Assumed .............................. -- -- 607 10.24 -- --
Exercised for shares ............... (326) (7.21) (100) (6.80) (4) (10.09)
Forfeited or cashed out ............ (52) (26.92) (354) (10.66) (463) (10.30)
----- ------- ----- ------- ----- -------
Outstanding--end of year ............ 2,989 $ 18.74 2,755 $ 14.37 2,121 $ 11.96
===== ======= ===== ======= ===== =======
Exercisable--end of year ............ 1,806 $ 12.90 1,727 $ 10.88 1,254 $ 10.19
===== ======= ===== ======= ===== =======
Available for grant .................. 349 891
===== =====
Weighted-average fair value of
options granted during year ......... $7.97 $6.24
===== =====
</TABLE>

Exercise prices for options outstanding as of December 31, 1996 ranged
from $1.00 to $33.00. The weighted-average remaining contractual life of these
options is 6.75 years.

10. Fair Value of Financial Instruments

The following discussion outlines the methodologies and assumptions used
to determine the estimated fair value of the Company's financial instruments.
The aggregate fair value amounts presented herein do not necessarily represent
the underlying value of the Company, and accordingly, care should be exercised
in deriving conclusions about the Company's business or financial condition
based on the fair value information presented herein.

The following methods and assumptions were used by the Company in
determining estimated fair values of financial instruments:

Fixed maturities and equity securities: Fair values for fixed maturity
securities are based on quoted market prices, where available. For fixed
maturities not actively traded, the estimated fair values are determined
using values from independent pricing services, or, in the case of private
placements, are determined by discounting expected future cash flows using
a current market rate applicable to the yield, credit quality, and
maturity of the securities. The estimated fair values for equity
securities are based on quoted market prices.

Mortgage loans: The estimated fair value of mortgage loans are determined
by discounting future cash flows to the present at current market rates,
using expected prepayment rates.

Policy loans: The carrying value of policy loans approximates fair value.

Policy liabilities: Deferred annuity contracts are assigned fair value
equal to current net surrender value. Annuitized contracts are valued
based on the present value of the future cash flows at current pricing
rates.

Other invested assets, Cash: The carrying value for assets classified as
other invested assets and cash in the accompanying balance sheets
approximates their fair value.

F-19
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

Notes payable to affiliates, Revolving credit facility: Fair values for
debt are estimated using discounted cash flow analyses based on the
Company's incremental borrowing rate for similar types of borrowing
arrangements.

The estimated fair values and carrying values of the Company's financial
instruments are as follows (in millions):

<TABLE>
<CAPTION>
December 31,
-------------------------------------------------
1996 1995
----------------------- ---------------------
Carrying Fair Carrying Fair
Value Value Value Value
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Assets:
Fixed maturity securities ............... $10,718.6 $10,718.6 $9,536.0 $9,536.0
Equity securities ........................ 35.9 35.9 25.2 25.2
Mortgage loans ........................... 67.0 73.4 74.5 79.7
Policy loans .............................. 532.8 532.8 498.3 498.3
Other invested assets ..................... 183.6 183.6 10.7 10.7
Cash and cash equivalents ............... 875.8 875.8 875.3 875.3

Liabilities:
Policy liabilities ........................ 11,637.5 11,127.4 10,084.4 9,650.1
Note payable to affiliates ............... 229.0 229.0 229.0 229.0
Revolving credit facility ............... 52.5 52.5 61.0 61.0
</TABLE>

11. Industry Segment Information

The Company's operations are classified in two business segments: annuity
and asset management. Annuity operations relate principally to the issuance of
fixed, indexed and variable annuity products and a closed block of
investment-oriented life insurance products. Asset management includes mutual
funds, wealth management, and institutional asset management. Information by
industry segment for 1996, 1995 and 1994 is shown below (in millions).

