The Company owns its television broadcast studios, office buildings and transmitter sites in Columbia, SC; Montgomery, AL; Toledo, OH; Louisville, KY; Evansville, IN; Jonesboro, AR; Lake Charles, LA; Biloxi, MS; Albany, GA; Harlingen, TX; Lubbock, TX; Wilmington, NC; Jackson MS; Tyler, TX; and Lufkin, TX.
See Note 4 of the Consolidated Financial Statements regarding television station acquisitions made during 2000
On February 29, 2000, the Company completed the acquisition of KCBD, the NBC affiliate in Lubbock, TX in a cash transaction for $59.8 million. The transaction was accounted for as a purchase, and accordingly, its results of operations are included in the accompanying consolidated financial statements since the date of acquisition. This purchase was funded using proceeds from the Company’s credit facility.
On June 19, 2000, the Company entered into a purchase agreement with RBC, a Canadian-chartered bank, pursuant to which RBC was to acquire from the Company all of the issued and outstanding shares of capital stock of the companies comprising its insurance operations, for a total of approximately $648 million, consisting of a dividend from Liberty Life Insurance Company of up to $70 million and the balance in cash from RBC. On September 29, 2000, the Company’s shareholders approved the purchase agreement, and on November 1, 2000 the Company completed the sale to RBC. Accordingly, these entities have been treated as discontinued operations in the accompanying financial statements (see Note 3 of the Consolidated Financial Statements).
On November 1, 2000, using proceeds from the sale of its insurance operations, the Company repaid its revolving credit facility in full.
On December 1, 2000, the Company completed its acquisition of Civic. The agreed upon purchase price for all of the outstanding common stock of Civic was $204 million. The Company used proceeds from the sale of its insurance operations to fund the transaction. Civic owned and operated WLBT-TV, the NBC affiliate in Jackson, MS, KLTV-TV, the ABC affiliate in Tyler, TX, and KTRE-TV, the satellite affiliate of KLTV in Lufkin, TX.
FCC licenses and network affiliations and goodwill are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142, which the Company adopted during the first quarter of 2002, requires that intangible assets with indefinite lives and goodwill no longer be amortized to earnings, but instead be reviewed for impairment. This review for impairment requires management to make certain estimates and assumptions to determine the estimated fair value of its individual stations and its station group as a whole. These estimates and assumptions include, among other things, the future cash flows to be generated by its stations, terminal multiples for assumed station sales, discount rates to be used in present value calculations, and assumed
future capital expenditure levels. Actual results and future market conditions could differ from those estimates and assumptions used.
Cable advertising revenues are generated primarily from assisting local cable operators with the sale of commercial time available in cable network programs. Revenues are recognized in the period during which the advertising spots sold by the Company are aired by the local cable operator.
Deferred tax assets and liabilities are based on estimated timing differences between the book and tax basis of certain assets and liabilities. These estimates may be affected by future changes in enacted tax legislation and the results of regulatory review. Deferred tax assets are subject to periodic recoverability assessments. Realization of our deferred tax assets is principally dependent upon our achievement of projected future taxable income. Our judgments regarding future profitability may change due to future market conditions, among other factors. These changes, if any, may require possible material adjustments to these deferred tax asset balances.
Net revenues were $206.4 million for the year ended December 31, 2002, an increase of $28.1 million over the $178.3 million reported for 2001. Net station revenues were $190.1 million for 2002, an increase of $25.1 million over the $165.0 million reported for 2001.
National revenue was up four percent on a year-over-year basis due mainly to increases in automotive advertising by the large auto manufacturers.
Political revenue was $27.3 million in 2002 versus $2.0 million in 2001. Political revenue was up in 2002 as it was a Congressional election year and a majority of the Company’s stations are the leading news providers in their markets. Due to their ability to deliver significant numbers of viewers, they are attractive vehicles for political candidates to use to inform the public of their campaign messages.
Network revenues were down 45 percent on a year-over-year basis as a majority of the Company’s stations began operating under new network contracts during the second half of 2001.
Cable and other revenues were $16.2 million for the year ended December 31, 2002, an increase of $3.0 million over the $13.2 million reported for 2001. The increase in cable and other revenues is due to political revenue in 2002 that was not present in 2001, generally stronger advertising environments in several markets, and startup operations at certain locations in the previous year being fully operational during 2002.
