<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
/X/ AMENDMENT TO QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
-------------------- -------------------
Commission file number: 1-13654.
LIBERTY FINANCIAL COMPANIES, INC.
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Massachusetts 04-3260640
----------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
600 Atlantic Avenue, Boston, Massachusetts 02210-2214
----------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(617) 722-6000
----------------------------------------------------------------------
(Registrant's telephone number, including area code)
----------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. [ X ] Yes [ ] No
There were 48,209,421 shares of the registrant's Common Stock, $.01 par
value, and 216,322 shares of the registrant's Series A Convertible Preferred
Stock, $.01 par value, outstanding as of July 31, 2000.
Exhibit Index - Page 25 Page 1 of 27
<PAGE>
EXPLANATORY STATEMENT
This Form 10-Q/A restates the Company's Form 10-Q originally filed on
August 11, 2000 to reflect the after-tax net change in unrealized and
undistributed gains in private equity limited partnerships. The net increase
in net income and net income per share was $4.9 million and $0.10 per share,
respectively, for the quarter ended June 30, 2000 and $14.6 million and $0.30
per share, respectively, for the first six months of 2000, and is described
in Note 6 of the Notes to Consolidated Financial Statements.
2
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
QUARTERLY REPORT ON FORM 10-Q/A FOR PERIOD ENDED JUNE 30, 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2000 and December 31,
1999 4
Consolidated Income Statements for the Three Months and Six Months Ended
June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows for the Six Months Ended
June 30, 2000 and 1999 6
Consolidated Statement of Stockholders' Equity for the Six Months Ended
June 30, 2000 7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
</TABLE>
3
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED BALANCE SHEETS
(IN MILLIONS)
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
----------------- -----------------
UNAUDITED
(RESTATED)
<S> <C> <C>
ASSETS
Assets:
Investments $12,239.5 $12,195.1
Cash and cash equivalents 1,621.2 1,232.6
Accrued investment income 153.4 162.0
Deferred policy acquisition costs 717.3 739.2
Deferred distribution costs 162.3 153.7
Intangible assets 274.4 282.0
Other assets 296.6 244.8
Separate account assets 3,829.2 3,363.1
----------------- -----------------
$19,293.9 $18,372.5
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Policyholder balances $12,018.4 $12,109.6
Notes payable 567.1 552.0
Payable for investments purchased and loaned 1,229.6 754.9
Other liabilities 471.1 453.1
Separate account liabilities 3,780.3 3,301.0
----------------- -----------------
Total liabilities 18,066.5 17,170.6
----------------- -----------------
Series A redeemable convertible preferred stock, par value $.01; authorized,
issued and outstanding 216,322 shares in 2000 and
324,759 shares in 1999 10.8 16.0
----------------- -----------------
Stockholders' Equity:
Common stock, par value $.01; authorized 100,000,000 shares, issued and
outstanding 48,194,921 shares in 2000 and
47,462,995 shares in 1999 0.5 0.5
Additional paid-in capital 934.3 923.0
Retained earnings 483.4 425.2
Accumulated other comprehensive loss (196.4) (158.1)
Unearned compensation (5.2) (4.7)
----------------- -----------------
Total stockholders' equity 1,216.6 1,185.9
----------------- -----------------
$19,293.9 $18,372.5
================= =================
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED INCOME STATEMENTS
(IN MILLIONS, EXCEPT PER SHARE DATA)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ------------------------
2000 1999 2000 1999
------------ ------------ -------------- ------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Investment income, including distributions from
private equity limited partnerships of $0.8 million
and $2.5 million for the three months and six
months ended June 30, 2000, respectively $216.4 $197.1 $422.3 $403.3
Interest credited to policyholders (133.2) (129.4) (260.5) (264.2)
------------ ------------ -------------- ------------
INVESTMENT SPREAD 83.2 67.7 161.8 139.1
-------------- ------------ ------------ -----------
NET REALIZED INVESTMENT LOSSES (12.9) (11.6) (16.8) (14.7)
------------ ------------ -------------- ------------
NET CHANGE IN UNREALIZED AND UNDISTRIBUTED GAINS IN
PRIVATE EQUITY LIMITED PARTNERSHIPS 7.5 - 22.5 -
------------ ------------ -------------- ------------
Fee income:
Investment advisory and administrative fees 71.3 68.2 143.2 134.4
Distribution and service fees 15.1 15.3 30.5 30.0
Transfer agency fees 12.2 12.8 24.9 25.7
Surrender charges and net commissions 9.3 9.0 20.0 17.4
Separate account fees 11.1 7.7 21.8 14.3
------------ ------------ -------------- ------------
TOTAL FEE INCOME 119.0 113.0 240.4 221.8
------------ ------------ -------------- ------------
Expenses:
Operating expenses (99.6) (90.5) (201.9) (179.2)
Amortization of deferred policy acquisition costs (29.8) (22.5) (56.9) (46.7)
Amortization of deferred distribution costs (10.4) (9.7) (20.6) (19.2)
Amortization of intangible assets (5.1) (5.1) (10.2) (10.1)
Interest expense, net (4.2) (5.3) (8.2) (11.0)
------------ ------------ -------------- ------------
TOTAL EXPENSES (149.1) (133.1) (297.8) (266.2)
------------ ------------ -------------- ------------
PRE-TAX INCOME 47.7 36.0 110.1 80.0
Income tax expense (18.7) (12.7) (41.7) (29.3)
-------------- ------------ ------------ -----------
NET INCOME $29.0 $23.3 $68.4 $50.7
============ ============ ============== ============
Net income per share - basic $0.60 $0.49 $1.43 $1.08
============ ============ ============== ============
Net income per share - assuming dilution $0.60 $0.49 $1.41 $1.06
============ ============ ============== ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN MILLIONS)
UNAUDITED
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
-------------------------------
2000 1999
------------- -------------
(RESTATED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $68.4 $50.7
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 39.7 41.3
Interest credited to policyholders 260.5 264.2
Net realized investment losses 16.8 14.7
Net change in unrealized and undistributed gains in private equity limited
partnerships (22.5) -
Net amortization on investments 44.3 39.3
Change in deferred policy acquisition costs (22.9) (10.9)
Net change in other assets and liabilities (35.7) (50.2)
------------- -------------
Net cash provided by operating activities 348.6 349.1
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments purchased available for sale (1,821.8) (3,080.4)
Investments sold available for sale 1,609.0 2,529.3
Investments matured available for sale 58.6 159.2
Change in policy loans, net (13.9) (8.3)