<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1996 1995 1994
-------- -------- -------
<S> <C> <C> <C>
Statement of Operations Data
Revenues:
Annuity:
Unaffiliated .......................................... $ 840.8 $ 790.1 $ 719.0
Intersegment .......................................... (8.6) (7.7) (6.7)
-------- -------- -------
Total annuity ....................................... 832.2 782.4 712.3
-------- -------- -------
Asset management:
Unaffiliated .......................................... 299.5 219.8 100.3
Intersegment .......................................... 8.6 7.7 6.7
-------- -------- -------
Total asset management .............................. 308.1 227.5 107.0
-------- -------- -------
Total revenues ....................................... $1,140.3 $1,009.9 $ 819.3
======== ======== =======
Income before income taxes:
Annuity:
Income before amortization of intangible assets ...... $ 132.6 $ 101.6 $ 91.4
Amortization of intangible assets ..................... (1.1) (1.2) (1.3)
-------- -------- -------
Subtotal annuity .................................... 131.5 100.4 90.1
-------- -------- -------
</TABLE>

F-20
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Asset management:
Income before amortization of intangible assets ...... 71.5 55.4 19.3
Amortization of intangible assets ..................... (14.1) (10.8) (4.3)
------ ------ ------
Subtotal asset management ........................... 57.4 44.6 15.0
------ ------ ------
Corporate:
Income before amortization of intangible assets ...... (38.4) (31.0) (21.6)
Amortization of intangible assets ..................... (0.2) (0.2) (0.2)
------ ------ ------
Subtotal corporate ................................. (38.6) (31.2) (21.8)
------ ------ ------
Total income before income taxes ..................... $150.3 $113.8 $ 83.3
====== ====== ======
</TABLE>

<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Balance Sheet Data
Identifiable Assets:
Annuity ...................................... $ 13,924.6 $ 12,279.2 $ 10,873.6
Asset management ............................. 484.0 469.3 74.3
Corporate ................................... 22.0 17.2 28.2
Intercompany eliminations ................... (2.9) (16.3) (7.3)
---------- ---------- ----------
Total ...................................... $ 14,427.7 $ 12,749.4 $ 10,968.8
========== ========== ==========
</TABLE>

12. Quarterly Financial Data, in Millions, Except Per Share Amounts (unaudited)

<TABLE>
<CAPTION>
Quarter Ended 1996
-------------------------------------------------
March June September December
31 30 30 31
------- ------- --------- --------
<S> <C> <C> <C> <C>
Investment income ........................... $ 189.2 $ 189.8 $ 201.7 $ 215.7
Interest credited to policyholders ......... (138.1) (136.2) (146.0) (152.4)
------- ------- ------- -------
Investment spread ........................... 51.1 53.6 55.7 63.3
Net realized investment gains (losses) ...... 3.8 (1.7) 0.7 5.2
Fee income ................................. 78.6 83.7 85.9 87.7
Pretax income .............................. 36.3 34.0 36.4 43.6
Net income ................................. 23.8 23.1 24.7 29.1
Net income per share ........................ 0.81 0.77 0.82 0.96
</TABLE>

<TABLE>
<CAPTION>
Quarter Ended 1995 (1)
-------------------------------------------------
March June September December
31 30 30 31
------- ------- --------- --------
<S> <C> <C> <C> <C>
Investment income ........................... $ 185.2 $ 190.9 $ 191.2 $ 194.5
Interest credited to policyholders ......... (130.9) (139.2) (143.3) (142.4)
------- ------- ------- -------
Investment spread ........................... 54.3 51.7 47.9 52.1
Net realized investment gains (losses) ...... (5.7) (0.7) 1.4 1.0
Fee income ................................. 33.3 70.0 72.6 76.2
Pretax income .............................. 18.2 32.3 32.7 30.6
Net income ................................. 10.1 21.1 21.9 20.8
Net income per share ........................ 0.42 0.72 0.76 0.71
</TABLE>

- ------------
(1) Includes the results of operations of Colonial since its acquisition date in
March 1995.

F-21
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

13. Statutory Information

Keyport is domiciled in Rhode Island and prepares its statutory financial
statements in accordance with accounting principles and practices prescribed or
permitted by the Department of Business Regulation of the State of Rhode
Island. Statutory surplus differs from shareholders' equity reported in
accordance with GAAP primarily because policy acquisition costs are expensed
when incurred, investment reserves and policy liabilities are based on
different assumptions, and income tax expense reflects only taxes paid or
currently payable. Keyport's statutory net income and surplus are as follows:

<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Statutory surplus ......... $567.7 $535.2 $546.4
Statutory net income ...... 40.2 38.3 23.4
</TABLE>

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 $0.6 million in 1996 and $0.9 million in each of 1995 and
1994. 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.