Operating expenses (including the amortization of program rights) were $122.9 million for the year ended December 31, 2002, an increase of $11.1 million over the $111.8 million reported for 2001. The broadcasting segment’s operating expenses were $109.4 million for 2002, an increase of $8.6 million over the $100.8 million reported for 2001. The increase in operating expenses is mainly attributable to higher levels of sales commissions as a result of the increased revenue base, accruals for performance based compensation in 2002 that were not present during 2001, and increased personnel costs related to the addition of nightly and weekend news casts at one of the Company’s stations, along with annual salary increases across the Company. Cable operating expenses were $12.9 million for 2002, an increase of $2.8 million over the $10.1 million reported for 2001. The increase in cable advertising operating expenses is attributable mainly to increased commissions as a result of the increased revenue base, along with the addition of personnel during the year as start up operations at certain locations in the previous year became fully operational during 2002.
first quarter of 2001, reported depreciation and amortization expenses would have been approximately $16.9 million. (See Note 6 of the accompanying Notes to Consolidated Financial Statements for further details).
Corporate, general, and administrative expenses were $13.5 million for the year ended December 31, 2002, an increase of $1.7 million over the $11.8 million reported for 2001. The increase in corporate, general, and administrative expenses is due to accruals for performance based compensation in 2002 that were not present during 2001, and the non-capitalizable portion of expenses related to the implementation of new accounting systems.
Net investment income was $0.6 million for the year ended December 31, 2002, a decrease of $3.5 million from the $4.1 million reported for 2001. Net investment income during 2002 was comprised mainly of interest earned on cash balances and venture capital distributions, offset by non-cash impairment charges in the Company’s venture capital portfolio. Net investment income during 2001 was comprised of significantly higher interest income (due to the interest earned during the first quarter of that year on the large cash balance related to the then as yet unpaid income taxes on the sale of the insurance operations) along with venture capital distributions and gains on the sale of stock in the Company’s equity portfolio, offset by impairments taken in the Company’s venture capital portfolio.
The effective tax rate was 38.0% and 39.4% for 2001 and 2000, respectively.
Adjustment to exclude the net impact in 2000 related to the phase-out and winding up of the Company’s direct mail coupon operations
The Company has determined that it is not practicable to estimate the fair values of its private equity, venture capital, and low income housing tax credit investments because of a lack of primary and secondary market prices and the inability to estimate fair values without incurring excessive costs. Fair values for private debt securities are estimated by discounting the expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments. Further discussion of investments and valuation is contained in Notes 7 and 15 to the Consolidated Financial Statements.
The Company’s primary long-term cash needs are the possible need for capital should the Company identify an appropriate acquisition opportunity, and the expenditures associated with implementing high definition television broadcast operations. While exact costs are not presently known, the additional capital expenditures required over the next several years to comply with the FCC high definition television implementation deadline are anticipated to be approximately $10 million to $15 million.
Cash flow used in financing activities for 2002 was $31.6 million versus $17.2 million and $251 million in 2001 and 2000, respectively. Cash flow used in financing activities was higher in 2002 as compared to 2001 due to the increased activity in the Company’s share buy-back program during 2002. During 2000, funds from the sale of the Company’s insurance operations were used to pay off the then outstanding balance on its revolving credit facility.
On February 4, 2003, the Board of Directors of the Company extended to February 28, 2004, the Company’s authorization to purchase from time to time up to 4 million shares of stock in the open market or directly negotiated transactions.
In February 2000, the Company used $59.8 million from borrowings under its credit facility to acquire KCBD, the NBC affiliate in Lubbock, Texas. On November 1, 2000, the Company repaid this facility in full with a portion of the proceeds from the sale of its insurance operations.
The Company has committed to make certain investments in its venture capital funds when called by the fund’s manager. The Company anticipates additional funding related to its venture capital portfolio of $1.2 million over the next one to three years. The Company also anticipates the funding of its private debt and equity holdings of approximately $4.0 million during 2003.