Change in mortgage loans, net 1.5 41.7
Other 23.9 (28.6)
------------- -------------
Net cash used in investing activities (142.7) (387.1)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Withdrawals from policyholder accounts (1,106.5) (962.4)
Deposits to policyholder accounts 754.8 358.0
Securities lending 526.2 570.3
Change in notes payable 15.1 39.5
Exercise of stock options 1.7 2.8
Dividends paid (3.2) (3.2)
Redemption of preferred stock (5.4) -
------------- -------------
Net cash provided by financing activities 182.7 5.0
------------- -------------
Increase (decrease) in cash and cash equivalents 388.6 (33.0)
Cash and cash equivalents at beginning of period 1,232.6 984.1
------------- -------------
Cash and cash equivalents at end of period $ 1,621.2 $ 951.1
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(IN MILLIONS)
UNAUDITED
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER TOTAL
COMMON PAID-IN RETAINED COMPREHENSIVE UNEARNED STOCKHOLDERS'
STOCK CAPITAL EARNINGS LOSS COMPENSATION EQUITY
------------- ------------ --------------- ------------------- ----------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE,
DECEMBER 31, 1999 $0.5 $923.0 $425.2 $(158.1) $(4.7) $1,185.9
Common stock issued for
acquisition 1.8 1.8
Effect of stock-based
compensation plans 2.7 (0.5) 2.2
Accretion to face value
of preferred stock (0.2) (0.2)
Common stock
Dividends 6.8 (9.6) (2.8)
Preferred stock
Dividends (0.4) (0.4)
Net income (Restated) 68.4 68.4
Other comprehensive
loss, net of tax (38.3) (38.3)
------------- ------------ --------------- ------------------- ----------------- -------------------
BALANCE,
JUNE 30, 2000 $0.5 $934.3 $483.4 $(196.4) $(5.2) $1,216.6
============= ============ =============== =================== ================= ===================
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
LIBERTY FINANCIAL COMPANIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2000
UNAUDITED
1. GENERAL
The accompanying unaudited consolidated financial statements include
all adjustments, consisting of normal recurring accruals, that management
considers necessary for a fair presentation of the Company's financial
position and results of operations as of and for the interim periods
presented. Certain footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Therefore, these
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements contained in the Company's Form
10-K for the year ended December 31, 1999. The results of operations for
the three months and six months ended June 30, 2000 are not necessarily
indicative of the results to be expected for the full year. Certain
previously reported amounts have been reclassified to conform with the
current period presentation.
2. SEGMENT INFORMATION
The Company is an asset accumulation and management company with two
reportable 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
at Liberty Funds Group, an investment advisor (through its subsidiary
Colonial Management Associates), distributor and transfer agent to mutual
funds, Stein Roe & Farnham Incorporated, a diversified investment advisor,
Newport Pacific Management, Inc., an investment advisor to mutual funds and
institutional accounts specializing in Asian equity markets, Crabbe Huson
Group, Inc., an investment advisor to mutual funds and institutional
accounts, Progress Investment Management Company, an investment advisor to
institutional accounts, and Liberty Asset Management Company, an investment
advisor to mutual funds. The asset management business derives fee income
from investment products and services.
8
<PAGE>
The Company's reportable segments offer different products and are each
managed separately. Information by reportable segment is shown below (in
millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ ------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> (RESTATED) (RESTATED)
Statement of Operations Data <C> <C> <C> <C>
REVENUES (EXCLUDING NET REALIZED INVESTMENT
LOSSES AND NET CHANGE IN UNREALIZED AND UNDISTRIBUTED
GAINS IN PRIVATE EQUITY LIMITED PARTNERSHIPS):
Annuity:
Unaffiliated $237.5 $213.3 $463.8 $433.1
Intersegment (4.3) (3.9) (8.1) (6.8)
------------ ----------- ------------ -----------
Total annuity 233.2 209.4 455.7 426.3
------------ ----------- ------------ -----------
Asset management:
Unaffiliated 97.9 96.8 198.9 192.0
Intersegment 4.3 3.9 8.1 6.8
------------ ------------ ----------- -----------
Total asset management 102.2 100.7 207.0 198.8
------------ ------------ ----------- -----------
Total revenues (excluding net realized investment
losses and net change in unrealized and undistributed
gains in private equity limited partnerships) $335.4 $310.1 $662.7 $625.1
============ ============ =========== ===========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------ -------------------------
2000 1999 2000 1999
------------ ----------- ------------- -----------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
INCOME BEFORE INCOME TAXES:
Annuity:
Income before amortization of intangible assets $50.5 $42.7 $100.7 $84.9
Amortization of intangible assets (0.3) (0.3) (0.6) (0.6)
------------ ----------- ------------- -----------
Subtotal annuity 50.2 42.4 100.1 84.3
------------ ----------- ------------- -----------
Asset management:
Income before amortization of intangible assets 16.9 21.2 33.9 43.2
Amortization of intangible assets (4.8) (4.8) (9.6) (9.4)
------------ ----------- ------------- -----------
Subtotal asset management 12.1 16.4 24.3 33.8
------------ ----------- ------------- -----------
Other:
Loss before amortization of intangible assets (9.2) (11.2) (20.0) (23.3)
Amortization of intangible assets - - - (0.1)
------------ ----------- ------------- -----------
Subtotal other (9.2) (11.2) (20.0) (23.4)
------------ ----------- ------------- -----------
Income before net realized investment losses, net change in
unrealized and undistributed gains in private equity limited
partnerships, and income taxes 53.1 47.6 104.4 94.7
Net realized investment losses (12.9) (11.6) (16.8) (14.7)
Net change in unrealized and undistributed gains in private equity
limited partnerships 7.5 - 22.5 -
------------ ----------- ------------- -----------
Total income before income taxes $47.7 $36.0 $110.1 $80.0
============ =========== ============= ===========
</TABLE>
3. INVESTMENTS
Investments were comprised of the following (in millions):
9
<PAGE>
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
2000 1999
---------------- ----------------
(RESTATED)
<S> <C> <C>
Fixed maturities $10,534.5 $10,516.1
Equity securities 63.5 37.9
Policy loans 613.4 599.5
Other invested assets 1,028.1 1,041.6
---------------- ----------------
Total $12,239.5 $12,195.1
================ ================
</TABLE>
The Company's general investment policy is to hold fixed maturity
securities 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 portfolio of
fixed maturity securities as "available for sale" and accordingly carries
such investments at fair value.