The Company provided asset management services to real estate limited
partnerships for which an affiliate of Liberty Mutual served as the general
partner. The affiliate paid the Company fees for such services which totaled
$6.7 million and $5.7 million in 1995 and 1994, respectively. These limited
partnerships were liquidated in 1995.

During 1996, the Company sold to a wholly owned subsidiary of Liberty
Mutual a wholly owned subsidiary which had provided real estate management
services to certain affiliates of Liberty Mutual. The sales price was $2.1
million, the net book value of the transferred subsidiary.

Regulatory authorities permit dividend payments from Keyport to the
Company up to 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.
As of December 31, 1996, Keyport could pay dividends of up to $42.5 million
without the approval of the Department of Business Regulation of the State of
Rhode Island. As of December 31, 1996 under its credit facility, Colonial could
pay dividends of up to $44.7 million.

15. Commitments and Contingencies

Leases: The Company leases data processing equipment, furniture and
certain office facilities from others under operating leases expiring in
various years through 2009. Rental expense (in millions) amounted to $16.0
million, $14.7 million and $10.6 million for the years ended December 31, 1996,
1995 and 1994, respectively. For each of the next five years, and in the
aggregate, as of December 31, 1996, the following are the minimum future rental
payments under noncancelable operating leases having remaining terms in excess
of one year (in millions):

<TABLE>
<CAPTION>
Year Payments
---- ---------
<S> <C>
1997 ................... $13.4
1998 ................... 12.8
1999 ................... 12.7
2000 ................... 12.7
2001 ................... 13.0
Thereafter ............. 37.3
</TABLE>

F-22
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--Continued

Legal Matters: The Company is involved at various times in litigation
common to its business. In the opinion of management, the resolution of any
such litigation is not expected to have a material adverse effect on the
Company's financial condition or its results of operations.

Regulatory Matters: 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 1996, 1995
and 1994, Keyport was assessed $10.0 million, $8.1 million, and $7.7 million,
respectively. During 1996, 1995 and 1994, Keyport recorded $1.0 million, $2.0
million, and $7.2 million respectively, of provisions for state guaranty fund
association expense. At December 31, 1996 and 1995, the reserve for such
assessments was $12.9 million and $21.9 million, respectively.

F-23
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
($ in millions)

<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>

ASSETS
Assets:
Investments ........................................................................ $11,541.5 $11,537.9
Cash and cash equivalents ............................................................ 1,123.5 875.8
Accrued investment income ............................................................ 156.7 146.8
Deferred policy acquisition costs ................................................... 321.9 250.4
Value of insurance in force ......................................................... 85.9 70.8
Deferred distribution costs ......................................................... 113.2 114.4
Intangible assets .................................................................. 199.9 205.4
Other assets ........................................................................ 127.2 134.7
Separate account assets ............................................................ 1,088.9 1,091.5
--------- ---------
$14,758.7 $14,427.7
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policyholder balances ............................................................... $11,687.7 $11,637.5
Notes payable to affiliates ......................................................... 229.0 229.0
Payable for investments purchased and loaned ....................................... 517.5 211.2
Other liabilities .................................................................. 230.2 267.1
Separate account liabilities ......................................................... 1,037.5 1,017.7
--------- ---------
Total liabilities ............................................................... 13,701.9 13,362.5
--------- ---------
Series A redeemable convertible preferred stock, par value $.01; authorized, issued and
outstanding 327,340 shares in 1997 and 1996 .......................................... 14.0 13.8
--------- ---------
Stockholders' Equity:
Common stock, par value $.01; authorized 100,000,000 shares, issued and
outstanding 28,904,131 shares in 1997 and 28,705,015 shares in 1996 ............... 0.3 0.3
Additional paid-in capital ......................................................... 840.1 835.3
Net unrealized investment gains ...................................................... 30.7 74.4
Retained earnings .................................................................. 171.7 141.4
--------- ---------
Total stockholders' equity ...................................................... 1,042.8 1,051.4
--------- ---------
$14,758.7 $14,427.7
========= =========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-24
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED INCOME STATEMENTS
(Unaudited)
(in millions, except share and per share data)