At December 31, 2002 and 2001, the Company had no outstanding debt. On March 21, 2001, the Company entered into a $100 million unsecured 364-day revolving credit facility with a bank. On May 20, 2002, the Company renewed the facility for an additional year on substantially similar terms. No amounts have been drawn on this facility since inception. At the end of the term of the facility any outstanding principal and interest will come due, unless the bank, in its sole discretion, otherwise extends the facility. The facility provides that the funds drawn may be used for working capital and other general corporate purposes, capital expenditures, repurchases of common stock, acquisitions, and investments.
The Company believes that its current level of cash, expected future cash flows from operations, and its credit facility are sufficient to meet the needs of its businesses. If suitable opportunities arise for additional acquisitions, the Company believes it can arrange for additional debt financing or use Common Stock or Preferred Stock as payment for all or part of the consideration for such acquisitions, or the Company may seek additional funds in the equity or debt markets.
As of December 31, 2002 the Company had no off-balance sheet arrangements.
The Company completed the sale of its insurance operations on November 1, 2000, as more fully discussed in Note 3. The insurance operations have been accounted for as discontinued operations.
The accompanying consolidated financial statements of The Liberty Corporation and Subsidiaries include the accounts of the Company after elimination of all significant intercompany balances and transactions.
Financial statements prepared in accordance with accounting principles generally accepted in the United States require management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes to the consolidated financial statements. Actual results could differ from those estimates and assumptions.
Program rights result from license agreements under which the Company has acquired rights to broadcast certain television program material, and are stated at cost less amortization. The cost of rights acquired is recorded as an asset and a liability when the program material has been accepted and made available for broadcast. Amortization is determined using both straight-line and accelerated methods over the terms of the license agreements. Carrying amounts are regularly reviewed by management for indications of impairment and are adjusted when appropriate to estimated amounts recoverable from future broadcasts of the applicable program material.
FCC licenses, network affiliations, and goodwill are accounted for in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142, which the Company adopted during the first quarter of 2002, requires that intangible assets with indefinite lives and goodwill no longer be amortized to earnings, but instead be reviewed for impairment. This review for impairment, performed at least annually, requires management to make certain estimates to determine the estimated fair value of its individual stations and it station group as a whole. These estimates include, among other things, the future cash flows to be generated by stations, terminal multiples for assumed station sales, discount rates to be used in present value calculations, and assumed future capital expenditure levels. Actual results and future market conditions could differ from those estimates and assumptions used.
Program contract obligations represent the gross amounts to be paid to program suppliers over the life of the contracts. Program rights acquired through the assumption of program contract obligations were approximately $7,036,000 and $7,244,000 for 2002 and 2001, respectively. Commitments for license agreements that were executed but were not reported in the accompanying balance sheets because they were not available for broadcasting were $9,266,000 and $11,703,000 for 2002 and 2001, respectively.
Station revenues are generated primarily from the sale of television advertising time, and are recognized in the period during which the advertising spots are aired. Station revenues are presented net of agency commissions of $34,147,000, $27,322,000, and $26,565,000 in 2002, 2001, and 2000, respectively. Station revenues also include revenues from network affiliation contracts. Revenues from network affiliation contracts are recorded as earned over the life of the contract. Cash payments received in excess of revenue earned to-date are recorded as unearned revenue.
Revenue from barter transactions is recognized when advertisements are broadcast. Barter revenue is recognized based on the fair value of merchandise or services received by the Company. Revenue from barter transactions was $2,976,000, $3,198,000, and $2,785,000 for the years 2002, 2001, and 2000, respectively.
Merchandise or services received are charged to cost and expense when received or used. Expense related to barter transactions was $3,079,000, $3,113,000, and $2,665,000 for the years 2002, 2001, and 2000, respectively.
Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax, reported in other comprehensive income. Realized gains and losses and declines in value judged to be other-then-temporary on available-for-sale securities are included in net investment income. The cost of securities sold is based on the specific identification method. Interest and dividends on securities classified as available-for-sale are included in other income.
The Company accounts for awards of restricted stock in accordance with SFAS No. 123. The Company recognizes compensation expense equal to the grant date fair value of the restricted stock awards as compensation expense over the vesting period of the restricted shares.
Reclassifications have been made in the 2001 and 2000 Consolidated Financial Statements to conform to the 2002 presentation.