4. NET INCOME PER SHARE
The following table sets forth the computation of net income per
share-basic and net income per share-assuming dilution:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ------------ ------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Numerator (in millions)
Net income $29.0 $23.3 $68.4 $50.7
Less: preferred stock dividends (0.2) (0.3) (0.4) (0.5)
------------ ------------ ------------ ------------
Numerator for net income per share - basic - income
available to common stockholders 28.8 23.0 68.0 50.2
Plus: income impact of assumed
conversions Preferred stock dividends 0.2 0.3 0.4 0.5
------------ ------------ ------------ ------------
Numerator for net income per share - assuming
dilution - income available to common stockholders
after assumed conversions $29.0 $23.3 $68.4 $50.7
Denominator
Denominator for net income per share - basic -
weighted-average shares 47,741,444 46,591,115 47,556,268 46,464,123
Effect of dilutive securities:
Employee stock options 339,333 673,304 347,816 676,460
Convertible preferred stock 468,824 514,370 491,597 514,370
Common stock issuable as contingent purchase price - 35,883 - 25,090
------------ ------------ ------------ ------------
Dilutive potential common shares 808,157 1,223,557 839,413 1,215,920
------------ ------------ ------------ ------------
Denominator for net income per share - assuming
dilution 48,549,601 47,814,672 48,395,681 47,680,043
============ ============ ============ ============
Net income per share - basic $0.60 $0.49 $1.43 $1.08
============ ============ ============ ============
Net income per share - assuming dilution $0.60 $0.49 $1.41 $1.06
============ ============ ============ ============
</TABLE>
5. COMPREHENSIVE INCOME
Comprehensive income (loss) was comprised of the following (in
millions):
10
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
--------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- -------------- -------------
(RESTATED) (RESTATED)
<S> <C> <C> <C> <C>
Net income $29.0 23.3 $68.4 $50.7
Other comprehensive loss, net of taxes:
Net unrealized losses on securities (33.8) (38.0) (38.3) (46.5)
Comprehensive income (loss) $(4.8) $(14.7) $30.1 $4.2
</TABLE>
6. NET CHANGE IN UNREALIZED AND UNDISTRIBUTED GAINS IN PRIVATE EQUITY LIMITED
PARTNERSHIPS
The Company is restating its results of operations and related
financial statements by filing this Form 10-Q/A to reflect the net change
in unrealized and undistributed gains in private equity limited
partnerships.
The net change in unrealized and undistributed gains in private equity
limited partnerships is accounted for on the equity method and represents
primarily increases in the fair value of the underlying investments of the
private equity limited partnerships for which the Company has ownership
interests in excess of 3%. This change in unrealized and undistributed
gains is recorded net of the related amortization of deferred policy
acquisition costs of $13.8 million and $41.6 million for the three months
and six months ended June 30, 2000, respectively, and net of amounts
realized, which are recognized in investment income, of $0.8 million and
$2.5 million for the three months and six months ended June 30, 2000,
respectively. The financial information for these investments is obtained
directly from the private equity limited partnerships on a periodic basis.
The corresponding amounts in 1999 were insignificant.
The net increase in net income and net income per share resulting from
such change was $4.9 million and $0.10 per share, respectively, for the
quarter ended June 30, 2000 and $14.6 million and $0.30 per share,
respectively, for the first six months of 2000.
7. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting
for Derivative Instruments and Hedging Activities." This statement
standardizes the accounting for derivative instruments and the derivative
portion of certain other contracts that have similar characteristics by
requiring that an entity recognize those instruments at fair value. This
statement also requires a new method of accounting for hedging
transactions, prescribes the type of items and transactions that may be
hedged, and specifies detailed criteria to be met to qualify for hedge
accounting. In June 1999, the FASB issued SFAS No. 137 "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133." SFAS No. 137 defers the effective date of
SFAS No. 133 until fiscal years beginning after June 15, 2000. Upon
adoption, the Company will be required to record a cumulative effect
adjustment to reflect this accounting change. At this time, the Company has
not completed its analysis and evaluation of the requirements and impact of
this statement.
8. ACQUISITION
On June 12, 2000, the Company announced an agreement to acquire Wanger
Asset Management, L.P. ("Wanger"), a registered investment advisor. This
acquisition is expected to close during the fourth quarter of 2000. Total
assets under management of Wanger as of June 30, 2000 were approximately
$9.0 billion. The purchase price for this transaction is $280.0 million in
cash. In addition, the Company has agreed to make additional payments over
the next five years of up to $170.0 million in cash, contingent upon the
attainment of certain earnings objectives. The purchase price and
contingent payments are subject to adjustment in certain circumstances.
This transaction will be accounted for as a purchase. The Company expects
to fund the acquisition
11
<PAGE>
of Wanger with $80.0 million of cash and investments and $200.0 million of
debt issued to Liberty Mutual Insurance Company.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The discussion below is based on the Company's restated results of
operations and related financial statements contained in this Form 10-Q/A
which reflect the after-tax net change in unrealized and undistributed gains
in private equity limited partnerships. See Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
NET INCOME was $29.0 million or $0.60 per share for the quarter ended
June 30, 2000 compared to $23.3 million or $0.49 per share for the quarter
ended June 30, 1999. For the first six months of 2000, net income was $68.4
million or $1.41 per share compared to $50.7 million or $1.06 per share for
the first six months of 1999. These increases resulted largely from higher
investment spread, net change in unrealized and undistributed gains in
private equity limited partnerships and fee income. In addition, interest
expense, net decreased. Partially offsetting these items were higher
operating expenses, amortization expense, income tax expense and net realized
investment losses.