<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1996
--------- ----------
<S> <C> <C>
Investment income ....................................... $ 208.0 $ 189.2
Interest credited to policyholders ..................... (147.3) (138.1)
---------- ----------
Investment spread ....................................... 60.7 51.1
---------- ----------
Net realized investment gains ........................... 12.9 3.8
---------- ----------
Fee income:
Investment advisory and administrative fees ............ 53.1 46.4
Distribution and service fees ........................... 12.1 10.6
Transfer agency fees .................................... 11.8 10.4
Surrender charges and net commissions .................. 8.5 7.7
Separate account fees ................................. 3.9 3.5
---------- ----------
Total fee income .................................... 89.4 78.6
---------- ----------
Expenses:
Operating expenses .................................... (75.8) (65.9)
Amortization of deferred policy acquisition costs ...... (16.3) (14.1)
Amortization of deferred distribution costs ............ (8.2) (6.8)
Amortization of value of insurance in force ............ (3.2) (1.7)
Amortization of intangible assets ..................... (3.2) (3.7)
Interest expense, net ................................. (4.5) (5.0)
---------- ----------
Total expenses ....................................... (111.2) (97.2)
---------- ----------
Pretax income .......................................... 51.8 36.3
Income tax expense ....................................... (16.8) (12.5)
---------- ----------
Net income ............................................. $ 35.0 $ 23.8
========== ==========
Net income per share .................................... $ 1.14 $ 0.81
========== ==========
Common stock and common stock equivalents ............... 30,490,150 29,262,329
========== ==========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-25
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)

<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income .................................................................. $ 35.0 $ 23.8
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............................................. 18.2 14.8
Interest credited to policyholders ....................................... 147.3 138.1
Net realized investment gains ............................................. (12.9) (3.8)
Net amortization (accretion) on investments .............................. (8.1) 1.5
Change in deferred policy acquisition costs .............................. (0.6) (1.6)
Net change in other assets and liabilities, net of effect of acquisitions (18.0) (42.7)
-------- --------
Net cash provided by operating activities .............................. 160.9 130.1
-------- --------
Cash flows from investing activities:
Investments purchased available for sale .................................... (717.6) (544.0)
Investments sold available for sale ....................................... 45.0 92.7
Investments matured available for sale .................................... 671.1 300.6
Change in policy loans, net ................................................ (6.0) (4.2)
Change in mortgage loans, net ............................................. 1.7 1.7
Acquisitions, net of cash acquired .......................................... -- (7.1)
-------- --------
Net cash used in investing activities .................................... (5.8) (160.3)
-------- --------
Cash flows from financing activities:
Withdrawals from policyholder accounts .................................... (299.4) (252.6)
Deposits to policyholder accounts .......................................... 202.3 218.9
Securities lending ......................................................... 194.9 198.0
Change in revolving credit facility ....................................... (5.5) 3.0
Exercise of stock options ................................................... 1.3 0.2
Dividends paid ............................................................ (1.0) (0.9)
-------- --------
Net cash provided by financing activities .............................. 92.6 166.6
-------- --------
Increase in cash and cash equivalents ....................................... 247.7 136.4
Cash and cash equivalents at beginning of period ........................... 875.8 875.3
-------- --------
Cash and cash equivalents at end of period ................................. $1,123.5 $1,011.7
======== ========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-26
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
(in millions)

<TABLE>
<CAPTION>
Net
Unrealized
Additional Investment Total
Common Paid-In Gains Retained Stockholders'
Stock Capital (Losses) Earnings Equity
------ ---------- ----------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ...... $0.3 $835.3 $ 74.4 $ 141.4 $ 1,051.4
Proceeds from exercise
of stock options ............... 1.3 1.3
Accretion to face value
of preferred stock ............ (0.2) (0.2)
Common stock dividends ......... 3.5 (4.3) (0.8)
Preferred stock dividends ...... (0.2) (0.2)
Change in net unrealized
investment gains ............... (43.7) (43.7)
Net income ..................... 35.0 35.0
---- ------ ------ ------- ---------
Balance, March 31, 1997 ......... $0.3 $840.1 $ 30.7 $ 171.7 $ 1,042.8
==== ====== ====== ======= =========
</TABLE>

See accompanying notes to unaudited consolidated financial statements.