On June 19, 2000, the Company entered into a Purchase Agreement (the “Purchase Agreement”) with Royal Bank of Canada (“RBC”), a Canadian-chartered bank, pursuant to which RBC was to acquire from the Company all of the issued and outstanding shares of capital stock of Liberty Life Insurance Company, Liberty Insurance Services Corporation, The Liberty Marketing Corporation, LC Insurance Limited and Liberty Capital Advisors, Inc., for a total of approximately $648 million, consisting of a dividend from Liberty Life Insurance Company of up to $70 million and the balance in cash from Royal Bank of Canada. On September 29, 2000, the shareholders of the Company approved the Purchase Agreement described above. Accordingly, these entities have been treated as discontinued operations in the accompanying financial statements. The transaction closed on November 1, 2000 with Liberty receiving $567.6 million in net cash proceeds and approximately $16 million in non-cash assets (mainly investments in venture capital funds and low income housing tax credits).
On December 1, 2000, the Company completed its acquisition of Civic Communications (“Civic”). The agreed-upon purchase price for all of the outstanding common stock of Civic was $204 million. The Company used proceeds from the sale of its insurance operations, which was completed November 1, 2000, to fund the transaction. Civic owned and operated WLBT-TV, the NBC affiliate in Jackson, MS, KLTV-TV, the ABC affiliate in Tyler, TX, and KTRE-TV, the satellite affiliate of KLTV in Lufkin, TX.
Both of the acquisitions were accounted for by the purchase method of accounting and, accordingly, the purchase price of the acquired businesses were allocated to underlying assets and liabilities based on fair values.
At the time of closing, the Company agreed to pay a portion of the purchase price to the Civic stockholders at a future date. The unpaid purchase price was remitted to the Civic stockholders during the first quarter of 2001.
FCC licenses, network affiliations, and goodwill are accounted for in accordance with SFAS No. 142 “Goodwill and Other Intangible Assets” (“SFAS No. 142”). SFAS No. 142, which the Company adopted during the first quarter of 2002, requires that intangible assets with indefinite lives and goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The Company recorded $15.1 million ($9.4 million net of income taxes) and $6.7 million ($4.2 million net of income taxes) of amortization expense related to intangibles that are no longer required to be amortized for the years ended December 31, 2001 and 2000, respectively. In connection with the adoption of SFAS No. 142, the Company reduced the carrying value of its FCC licenses by $76.4 million ($47.4 million net of income taxes) as a cumulative effect of a change in accounting principle.
The following table reconciles net income for the periods ended December 31, 2001 and December 31, 2000 as reported to the adjusted December 31, 2001 and December 31, 2000 net income, had Statement No. 142 been in effect as of January 1, 2000:
The following tables reconcile basic and diluted earnings per share as reported at December 31, 2001 and 2000, to the adjusted December 31, 2001 and 2000 basic and diluted earnings per share, had Statement No. 142 been in effect as of January 1, 2000:
At December 31, 2002 and December 31, 2001, the Company’s intangible assets not subject to amortization were comprised of FCC licenses and network affiliations.
Investments in debt securities and marketable equity securities are accounted for in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS No. 115”). SFAS No. 115 requires that all debt and marketable equity securities be classified into one of three categories - held to maturity, available-for-sale, or trading. The Company currently has no securities classified as held to maturity or trading.
Investments are generally held in the Corporate segment and are reported on the following basis:
Marketable equity securities are all considered available-for-sale and are carried at fair value. The fair values for marketable equity securities are based on quoted market prices.
Private equity investments, all of which represent a voting interest of less than 20%, are carried at cost, which includes provisions for impaired value when appropriate.
Private debt securities classified as available-for-sale are stated at fair value with unrealized gains and losses, after adjustment for deferred income taxes, reported directly in shareholders’ equity in accumulated other comprehensive income (loss). Fair values for private debt securities are estimated by discounting the expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments.
Real estate related investments consist primarily of residential land and lots in various stages of development and completion, and receivables related to prior land sales. The Company’s real estate properties were held for sale at December 31, 2002 and 2001, and accordingly are carried at the lower of cost or fair market value less costs to sell.
Certain of the Company’s private equity and debt securities have conversion, anti-dilution, demand registration, and other features typical for instruments of these types. In addition, certain of these instruments have warrants attached that if exercised, would allow the Company to purchase additional shares in certain of its investee companies at predetermined prices. These securities have maturities ranging from one to three years.