PRE-TAX INCOME was $47.7 million for the quarter ended June 30, 2000
compared to $36.0 million for the quarter ended June 30, 1999. For the first
six months of 2000, pre-tax income was $110.1 million compared to $80.0
million for the first six months of 1999. These increases resulted largely
from higher investment spread, net change in unrealized and undistributed
gains in private equity limited partnerships and fee income. In addition,
interest expense, net decreased. Partially offsetting these items were higher
operating expenses, amortization expense and net realized investment losses.
INVESTMENT SPREAD is the amount by which investment income earned on the
Company's investments exceeds interest credited on policyholder balances.
Investment spread was $83.2 million for the quarter ended June 30, 2000
compared to $67.7 million for the quarter ended June 30, 1999. The amount by
which the average yield on investments exceeds the average interest credited
rate on policyholder balances is the investment spread percentage. The
investment spread percentage for the quarter ended June 30, 2000 was 2.40%
compared to 1.90% for the quarter ended June 30, 1999. For the first six
months of 2000, investment spread was $161.8 million compared to $139.1
million for the first six months of 1999. The investment spread percentage
was 2.34% for the first six months of 2000 compared to 1.95% for the first
six months of 1999. These increases in investment spread percentage resulted
primarily from increased yields on average invested assets, largely relating
to distributed realized gains in private equity limited partnerships,
including those accounted for under the cost method.
Investment income was $216.4 million for the quarter ended June 30, 2000
compared to $197.1 million for the quarter ended June 30, 1999. The increase
of $19.3 million in 2000 compared to 1999 includes a $24.1 million increase
as a result of a higher average investment yield, partially offset by a $4.8
million decrease resulting from a lower level of average invested assets. The
2000 investment income was net of $23.5 million of S&P 500 Index call option
amortization expense related to the Company's equity-indexed annuities
compared to $19.4 million in 1999. The average investment yield was 6.83% for
the quarter ended June 30, 2000 compared to 6.08% for the quarter ended June
30, 1999. For the first six months of 2000, investment income was $422.3
million compared to $403.3 million for the first six months of 1999. The
increase of $19.0 million in 2000 compared to 1999 includes a $30.6 million
increase as a result of a higher average investment yield, partially offset
by an $11.6 million decrease resulting from a lower level of average invested
assets. The 2000 investment income was net of $44.6 million of S&P 500 Index
call option amortization expense related to the Company's equity-indexed
annuities compared to $38.8 million in 1999. The average investment yield was
6.67% for the first six months of 2000 compared to 6.20% for the first six
months of 1999.
Interest credited to policyholders totaled $133.2 million for the
quarter ended June 30, 2000 compared to $129.4 million for the quarter ended
June 30, 1999. The increase of $3.8 million in 2000 compared to 1999
primarily relates to a $7.8 million increase as a result of a higher average
interest credited rate, partially offset by a $4.0 million decrease as a
result of a lower level of average policyholder balances. Policyholder
balances averaged $12.0 billion (including $9.6
13
<PAGE>
billion of fixed products, consisting of fixed annuities and a closed block
of single premium whole life insurance, and $2.4 billion of equity-indexed
annuities) for the quarter ended June 30, 2000 compared to $12.4 billion
(including $10.2 billion of fixed products and $2.2 billion of equity-indexed
annuities) for the quarter ended June 30, 1999. The average interest credited
rate was 4.43% (5.26% on fixed products and 0.85% on equity-indexed
annuities) for the quarter ended June 30, 2000 compared to 4.18% (4.98% on
fixed products and 0.85% on equity-indexed annuities) for the quarter ended
June 30, 1999. Keyport's equity-indexed annuities credit interest to the
policyholder at a "participation rate" equal to a portion (ranging for
existing policies from 25% to 100%) of the change in value of the S&P 500
Index. Keyport's equity-indexed annuities also provide a full guarantee of
principal if held to term, plus interest at 0.85% annually. For each of the
periods presented, the interest credited to equity-indexed policyholders
related to the participation rate was offset by investment income recognized
on the S&P 500 Index call options resulting in a 0.85% net credited rate. For
the first six months of 2000, interest credited to policyholders totaled
$260.5 million compared to $264.2 million for the first six months of 1999.
The decrease of $3.7 million in 2000 compared to 1999 primarily relates to an
$8.6 million decrease resulting from a lower level of average policyholder
balances, partially offset by a $4.9 million increase as a result of a higher
average interest credited rate. Policyholder balances averaged $12.0 billion
(including $9.7 billion of fixed products and $2.3 billion of equity-indexed
annuities) for the first six months of 2000 compared to $12.4 billion
(including $10.3 billion of fixed products and $2.1 billion of equity-indexed
annuities) for the first six months of 1999. The average interest credited
rate was 4.33% (5.13% on fixed products and 0.85% on equity-indexed
annuities) for the first six months of 2000 compared to 4.25% (5.00% on fixed
products and 0.85% on equity-indexed annuities) for the first six months of
1999.
Average investments in the Company's general account (computed without
giving effect to Statement of Financial Accounting Standards No. 115),
including a portion of the Company's cash and cash equivalents, were $12.7
billion for the quarter ended June 30, 2000 compared to $13.0 billion for the
quarter ended June 30, 1999. For the first six months of 2000, such average
investments were $12.7 billion compared to $13.0 billion for the first six
months of 1999. These decreases were primarily due to net redemptions and
transfers to separate accounts, partially offset by the reinvestment of
portfolio earnings for the twelve months ended June 30, 2000.
NET REALIZED INVESTMENT LOSSES were $12.9 million for the quarter ended
June 30, 2000 compared to $11.6 million for the quarter ended June 30, 1999.
For the first six months of 2000, net realized investment losses were $16.8
million compared to $14.7 million for the first six months of 1999. The net
realized investment losses in 2000 included losses of $5.4 million for the
quarter and $8.7 million for the six months for certain fixed maturity
investments where the decline in value was determined to be other than
temporary.
NET CHANGE IN UNREALIZED AND UNDISTRIBUTED GAINS IN PRIVATE EQUITY
LIMITED PARTNERSHIPS is accounted for on the equity method and represents
primarily increases in the fair value of the underlying investments of the
private equity limited partnerships for which the Company has ownership
interests in excess of 3%. This change in unrealized and undistributed gains
is recorded net of the related amortization of deferred policy acquisition
costs of $13.8 million and $41.6 million for the three months and six months
ended June 30, 2000, respectively, and net of amounts realized, which are
recognized in investment income of $0.8 million and $2.5 million for the
three months and six months ended June 30, 2000, respectively. The financial
information for these investments is obtained directly from the private
equity limited partnerships on a periodic basis. The increase for the three
months and six months ended June 30, 2000 was due primarily to the increase
in the valuation of the underlying investments of certain private equity
limited partnerships. The corresponding amounts in 1999 were insignificant.