F-27
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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 this
Prospectus. The results of operations for the three months ended March 31, 1997
are not necessarily indicative of the results to be expected for the full year.

Certain prior period amounts in the accompanying unaudited consolidated
income statements have been reclassified to conform to the current period
presentation. The principal reclassifications relate to the presentation of
investment spread (the amount by which net investment income exceeds interest
credited to policyholder balances) and the components of the Company's fee
income. These reclassifications were made to provide additional information
with respect to the Company's major sources of revenue.

2. Industry Segment Information

The Company is an asset accumulation and management company which operates
in two industry segments: retirement-oriented insurance (principally annuities)
and asset management. The annuity insurance business is conducted at Keyport
Life Insurance Company ("Keyport"). Keyport generates investment spread income
from the investment portfolio which supports policyholder balances associated
with its fixed and indexed annuity business and its closed block of single
premium whole life insurance. The annuity insurance business also derives fee
income from the administration of fixed, indexed and variable annuity
contracts. The asset management business is conducted principally at The
Colonial Group, Inc. ("Colonial"), an investment advisor, distributor and
transfer agent to mutual funds, Stein Roe & Farnham Incorporated ("Stein Roe"),
a diversified investment advisor, and Newport Pacific Management, Inc.
("Newport"), an investment advisor to mutual funds and institutional accounts
specializing in Asian equity markets. The asset management business derives fee
income from investment products and services.

Approximately 65% of the Company's income before amortization of
intangible assets, net realized investment gains and income taxes for the three
months ended March 31, 1997 was attributable to the Company's annuity insurance
business, with the remaining 35% attributable to the Company's asset management
activities. This compares to approximately 59% and 41%, respectively, during
the year earlier period.

3. Investments

Investments, all of which pertain to the Company's annuity insurance
operations, were comprised of the following (in millions):

<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
--------- ------------
<S> <C> <C>
Fixed maturities ............ $10,683.7 $10,718.6
Mortgage loans ............ 65.3 67.0
Policy loans ............... 538.8 532.8
Other invested assets ...... 216.3 183.6
Equity securities ......... 37.4 35.9
--------- ---------
Total ..................... $11,541.5 $11,537.9
========= =========
</TABLE>

The Company's general investment policy is to hold fixed maturity assets
for long-term investment and, accordingly, the Company does not have a trading
portfolio. To provide for maximum portfolio flexibility and enable

F-28
<PAGE>

LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS--Continued

appropriate tax planning, the Company classifies its entire fixed maturities
investments as "available for sale" which are carried at estimated fair value.

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 primarily of outstanding employee
stock options. In calculating net income per share, net income is reduced by
convertible preferred stock dividend requirements. Such preferred stock earns
cumulative dividends at the annual rate of $2.875 per share and is redeemable
at the option of the Company, subject to certain conditions, anytime after
March 24, 1998. At the time of issuance, the convertible preferred stock was
determined not to be a common stock equivalent.

In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share"
("SFAS 128"), which is required to be adopted for periods ending after December
15, 1997. SFAS 128 replaces primary and fully diluted earnings per share with
basic and diluted earnings per share. Basic earnings per share is computed by
dividing income available to common stockholders by the weighted average number
of common shares outstanding during the period. Diluted earnings per share is
computed similarly to fully diluted earnings per share. Assuming that SFAS 128
had been implemented, basic earnings per share would have been $1.21 and $0.85
for the first quarters of 1997 and 1996, respectively. The calculation of
diluted earnings per share under SFAS 128 for these quarters would not
materially differ from the calculation of fully diluted earnings per share.

F-29

<PAGE>

================================================================================
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offering covered by this Prospectus. If given
or made, such information or representations must not be relied upon as having
been authorized by the Company, the Selling Shareholders or the Underwriters.
This Prospectus does not constitute an offer to sell, or the solicitation of an
offer to buy, the Common Stock in any jurisdiction where, or to any person to
whom, it is unlawful to make such offer or solicitation. Neither the delivery of
the Prospectus nor any sale made hereunder or thereunder shall, under any
circumstances, create an implication that there has not been any change in the
facts set forth in this Prospectus or in the affairs of the Company since the
date hereof.

