The Company leases the space for its main office which is located at 135 South Main Street, Greenville, SC.
See Note 3 of the Consolidated Financial Statements regarding the sale of the Company’s insurance operations in November of 2000
See Note 6 of the Consolidated Financial Statements regarding the cumulative effect of a change in accounting principle related to the adoption of Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets”
The Liberty Corporation is a holding company with operations primarily in the television broadcasting industry. The Company’s television broadcasting subsidiary, Cosmos Broadcasting, consists of fifteen network-affiliated television stations principally located in the Southeast and Midwest, a cable advertising company, a video production company and a professional broadcast equipment dealership. Eight of the Company’s television stations are affiliated with NBC, five with ABC, and two with CBS.
Prior to September 29, 2000, the Company was also engaged in the insurance industry. On September 29, 2000, the Company’s shareholders approved the sale of the Company’s insurance operations to RBC for $648 million. The sale closed on November 1, 2000. Accordingly, these entities have been treated as discontinued operations in the accompanying financial statements (see Note 3 of the Consolidated Financial Statements).
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information contained herein or in any other written or oral statements made by, or on behalf of the Company, are or may be viewed as forward-looking. The words “expect”, “believe”, “anticipate” or similar expressions identify forward-looking statements. Although the Company has used appropriate care in developing any such forward-looking information, forward-looking information involves risks and uncertainties that could significantly impact actual results. These risks and uncertainties include, but are not limited to, the following: changes in national and local markets for television advertising; changes in general economic conditions, including the performance of financial markets and interest rates; competitive, regulatory, or tax changes that affect the cost of or demand for the Company’s services; and adverse litigation results. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future developments, or otherwise.
On August 25, 2000, the Company completed the redemption of all of the outstanding shares of its Series 1995-A Cumulative Convertible Preferred Stock. Shares were called for redemption at $35.00 per share plus accrued dividends for the period from July 1, 2000 through the Series 1995-A redemption date (September 5, 2000). Prior to the redemption date, all shares of the 1995-A Series were converted into common stock.
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. Advertising revenue for specific program contracts may not continue to equal or exceed the amortization being taken and additional adjustments may be necessary in the future.
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 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.
Realized investment gains and losses are recognized using the specific identification method to determine the cost of investments sold. Gains and losses on the sale of real estate acquired for development and resale are included in net investment income. Realized gains and losses include write-downs for impaired values of investment assets. The Company establishes impairments on specific assets at the time the Company determines the assets to have been impaired. In performing this determination management utilizes mathematical models, market information, and valuation information supplied by investee companies to determine if an impairment exists. Changes in market conditions or the valuations of the investee companies could significantly impact our judgments and require further adjustments to these balances. The Company reviews its investments for impairment on a quarterly basis.
From time to time, proposals have been advanced in the U.S. Congress and at the FCC to require television broadcast stations to provide advertising time to political candidates at no or reduced charge, which would eliminate in whole or in part advertising revenues from political candidates.
Local and regional advertising was up four percent on a year-over-year basis due mainly to increases in automotive advertising by local auto dealerships and increases in the fast food category.
Depreciation and amortization was $17.8 million for the year ended December 31, 2002, a decrease of $14.2 million from the $32.0 million reported for 2001. During the first quarter of 2002, the Company adopted SFAS No. 142 “Goodwill and Other Intangible Assets”. SFAS No. 142 requires that goodwill and certain other identified intangibles no longer be amortized to earnings, but instead be review for impairment. Had SFAS No. 142 been effective as of the beginning of the
The effective tax rate was 37.5% and 38.0% for 2002 and 2001, respectively.
Net revenues were $178.3 million for the year ended December 31, 2001, an increase of $4.6 million over the $173.7 million reported for 2000. Net station revenues were $165.0 million for 2001, an increase of $5.2 million over the $159.8 million reported for 2000. The acquisitions of KCBD in February 2000, and WLBT, KLTV, and KTRE in December 2000, accounted for $29.6 million of the revenue in 2001. On a pro forma basis, as if the Company held all of its current stations for the full year of 2000, net station revenue decreased 13 percent. National revenue increased $7.8 million, due mainly to the four station acquisitions completed during 2000. On a pro forma basis, national revenue was down three percent. Local and regional revenue increased $12.5 million, mainly due to the four stations acquired during 2000. On a pro forma basis, local and regional revenue was down seven percent. The decreases in national and local and regional revenue on a pro forma basis were due to the general weakness in the advertising industry during 2001. This general weakness was exacerbated by the events of September 11th, as a number of advertisers cancelled or reduced schedules at that time. Political revenue was $2.0 million in 2001, down $12.3 million from the prior year level as 2001 was an off year in the biannual political cycle.
Cable and other revenues were $13.2 million for the year ended December 31, 2001, a decrease of $0.6 million from the prior year level.