There can be no assurance that any unrealized and undistributed gains will
ultimately be realized or that the Company will not incur losses in the
future on such investments.
The net increase in net income and net income per share resulting from
such change was $4.9 million and $0.10 per share, respectively, for the
quarter ended June 30, 2000 and $14.6 million and $0.30 per share,
respectively, for the first six months of 2000.
INVESTMENT ADVISORY AND ADMINISTRATIVE FEES are based on the market
value of assets managed for mutual funds, private capital management and
institutional investors. Investment advisory and administrative fees were
$71.3 million for the quarter ended June 30, 2000 compared to $68.2 million
for the quarter ended June 30, 1999. For the first six months of 2000,
investment advisory and administrative fees were $143.2 million compared to
$134.4 million for
14
<PAGE>
the first six months of 1999. These increases during 2000 compared to 1999
primarily reflect a higher level of average fee-based assets under management.
Average fee-based assets under management were $52.2 billion for the
quarter ended June 30, 2000 compared to $48.1 billion for the quarter ended
June 30, 1999. For the first six months of 2000, average fee-based assets
under management were $51.8 billion compared to $47.8 billion for the first
six months of 1999. These increases during 2000 compared to 1999 resulted
from net sales and market appreciation for the twelve months ended June 30,
2000. Investment advisory and administrative fees were 0.55% and 0.57% of
average fee-based assets under management for the quarters ended June 30,
2000 and 1999, respectively. For the first six months of 2000 and 1999, such
percentages were 0.55% and 0.56%, respectively.
The amount of fee-based assets under management is affected by product
sales and redemptions and 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 JUNE 30
-------------------------------
2000 1999
------------- -------------
<S> <C> <C>
Mutual Funds:
Intermediary-distributed $17.6 $18.3
Direct-marketed 6.5 6.6
Closed-end 2.8 2.4
Variable annuity 2.1 1.8
------------- -------------
29.0 29.1
Private Capital Management 9.5 8.5
Institutional 14.0 11.5
------------- -------------
Total Fee-Based Assets Under Management* $52.5 $49.1
============= =============
</TABLE>
--------------
* As of June 30, 2000 and 1999, Keyport's insurance assets of $14.0 billion
and $13.6 billion, respectively, bring total assets under management to
$66.5 billion and $62.7 billion, respectively.
CHANGES IN FEE-BASED ASSETS UNDER MANAGEMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
-------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
Fee-based assets under management - beginning $53.1 $47.4 $51.4 $47.9
Sales and reinvestments:
Mutual funds 1.6 1.9 3.2 3.7
Private Capital Management 0.5 0.4 0.9 0.6
Institutional 1.3 0.9 2.2 1.5
------------- ------------ -------------- ------------
3.4 3.2 6.3 5.8
------------- ------------ -------------- ------------
Redemptions and withdrawals:
Mutual funds (1.6) (2.0) (3.8) (3.9)
Private Capital Management (0.3) (0.2) (0.5) (0.3)
Institutional (0.6) (0.7) (1.0) (1.6)
------------- ------------ -------------- ------------
(2.5) (2.9) (5.3) (5.8)
------------- ------------ -------------- ------------
Market appreciation (depreciation) (1.5) 1.4 0.1 1.2
------------- ------------ -------------- ------------
Fee-based assets under management - ending $52.5 $49.1 $52.5 $49.1
============= ============ ============== ============
</TABLE>
DISTRIBUTION AND SERVICE FEES are based on the market value of the
Company's intermediary-distributed mutual funds. Distribution fees of 0.75%
are generally earned on the average assets attributable to such funds sold
with 12b-1
15
<PAGE>
distribution fees and contingent deferred sales charges and service fees of
0.25% (net of amounts passed on to selling brokers) are generally earned on
the total of such average mutual fund assets. These fees totaled $15.1
million for the quarter ended June 30, 2000 compared to $15.3 million for the
quarter ended June 30, 1999. For the first six months of 2000, distribution
and service fees were $30.5 million compared to $30.0 million for the first
six months of 1999. As a percentage of intermediary-distributed average
mutual fund assets, distribution and service fees were approximately 0.35%
for the quarters ended June 30, 2000 and 1999. For the first six months of
2000 and 1999, such percentages were 0.35% and 0.34%, respectively.
TRANSFER AGENCY FEES are based on the market value of assets managed in
the Company's intermediary-distributed, direct-marketed and variable annuity
mutual funds. Such fees were $12.2 million on average assets of $26.3 billion
for the quarter ended June 30, 2000 and $12.8 million on average assets of
$26.3 billion for the quarter ended June 30, 1999. For the first six months
of 2000, transfer agency fees were $24.9 million on average assets of $26.5
billion and $25.7 million on average assets of $26.2 billion for the first
six months of 1999. As a percentage of total average assets under management,
transfer agency fees were approximately 0.19% for the quarters ended June 30,
2000 and 1999. For the first six months of 2000 and 1999, such percentages
were 0.19% and 0.20%, 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 12b-1 distribution
fees and 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 commissions that are paid to the Company's client banks
and brokers). Total surrender charges and net commissions were $9.3 million
for the quarter ended June 30, 2000 compared to $9.0 million for the quarter
ended June 30, 1999. For the first six months of 2000, total surrender
charges and net commissions were $20.0 million compared to $17.4 million for
the first six months of 1999.
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 generally during the first six years. Such charges totaled $7.3
million for the quarter ended June 30, 2000 and $6.0 million for the quarter
ended June 30, 1999. For the first six months of 2000, surrender charges were
$14.7 million compared to $11.5 million for the first six months of 1999.
Total annuity withdrawals represented 16.9% and 15.0% of the total average
annuity policyholder and separate account balances for the quarters ended
June 30, 2000 and 1999, respectively. For the first six months of 2000 and
1999, the corresponding percentages were 15.9% and 14.0%, respectively. Net
commissions were $2.0 million for the quarter ended June 30, 2000 and $3.0
million for the quarter ended June 30, 1999. For the first six months of
2000, net commissions were $5.3 million compared to $5.9 million for the
first six months of 1999.