------------------------------

TABLE OF CONTENTS

Page
--------
Available Information ........................... 3
Incorporation of Certain Documents
by Reference ................................. 3
Prospectus Summary .............................. 4
Investment Considerations ..................... 8
Price Range of Common Stock
and Dividends ................................. 14
Selected Historical Consolidated
Financial and Operating Data .................. 15
Management's Discussion and Analysis
of Results of Operations
and Financial Condition ........................ 17
Business ....................................... 27
Management ....................................... 44
Principal and Selling Shareholders ............... 47
Certain Relationships and Related
Transactions ................................. 49
Description of the Capital Stock ............... 54
Underwriting .................................... 59
Legal Opinions ................................. 61
Experts ....................................... 61
Index to Consolidated Financial Statements ...... F-1

2,500,000 Shares

[LOGO]

Liberty
Financial
Companies, Inc.

Common Stock

--------------------------------------

P R O S P E C T U S

--------------------------------------

Merrill Lynch & Co.
Goldman, Sachs & Co.
PaineWebber Incorporated
Fox-Pitt, Kelton Inc.

July 17, 1997

================================================================================

<PAGE>

PROSPECTUS

2,500,000 Shares

[LIBERTY LOGO]

Liberty Financial Companies, Inc.
Common Stock
----------
All of the 2,500,000 shares of Common Stock offered hereby are being sold
by LFC Holdings, Inc. and certain other shareholders (collectively, the
"Selling Shareholders") of Liberty Financial Companies, Inc. (the "Company" or
"Liberty Financial"). See "PRINCIPAL AND SELLING SHAREHOLDERS." LFC Holdings,
Inc. is an indirect subsidiary of Liberty Mutual Insurance Company ("Liberty
Mutual"). The Company will not receive any of the proceeds from the sale of the
shares by the Selling Shareholders.

Of the shares of Common Stock offered hereby, 500,000 shares initially are
being offered outside the United States and Canada by the International
Managers (the "International Offering") and 2,000,000 shares initially are
being offered in a concurrent offering in the United States and Canada by the
U.S. Underwriters (the "U.S. Offering" and, together with the International
Offering, the "Offerings"). The public offering price and the underwriting
discount per share are identical for both of the Offerings. See "UNDERWRITING."

Investors should consider carefully the factors set forth under the
caption "INVESTMENT CONSIDERATIONS" on page 8.

----------

- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Price to Underwriting Proceeds to
Public Discount (1) Selling Shareholders (2)
<S> <C> <C> <C>
Per Share ...... $52.50 $2.50 $50.00
Total (3) ...... $131,250,000 $6,250,000 $125,000,000
</TABLE>

- --------------------------------------------------------------------------------

(1) The Company and the Selling Shareholders have agreed to indemnify the
several Underwriters and certain related persons against certain
liabilities under the Securities Act of 1933, as amended. See
"UNDERWRITING."
(2) Before deducting expenses of the offering estimated at $425,000 payable by
LFC Holdings, Inc.
(3) LFC Holdings, Inc. has granted the International Managers and the U.S.
Underwriters 30-day options to purchase up to 75,000 and 300,000
additional shares of Common Stock, respectively, solely to cover
over-allotments, if any. If all such additional shares are purchased, the
total Price to Public, Underwriting Discount and Proceeds to Selling
Shareholders will be $150,937,500, $7,187,500 and $143,750,000,
respectively. See "UNDERWRITING."

----------

Merrill Lynch International
Goldman Sachs International
PaineWebber International
Fox-Pitt, Kelton N.V.
----------

The date of this Prospectus is July 17, 1997.

<PAGE>

UNDERWRITING

Subject to the terms and conditions set forth in the purchase agreement
(the "International Purchase Agreement"), the Selling Shareholders have agreed
to sell to each of the underwriters named below (the "International Managers"),
and each of the International Managers, for whom Merrill Lynch International,
Goldman Sachs International, PaineWebber International (U.K.) Ltd. and
Fox-Pitt, Kelton N.V. are acting as lead managers (the "Lead Managers"),
severally has agreed to purchase from the Selling Shareholders, the number of
shares of Common Stock set forth opposite its name below.