Operating expenses (including the amortization of program rights) were $111.8 million for the year ended December 31, 2001, an increase of $10.4 million over the $101.4 million reported for 2000. The broadcasting segment’s operating expenses were $100.8 million for 2001, an increase of $13.8 million over the $87.0 million reported for 2000. On a pro forma basis, broadcast operating expenses decreased five percent. This decrease is due to lower levels of commission paid to local sales personnel as a result of a lower revenue base in 2001, reductions in promotional expenses, and a reduction in
personnel implemented during 2001. Cable operating expenses were $10.1 million for 2001, an increase of $0.5 million over the $9.6 million reported for 2000. The increase in cable advertising operating expenses is attributable mainly to its expansion to new locations. Operating expenses associated with the Company’s other operations were approximately $0.9 million in 2001 and $4.8 million in 2000. Of the amount in 2000, $4.4 million relates to the phase-out and wind up of the Company’s direct mail coupon business.
Depreciation and amortization was $32.0 million for the year ended December 31, 2001, an increase of $10.9 million over the $21.1 million reported for 2000. The increase in depreciation and amortization expense is attributable to the four station acquisitions completed during 2000.
Corporate, general, and administrative expenses were $11.8 million for the year ended December 31, 2001, a decrease of $0.4 million over the $12.2 million reported for 2000. The decrease in corporate, general, and administrative expenses is due to lower levels of corporate charitable contributions and consulting fees, offset by certain costs associated with the relocation of the Company’s headquarters, and the non-capitalizable portion of expenses related to the implementation of new accounting and payroll systems.
No interest expense was reported for the year ended December 31, 2001 as the Company paid off its credit facility during 2000 with proceeds from the sale of its insurance operations. Interest expense of $14.4 million was reported for the year ended December 31, 2000.
Additional measures of broadcasting performance are based on cash flow. Broadcast cash flow information is included because such data is commonly used as a performance measure for broadcasting companies by investors for, among other items, measuring a company’s debt, and debt service capacity.
Broadcast cash flow for 2002 was $89.8 million, an increase of $21.4 million as compared to the $68.4 million reported for 2001. The increase in broadcast cash flow is due mainly to the increase in revenues as a result of robust spending by political advertisers during 2002.
This cash flow information is not, and should not be used as, an alternative or substitute for the net income or cash flows included in the Company’s Consolidated Financial Statements, and is not a measure of financial performance under generally accepted accounting principles. As the calculation of broadcast cash flow is before corporate expenses, interest expense, and income taxes, it is not necessarily indicative of the funds that are available for management’s discretionary use.
During the year ended December 31, 2002, the Company had net investment income of $0.6 million. The majority of this was related to gains on the sale of marketable equity securities and interest income earned on cash balances. At December 31, 2002, other long-term investments, included in the caption “investments and other assets” on the balance sheet, was comprised of approximately 24% private equity securities, 26% private debt securities, 14% real estate related investments, 16% venture capital limited partnerships, and 20% low income housing tax credits and other investments.
The Company’s short-term cash needs consist primarily of working capital requirements, and dividends to shareholders. Historically, Liberty’s operations have provided sufficient liquidity for the operations of the Company.
On a consolidated basis, Liberty’s net cash provided by operating activities was $91.8 million for 2002 compared with cash used in operating activities of $75.5 million for 2001 and cash provided by operating activities of $28.8 million for 2000. The increase in cash provided by operating activities is due to the payment in 2001 of approximately $132 million of income taxes related to the sale of its insurance operations. Excluding the impact of the Company’s discontinued insurance operations and the income taxes paid related to that sale, net cash provided by operations was $56.5 million in 2001 and $43.3 million for 2000.The increase in cash provided by operating activities in 2002 as compared to the adjusted 2001 cash provided by operating activities is due to mainly to the increase in revenues during 2002.
Liberty’s net cash used in investing activities was $27.7 million in 2002 compared to $20.8 million in 2001 and net cash provided by investing activities of $359.3 million in 2000. The increase in net cash used in investing activities in 2002 was due to increased capital expenditures related to the Company’s conversion to digital television broadcasting. The majority of the net cash provided by investing activities during 2000 was related to the sale of the Company’s insurance operations.
During 2002, the Company repurchased 404,400 shares of its common stock for approximately $15.3 million. During 2001, the Company repurchased 240,000 shares of its common stock for approximately $9.6 million. During 2000, the Company repurchased 683,500 shares of its common stock for approximately $24.6 million.
During 2001, the Company completed negotiations with NBC regarding its network affiliation agreements, and entered into a ten year agreement that calls for compensation payments from NBC for the first five years and is compensation neutral thereafter.
Other Company commitments are shown in Note 18 to the Consolidated Financial Statements. Further discussion of investments and valuation is contained in Notes 2 and 15 to the Consolidated Financial Statements.
Comprehensive income (loss), which includes the aggregate of net income (loss) and net unrealized investment gains (losses), was $(14,157), $15,823, and $55,439, for 2002, 2001, and 2000, respectively.