SEPARATE ACCOUNT FEES are primarily mortality and expense charges earned
on variable annuity and variable life policyholder balances. In addition, for
certain separate institutional accounts, the difference between investment
income and interest credited on these institutional accounts is included in
separate account fees. These fees, which are primarily based on the market
values of the assets in separate accounts supporting the contracts, were
$11.1 million for the quarter ended June 30, 2000 compared to $7.7 million
for the quarter ended June 30, 1999. For the first six months of 2000,
separate account fees were $21.8 million compared to $14.3 million for the
first six months of 1999. The increase in separate account fees was due to
the increase in separate account assets in 2000. Such fees represented 1.23%
and 1.26% of average variable annuity, variable life and institutional
separate account balances for the quarters ended June 30, 2000 and 1999,
respectively. For the first six months of 2000 and 1999, such percentages
were 1.25% and 1.27%, respectively.
OPERATING EXPENSES primarily represent compensation, marketing, and
other general and administrative expenses. These expenses were $99.6 million
for the quarter ended June 30, 2000 compared to $90.5 million for the quarter
ended June 30, 1999. For the first six months of 2000, operating expenses
were $201.9 million compared to $179.2 million for the first six months of
1999. These increases during 2000 compared to 1999 were primarily related to
the expansion of investment management capabilities, mutual fund product
lines, distribution and electronic commerce activities.
16
<PAGE>
Operating expenses expressed as a percent of average total assets under
management were 0.60% for the quarter ended June 30, 2000 compared to 0.59%
for the quarter ended June 30, 1999. For the first six months of 2000 and
1999, such percentages were 0.62% and 0.59%, 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 $29.8
million for the quarter ended June 30, 2000 compared to $22.5 million for the
quarter ended June 30, 1999. For the first six months of 2000, amortization
of deferred policy acquisition costs was $56.9 million compared to $46.7
million for the first six months of 1999. The increase during 2000 compared
to 1999 was due to the increased profit realized on the in-force business.
Amortization expense represented 31.6% and 29.8% of investment spread and
separate account fees for the quarters ended June 30, 2000 and 1999,
respectively. For the first six months of 2000 and 1999, the corresponding
percentages were 31.0% and 30.4%, respectively.
AMORTIZATION OF DEFERRED DISTRIBUTION COSTS relates to the distribution
of mutual fund shares sold with 12b-1 distribution fees and contingent
deferred sales charges. Amortization was $10.4 million for the quarter ended
June 30, 2000 compared to $9.7 million for the quarter ended June 30, 1999.
For the first six months of 2000, amortization of deferred distribution costs
was $20.6 million compared to $19.2 million for the first six months of 1999.
AMORTIZATION OF INTANGIBLE ASSETS relates to goodwill and certain
identifiable intangible assets arising from business combinations accounted
for as purchases. Amortization was $5.1 million for the quarters ended June
30, 2000 and 1999. For the first six months of 2000, amortization of
intangible assets was $10.2 million compared to $10.1 million for the first
six months of 1999. The Company has experienced higher than anticipated
redemptions of assets under management at an acquired company, which at June
30, 2000 had goodwill and other intangible assets of $82.1 million. Although
the Company has determined that there is no impairment of goodwill and other
intangible assets at this time, if the higher level of redemptions were to
continue and sales were not to increase, the Company's estimate of related
future cash flows may change, resulting in the need to record an impairment
loss.
INTEREST EXPENSE, NET was $4.2 million for the quarter ended June 30,
2000 compared to $5.3 million for the quarter ended June 30, 1999. For the
first six months of 2000, interest expense, net was $8.2 million compared to
$11.0 million for the first six months of 1999. Interest expense primarily
consists of interest on notes payable and interest on the Liberty Funds Group
revolving credit facility which is utilized to finance deferred sales
commissions paid in connection with the distribution of mutual fund shares
sold with 12b-1 distribution fees and contingent deferred sales charges.
Interest expense was net of interest income of $5.9 million and $3.8 million
for the quarters ended June 30, 2000 and 1999, respectively. For the first
six months of 2000 and 1999, interest expense was net of interest income of
$11.7 million and $6.9 million, respectively.
INCOME TAX EXPENSE was $18.7 million or 39.2% of pre-tax income for the
quarter ended June 30, 2000 compared to $12.7 million, or 35.3% of pre-tax
income for the quarter ended June 30, 1999. For the first six months of 2000,
income tax expense was $41.7 million or 37.9% of pre-tax income compared to
$29.3 million or 36.6% of pre-tax income for the first six months of 1999.
FINANCIAL CONDITION
STOCKHOLDERS' EQUITY was $1.22 billion as of June 30, 2000 compared to
$1.19 billion as of December 31, 1999. Net income for the first six months of
2000 was $68.4 million and cash dividends on the Company's preferred and
common stock totaled $3.2 million. Common stock totaling $1.7 million was
issued in connection with the exercise of stock options. An increase in
accumulated other comprehensive loss, which consists of net unrealized
investment losses, net of adjustments to deferred policy acquisition costs
and income taxes, during the period decreased stockholders' equity by $38.3
million.
BOOK VALUE PER SHARE amounted to $25.24 at June 30, 2000 compared to
$24.99 at December 31, 1999. Excluding net unrealized losses on investments,
book value per share amounted to $29.32 at June 30, 2000 and $28.32
17
<PAGE>
at December 31, 1999. As of June 30, 2000, there were 48.2 million common
shares outstanding compared to 47.5 million shares as of December 31, 1999.
INVESTMENTS not including cash and cash equivalents, totaled $12.2
billion at June 30, 2000 and December 31, 1999.
The Company manages the majority of its invested assets internally. The
Company's general investment policy is to hold fixed maturity securities 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 portfolio of fixed maturity
securities as "available for sale" and accordingly carries such investments
at fair value. The Company's total investments at June 30, 2000 and December
31, 1999 reflected net unrealized losses of $343.7 million and $318.6
million, respectively.