<TABLE>

<CAPTION>
Number of
International Manager Shares
- ----------------------------------------------------- ----------
<S> <C>
Merrill Lynch International ............... 125,000
Goldman Sachs International ............... 125,000
PaineWebber International (U.K.) Ltd. ...... 125,000
Fox-Pitt, Kelton N.V. ..................... 125,000
-------
Total ................................. 500,000
========
</TABLE>

The Company and the Selling Shareholders have also entered into a purchase
agreement (the "U.S. Purchase Agreement" and, together with the International
Purchase Agreement, the "Purchase Agreements") with Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Goldman, Sachs & Co., PaineWebber Incorporated and
Fox-Pitt, Kelton Inc., acting as representatives (the "U.S. Representatives"),
and certain other underwriters in the United States and Canada (the "U.S.
Underwriters" and, together with the International Managers, the
"Underwriters"). Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, the Company and the Selling Shareholders have agreed to sell
to the U.S. Underwriters, and the U.S. Underwriters have severally agreed to
purchase, an aggregate of 2,000,000 shares of Common Stock.

The Lead Managers have advised the Company that the International Managers
propose to offer the shares of Common Stock in the International Offering to
the public at the initial public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $1.50 per share. The International Managers may allow, and such
dealers may re-allow, a concession not in excess of $.10 per share on sales
to other dealers. After the initial public offering, the public offering price
and the concessions may be changed.

The public offering price per share of Common Stock and the underwriting
discount per share of Common Stock are identical for both Offerings.

LFC Holdings, Inc. has granted to the International Managers and the U.S.
Underwriters options exercisable for 30 days from the date of this Prospectus
to purchase up to an additional 75,000 and 300,000 shares of Common Stock,
respectively, solely to cover over-allotments, if any, at the initial public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. If the Underwriters exercise such options, each Underwriter
will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the foregoing table bears to the 2,500,000
shares of Common Stock initially offered hereby.

The Company has been informed that the Underwriters have entered into an
agreement (the "Intersyndicate Agreement") providing for the coordination of
their activities. Pursuant to the Intersyndicate Agreement, the International
Managers and the U.S. Underwriters are permitted to sell shares of Common Stock
to each other for purposes of resale at the public offering price, less an
amount not greater than the selling concession.

59
<PAGE>

to persons who are non-U.S. or non-Canadian persons or to persons they believe
intend to resell to persons who are non-U.S. or non-Canadian persons, and the
International Managers and any bank, broker or dealer to whom they sell shares
of Common Stock will not offer to sell or resell shares of Common Stock to U.S.
persons or to Canadian persons or to persons they believe intend to resell to
U.S. persons or to Canadian persons, except in the case of transactions
pursuant to the Intersyndicate Agreement which, among other things, permits the
Underwriters to purchase from each other and offer for resale such number of
shares of Common Stock as the selling Underwriter or Underwriters and the
purchasing Underwriter or Underwriters may agree.

Each International Manager has agreed that (i) it has not offered or sold,
and it will not offer or sell, directly or indirectly, any shares of Common
Stock offered hereby to persons in the United Kingdom prior to the expiration
of the period of six months from the closing date except to persons whose
ordinary activities involve them in acquiring, holding, managing or disposing
of investments (as principal or agent) for the purposes of their businesses or
otherwise in circumstances which have not resulted and will not result in an
offer to the public within the meaning of the Public Offers of Securities
Regulations 1995, (ii) it has complied and will comply with all applicable
provisions of the Financial Services Act 1986 with respect to anything done by
it in relation to the Common Stock in, from, or otherwise involving the United
Kingdom, and (iii) it has only issued or passed on and will only issue or pass
on to any person in the United Kingdom any document received by it in
connection with the issuance of Common Stock if that person is of a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom the document may
otherwise lawfully be issued or passed on.