In November 2000, the Company sold its insurance operations for approximately $648 million (See Note 3). The Company used approximately $258 million of its net cash proceeds from this sale to repay its credit facility in full. The Company had no outstanding debt, nor interest expense, during 2001 or 2002. Interest paid amounted to approximately $15,005,000 in 2000.
In March 2001, the Company entered into a $100 million unsecured 364-day revolving credit facility with a bank. On May 20, 2002, the Company renewed the facility for an additional year on substantially similar terms. No amounts have been drawn on this facility since inception. At the end of the term of the facility, any outstanding principal and interest will come due, unless the bank, in its sole discretion, otherwise extends the facility. The facility provides that the funds drawn may be used for working capital and other general corporate purposes, capital expenditures, repurchases of common stock, acquisitions, and investments.
The following schedule reconciles the status of the Company’s plan with the unfunded postretirement benefit obligation included in its balance sheets at December 31:
A one-percentage-point change in assumed health care cost trend rates would have the following effects:
Stock options under the Program are issued at least at 100% of the market price on the date of grant, are vested over such period of time, which generally may not be less than one year, as may be established by the Compensation Committee, and expire no more than ten years after the grant. As required by the Program, the sale of the Company’s insurance operations on November 1, 2000, resulted in the vesting of all of the then outstanding stock options.
In accordance with the provisions SFAS No. 123, “Accounting for Stock-Based Compensation", the Company has elected to follow Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and related interpretations in accounting for its plans and does not recognize compensation expense for its stock-based compensation plans other than for awards of restricted shares. Expense is recognized over the vesting period of the restricted shares. Expense related to restricted shares totaled $990,000 and $757,000 for the years ended December 31, 2002 and 2001, respectively. Commensurate with the sale of the Company’s insurance operations on November 1, 2000, all of the then outstanding restricted stock vested. The expense related to this required vesting was included in the gain on the sale of discontinued operations. Prior to the sale of the insurance operations, the Company had expensed approximately $2,438,000 in 2000.
Under APB No. 25, because the exercise price of the Company’s employee stock options at least equals the market price of the underlying stock on the date of the grant, no compensation expense is recognized. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement.
The weighted average grant-date estimated fair value of grants during 2002, 2001, and 2000 using a Black-Scholes option valuation model, and the weighted average assumptions used to determine the estimated fair value are as follows:
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility.
The following schedule summarizes activity in the Program during the three years ending December 31, 2002:
Significant components of the Company’s deferred tax liabilities and assets as of December 31, 2002 and 2001 are as follows:
The diluted income from continuing operations per common share calculation excludes the effect of potentially dilutive shares when the inclusion of those shares in the calculation would have an anti-dilutive effect.
Private debt securities: The carrying amounts reported in the balance sheet for theses securities approximate their fair value. Fair values are estimated by discounting the expected future cash flows using a current market rate applicable to the yield, credit quality, and maturity of the investments.
The components of other comprehensive income (loss) and the related tax effects, for the years 2002, 2001, and 2000 are as follows:
The Company and its subsidiaries are defendants in various lawsuits arising in the ordinary course of business. It is the opinion of management and legal counsel that these actions will not have a material effect on the financial position or results of operations of the Company. The Company has lease agreements for broadcast, data processing, and telephone equipment, along with rent for certain office space. Most of these agreements have optional renewal provisions covering additional periods of one to ten years. All leases were made in the ordinary course of business and contain no significant restrictions or obligations. Annual rental expense amounted to approximately $1,023,000, $871,000 and $674,000 in 2002, 2001, and 2000, respectively.
The Company has also entered into commitments for various television programming rights for which the license periods have not yet commenced. See the caption “Program Contract Obligation” included in Note 2 for further details.
The consolidated financial statements included in this Annual Report have been prepared by management, which is responsible for the integrity and fair presentation of the financial data and related disclosures. The consolidated financial statements are in accordance with accounting principles generally accepted in the United States and necessarily include amounts that are based on management’s estimates and assumptions. Management believes that the consolidated financial statements fairly reflect the Company’s financial position and results of operations.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Liberty Corporation and Subsidiaries at December 31, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements and schedule taken as a whole, presents fairly in all material respects the information set forth therein.