Approximately $11.2 billion, or 80.2%, of the Company's general account
and certain separate account investments at June 30, 2000, were rated by
Standard & Poor's Corporation, Moody's Investors Service or under comparable
statutory rating guidelines established by the National Association of
Insurance Commissioners ("NAIC"). At June 30, 2000, the carrying value of
investments in below investment grade securities represented $1.2 billion or
8.5% of general account investments, including cash and cash equivalents in
the Company's annuity operations, and certain separate 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.
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. 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 maturity securities, management also considers market
value quotations if available. As of June 30, 2000 and December 31, 1999, the
carrying value of fixed maturity securities that were non-income producing
was $28.3 million and $22.6 million, respectively.
DERIVATIVES
As a component of its investment strategy and to reduce its exposure to
interest rate risk, the Company utilizes interest rate and total return swap
agreements to match assets more closely to liabilities. Interest rate 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 interest rate swap agreements to reduce asset duration and to better
match interest earned on longer-term fixed-rate assets with interest credited
to policyholders. A total return swap agreement is an agreement to exchange
payments based upon an underlying notional balance and changes in variable
rate and total return indices. The Company utilizes total return swap
agreements to hedge its obligations related to certain separate account
liabilities. The Company had 61 and 67 outstanding swap agreements with an
aggregate notional principal amount of $2.9 billion and $3.4 billion as of
June 30, 2000 and December 31, 1999, respectively.
With respect to the Company's equity-indexed annuities and certain
separate account liabilities, the Company buys call options, futures and
certain total return swap agreements on the S&P 500 Index to hedge its
obligations to provide returns based upon this index. The Company had call
options with a carrying value of $489.0 million and $701.1 million as of June
30, 2000 and December 31, 1999, respectively. The Company had total return
swap agreements with a carrying value of $29.9 million and $37.8 million as
of June 30, 2000 and December 31, 1999, respectively.
18
<PAGE>
There are risks associated with some of the techniques the Company uses
to match its assets and liabilities. The primary risk associated with swap,
cap and call option agreements is counterparty non-performance. The Company
believes that the counterparties to its swap, cap and call option agreements
are financially responsible and that the counterparty risk associated with
these transactions is minimal. Futures contracts trade on organized exchanges
and therefore have minimal credit risk. In addition, swap and cap agreements
have interest rate risk and call options, futures and certain total return
swap agreements have stock market risk. These swap and cap agreements hedge
fixed-rate assets and the Company expects that any interest rate movements
that adversely affect the market value of swap and cap agreements would be
offset by changes in the market values of such fixed rate assets. However,
there can be no assurance that these hedges will be effective in offsetting
the potential adverse effects of changes in interest rates. Similarly, the
call options, futures and certain total return swap agreements hedge the
Company's obligations to provide returns on equity-indexed annuities and
certain separate liabilities 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 500 Index call options, futures and certain total return swap
agreements would be substantially offset by a reduction in policyholder and
certain separate account 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. The Company's profitability could be
adversely affected if the value of its swap and cap agreements increase less
than (or decrease more than) the change in the market value of its fixed rate
assets and/or if the value of its S&P 500 Index call options, futures and
certain total return swap agreements increase less than (or decrease more
than) the value of the guarantees made to equity-indexed and certain separate
account policyholders.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133 "Accounting for
Derivative Instruments and Hedging Activities." This statement standardizes
the accounting for derivative instruments and the derivative portion of
certain other contracts that have similar characteristics by requiring that
an entity recognize those instruments at fair value. This statement also
requires a new method of accounting for hedging transactions, prescribes the
type of items and transactions that may be hedged, and specifies detailed
criteria to be met to qualify for hedge accounting. In June 1999, the FASB
issued SFAS No. 137 "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS
No. 137 defers the effective date of SFAS No. 133 until fiscal years
beginning after June 15, 2000. Upon adoption, the Company will be required to
record a cumulative effect adjustment to reflect this accounting change. At
this time, the Company has not completed its analysis and evaluation of the
requirements and the impact of this statement.
ACQUISITION
On June 12, 2000, the Company announced an agreement to acquire Wanger
Asset Management, L.P. ("Wanger"), a registered investment advisor. This
acquisition is expected to close during the fourth quarter of 2000. Total
assets under management of Wanger as of June 30, 2000 were approximately $9.0
billion. The purchase price for this transaction is $280.0 million in cash.
In addition, the Company has agreed to make additional payments over the next
five years of up to $170.0 million in cash, contingent upon the attainment of
certain earnings objectives. The purchase price and contingent payments are
subject to adjustment in certain circumstances. This transaction will be
accounted for as a purchase.
LIQUIDITY
The Company is a holding company whose liquidity needs include the
following: (i) operating expenses; (ii) debt service; (iii) dividends on
preferred stock and common stock; (iv) acquisitions; and (v) working capital
where needed by 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 and offerings of preferred and common
stock.
The Company has a $150.0 million revolving credit facility (the
"Facility"), established in April 1999 which is utilized to finance sales
commissions paid in connection with the distribution of mutual fund shares
sold with 12b-1 distribution fees and contingent deferred sales charges. This
five year Facility is secured by such 12b-1 distribution fees and
19
<PAGE>
contingent deferred sales charges. Interest accrues on the outstanding
borrowings under the Facility at a rate determined by sales of highly rated
commercial paper backed in part by the security interest in such fees and
charges. At June 30, 2000, the interest paid on borrowings under the Facility
was at the rate of 6.66% per annum.
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 June 30, 2000,
the amount of dividends that Keyport could pay without such approval was
$47.8 million. Future regulatory changes and credit agreements may create
additional limitations on the ability of the Company's subsidiaries to pay
dividends.
Based upon the historical cash flow of the Company, the Company's
current financial condition and the Company's expectation that there will not
be a material adverse change in the results of operations of the Company and
its subsidiaries during the next twelve months, the Company believes that
cash flow provided by operating activities over this period will provide
sufficient liquidity for the Company to meet its working capital, capital
investment and other operational cash needs, its debt service obligations,
its obligations to pay dividends on the preferred stock and its intentions to
pay dividends on the common stock. The Company may require external sources
of liquidity in order to finance material acquisitions where the purchase
price is not paid in equity. The Company expects to fund the acquisition of
Wanger with $80.0 million of cash and investments and $200.0 million of debt
issued to Liberty Mutual Insurance Company.