The Company, the Selling Shareholders and certain officers and directors of
the Company have agreed not to sell or otherwise dispose of any Common Stock or
securities convertible into or exchangeable or exercisable for Common Stock for
a period of 120 days after the date of this Prospectus, without the prior
written consent of Merrill Lynch International ("Merrill Lynch"), except that
certain officers of the Company may exercise up to an aggregate of approximately
440,000 non-qualified stock options and sell the shares of Common Stock issuable
upon such exercise. Upon the consummation of this offering, it is expected that
such lock-up agreements will cover an aggregate of approximately 22.6 million
shares of Common Stock and options to purchase an aggregate of approximately
1,170,000 shares of Common Stock (excluding those 440,000 options subject to the
exception described above). There are no known formal or informal plans,
arrangements, agreements or understandings regarding any intention to seek the
consent of Merrill Lynch to release any of the foregoing restrictions at this
time. It is generally the policy of Merrill Lynch to review any such requested
consent on a case by case basis in light of the applicable circumstances.

Until the distribution of the Common Stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Common Stock. As
an exception to these rules, the Lead Managers are permitted to engage in
certain transactions that stabilize the price of the Common Stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the Common Stock.

If the Underwriters create a short position in the Common Stock in
connection with the offering (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the Lead Managers may
reduce that short position by purchasing Common Stock in the open market. The
Lead Managers may also elect to reduce any short position through the exercise
of all or part of the over-allotment options described above.

Neither the Company nor any of the Underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Lead Managers will engage in such transactions or that
such transactions, once commenced, will not be discontinued without notice.

In the Purchase Agreements, the Company and the Selling Stockholders have
agreed to indemnify the several Underwriters against certain civil liabilities,
including liabilities under the Securities Act. Pursuant to the Liberty Mutual
Registration Rights Agreement, Liberty Financial will indemnify LFC Holdings,
Inc. and its officers, directors and controlling persons against certain
liabilities arising in respect of this offering. Consequently, it is anticipated
that, to

60
<PAGE>

the extent LFC Holdings, Inc. is required to pay any indemnification claims to
the Underwriters under the Purchase Agreements, the Company will be obligated to
reimburse LFC Holdings, Inc. for any amount paid.

LEGAL OPINIONS

EXPERTS

The consolidated financial statements of Liberty Financial Companies, Inc.
at December 31, 1996 and for the year then ended, appearing in this Prospectus
and Registration Statement have been audited by Ernst & Young LLP, independent
auditors and at December 31, 1995 and for each of the two years in the period
ended December 31, 1995, appearing in this Prospectus and Registration
Statement have been audited by KPMG Peat Marwick LLP, independent auditors, as
set forth in their respective reports thereon appearing elsewhere herein and
are included in reliance upon such reports given upon the authority of such
firms as experts in accounting and auditing.

61
<PAGE>

================================================================================

No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in
this Prospectus in connection with the offering covered by this Prospectus. If
given or made, such information or representations must not be relied upon as
having been authorized by the Company, the Selling Shareholders or the
Underwriters. This Prospectus does not constitute an offer to sell, or the
solicitation of an offer to buy, the Common Stock in any jurisdiction where, or
to any person to whom, it is unlawful to make such offer or solicitation.
Neither the delivery of the Prospectus nor any sale made hereunder or
thereunder shall, under any circumstances, create an implication that there has
not been any change in the facts set forth in this Prospectus or in the affairs
of the Company since the date hereof.

------------------------------

TABLE OF CONTENTS

<TABLE>
<CAPTION>
Page
----------
<S> <C>
Available Information ........................... 3
Incorporation of Certain Documents
by Reference ................................. 3
Prospectus Summary .............................. 4
Investment Considerations ..................... 8
Price Range of Common Stock
and Dividends ................................. 14
Selected Historical Consolidated
Financial and Operating Data .................. 15
Management's Discussion and Analysis
of Results of Operations
and Financial Condition ........................ 17
Business ....................................... 27
Management ....................................... 44
Principal and Selling Shareholders ............... 47
Certain Relationships and Related
Transactions ................................. 49
Description of the Capital Stock ............... 54
Underwriting .................................... 59
Legal Opinions ................................. 61
Experts ....................................... 61
Index to Consolidated Financial Statements ...... F-1
</TABLE>

2,500,000 Shares

[LIBERTY LOGO]

Liberty

Financial
Companies, Inc.

Common Stock

--------------------------------------

P R O S P E C T U S

--------------------------------------

Merrill Lynch International
Goldman Sachs International
PaineWebber International
Fox-Pitt, Kelton N.V.

July 17, 1997

================================================================================