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, private capital management and
institutional accounts. The Company expects that, based upon their historical
cash flow and current prospects, these operating subsidiaries will be able to
meet their liquidity needs from internal sources and, in the case of Liberty
Funds Group, from its credit facility used to finance sales of mutual fund
shares sold with 12b-1 distribution fees and 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 the sales and 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 and cash equivalents in an effort to maintain
sufficient liquidity and has strategies in place to maintain sufficient
liquidity in changing interest rate environments. Consistent with the nature
of its obligations, Keyport has invested a substantial amount of its general
account assets in readily marketable securities. As of June 30, 2000, $11.2
billion, or 78.2%, of Keyport's general account and certain separate account
investments are considered readily marketable.
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. Although
no assurances can be given, Keyport believes that liquidity to fund
anticipated withdrawals would be available through incoming cash flow and the
sale of short-term or floating-rate investments, thereby precluding the sale
of fixed maturity investments in a potentially unfavorable market. In
addition, the Company's fixed-rate products incorporate surrender charges to
encourage persistency and to make the cost of its policyholder balances more
predictable. Approximately 75.0% of the Company's fixed annuity policyholder
balances were subject to surrender charges or restrictions as of June 30,
2000.
20
<PAGE>
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.
Inflation may result in increased operating expenses that may not be readily
recoverable in the prices of the services charged by the Company.
FORWARD-LOOKING STATEMENTS
The Company desires to take advantage of the "safe harbor" provisions of
the Private Securities Litigation Reform Act of 1995 (the "Reform Act").
Investors are cautioned that all statements not based on historical fact,
trend analyses and other information contained in this report or in any of
the Company's filings under Section 13 or 15 (d) of the Securities Exchange
Act of 1934 (the "Exchange Act"), relative to the markets for the Company's
products and trends in the Company's operations or financial results, as well
as other statements including words such as "anticipate", "believe", "plan",
"estimate", "expect", "intend" and other similar expressions, constitute
forward-looking statements under the Reform Act. These forward-looking
statements are made based on current expectations and assumptions and are
subject to known and unknown risks, uncertainties and other factors, many of
which are beyond the Company's control, that may cause actual results to be
materially different from those expressed or implied by the forward-looking
statements. Such factors include, among other things: (1) general economic
conditions and market factors, such as prevailing interest rate levels, stock
market performance and fluctuations in the market for retirement-oriented
savings products and investment management products, which may adversely
affect the ability of the Company to sell its products and services and the
market value of the Company's investments and assets under management and,
therefore, the portion of its revenues that are based on a percentage of
assets under management; (2) the Company's ability to manage effectively its
investment spread (i.e. the amount by which investment income exceeds
interest credited to annuity and life insurance policyholders) as a result of
changes in interest rates and crediting rates to policyholders, market
conditions and other factors (the Company's results of operations and
financial condition are significantly dependent on the Company's ability to
manage effectively its investment spread); (3) that the net change in
unrealized and undistributed gains in private equity limited partnerships
will not be realized or that future losses on such investment will not occur;
(4) levels of surrenders, withdrawals and net redemptions of the Company's
retirement-oriented insurance products and investment management products;
(5) relationships with investment management clients, including levels of
assets under management; (6) the ability of the Company to manage effectively
certain risks with respect to its investment portfolio, including risks
relating to holding below investment grade securities and the ability to
dispose of illiquid and/or restricted securities at desired times and prices,
and the ability to manage and hedge against interest rate changes through
asset/liability management techniques; (7) competition in the sale of the
Company's products and services, including the Company's ability to establish
and maintain relationships with distributors of its products; (8) changes in
financial ratings of Keyport or those of its competitors; (9) the Company's
ability to attract and retain key employees, including senior officers,
portfolio managers and sales executives; (10) the impact of and compliance by
the Company with existing and future regulation, including restrictions on
the ability of certain subsidiaries to pay dividends and any obligations of
the Company under any guaranty fund assessment laws; (11) changes in
applicable tax laws which may affect the relative tax advantages and
attractiveness of some of the Company's products; (12) the result of any
litigation or legal proceedings involving the Company; (13) changes in
generally accepted accounting principles and the impact of accounting
principles and pronouncements on the Company's financial condition and
results of operations; (14) changes in the Company's senior debt ratings;
(15) changes in operating expense levels; (16) acquisition risks, including
risks that the acquisition of Wanger Asset Management, L.P. will not close or
that, if it closes, the acquisition and integration of Wanger will not be as
successful as anticipated; and (17) the other risk factors or uncertainties
contained from time to time in any document incorporated by reference in this
report or otherwise filed by the Company under the Exchange Act. Given these
uncertainties,
21
<PAGE>
prospective investors are cautioned not to place undue reliance on such
forward-looking statements and no assurances can be given that the estimates
and expectations reflected in such statements will be achieved.
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes during the first six months of 2000
in the Company's market risks or in the methods which the Company uses to
manage such risks, which are described in the Company's Form 10-K for the
year ended December 31, 1999.
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Annual Meeting of Stockholders was held on May 8, 2000. The
following matters were submitted to a vote of the shareholders at the Annual
Meeting with the following results:
1. Election of the following individuals as directors of the Company
for a term of three years:
<TABLE>
<CAPTION>
COMMON STOCK SERIES A PREFERRED STOCK
------------ ------------------------
FOR WITHHELD FOR WITHHELD
--- -------- --- --------
<S> <C> <C> <C> <C>
Michael J. Babcock 46,526,145 97,913 444,454 14,061
Gary L. Countryman 44,715,971 1,908,087 444,454 14,061
John P. Hamill 46,525,445 98,613 444,454 14,061
Marian L. Heard 46,504,116 119,942 444,454 14,061
</TABLE>
No other matters were submitted to the shareholders for a vote.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
12 Statement re Computation of Ratios
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
There were no reports on Form 8-K filed during the quarter ended June
30, 2000.
23
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LIBERTY FINANCIAL COMPANIES, INC.
/s/ J. Andy Hilbert
--------------------------------------------
J. Andy Hilbert
(Duly Authorized Officer and
Chief Financial Officer)
Date: November 14, 2000
24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION PAGE
----------- ------------- ----
<S> <C> <C>
12 Statement re Computation of Ratios 26
27 Financial Data Schedule 27
</TABLE>
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