The Company includes with cash and cash equivalents all highly liquid investments which mature within three months of the date of acquisition. The Company routinely enters into repurchase agreements with banks whereby the Company makes overnight purchases of government securities using its available cash balances. The following day, the bank is required to repurchase the investments from the Company. The Company generally does not require collateral for these investments. Overnight investments of $9,309,000 and $18,693,000 were included in cash and cash equivalent at December 31, 2002 and 2001, respectively.
Receivables, net of allowance for doubtful accounts, are carried at cost, which approximates fair value. The Company calculates its allowance for doubtful accounts based on an estimation process. The Company uses a mathematical calculation coupled with the specific identification of certain accounts to estimate its allowance for doubtful accounts. Estimates of the likelihood of collection are made based on a mutli-year historical average of the actual collections experience at each station. The Company charges accounts receivables off against its allowance for doubtful accounts when it deems them to be uncollectible on a specific identification basis.
Property, plant, and equipment are recorded at cost. Depreciation over the estimated useful lives of the properties is determined principally using the straight-line method with lives ranging from 3 to 30 years.
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. Cable advertising and other revenues are presented net of commissions of $2,712,000, $1,636,000, and, $1,636,000 in 2002, 2001, and 2000, respectively.
A significant portion of the Company’s accounts receivable are due from local and national advertising agencies. Such amounts are generally unsecured.
Realized gains and losses on the sale of real estate acquired for development and resale are included in net investment income. Realized gains and losses include write-downs for impaired values of investment assets. The Company establishes impairments on specific assets at the time the Company judges the assets to have been impaired and the impairment can be estimated.
Income taxes are computed using the liability method required by SFAS No. 109, “Accounting for Income Taxes (“SFAS No 109”)”. Under SFAS No. 109, deferred tax assets and liabilities are determined based on the differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and law that will be in effect when the differences are expected to reverse.
In accordance with the provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), the Company has elected to follow the intrinsic value method to account for stock-based compensation. Under the intrinsic value method, 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. Please see Note 11 Stock Ownership and Stock Option Plans for a tabular presentation of this information and additional important disclosures regarding the Company’s equity compensation programs.
Operating results in 2000 include operations through September 29, 2000, the date the shareholders approved the transaction. Results from that date through the date of sale are included in the gain on the sale of discontinued operations.
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. This purchase was funded using proceeds from the Company’s credit facility.
The following table sets forth the unaudited pro forma results of operations as if the acquisitions had been consummated at the beginning of 2000:
The pro forma data give effect in the aggregate to the acquisition of KCBD-TV, which occurred on February 29, 2000, to the sale of Liberty’s insurance operations to RBC, which closed on November 1, 2000, and to the acquisition of Civic, which occurred on December 1, 2000, as if each had occurred at the beginning of the period presented. The pro forma amounts include actual operating results prior to each respective acquisition and adjustments to intangible amortization, depreciation, interest expense and income taxes. These pro forma amounts do not purport to be indicative of results that would have occurred had the transactions been in effect for the periods presented or that may be obtained in the future.
At December 31, 2002 and December 31, 2001, the Company’s intangible assets subject to amortization were comprised of leases acquired through station purchases for space on certain of its towers, non-compete agreements, and loan costs associated with the Company’s unused line of credit.
Estimated amortization expense resulting from intangible assets subject to amortization for the five year period ending 2007 is expected to be as follows:
The Company realized $401,000, $1,053,000, and $13,987,000 in gains on the sale of available-for-sale securities in 2002, 2001, and 2000, respectively. The Company realized $147,000, $15,000, and $1,104,000 in losses on the sale of available-for-sale securities in 2002, 2001, and 2000, respectively. Gains and losses on the sale of available-for-sale securities are reported in net investment income on the face of the income statement. The major classifications of investments and other assets are as follows:
Investments in venture capital funds are generally carried at cost, which includes provisions for impaired value where appropriate.
Investments in low income housing tax credits are accounted for using the cost method, in accordance with Emerging Issues Task Force 94-1 “Accounting for Tax Benefits Resulting from Investments in Affordable Housing Projects”. Under the cost method, any excess of the carrying amount of the investment over its estimated residual value is amortized over the remaining period during which the Company is to receive tax credits.
See Note 15 Fair Values of Financial Instruments for further discussion of the methods used to estimate the fair values of the Company’s financial instruments.
The Company has adopted a Shareholder Rights Plan and declared a dividend of one preferred stock purchase right for each outstanding share of common stock. Upon becoming exercisable, each right entitles the holder to purchase for a price of $150.00 one one-hundredth of a share of Series A Participating Cumulative Preferred Stock. All of the rights may be redeemed by the Company at a price of $0.01 per right until ten business days (or such later date as the Board of Directors determines) after the public announcement that a person or group has acquired beneficial ownership of 20 percent or more of the outstanding common shares (“Acquiring Person”). Upon existence of an Acquiring Person, the Company may redeem the rights only with the concurrence of a majority of the directors not affiliated with the Acquiring Person. The rights, which do not have voting power and are not entitled to dividends, expire on August 7, 2010. The rights are not exercisable until ten business days after the public announcement that a person has become an Acquiring Person or after the commencement of a tender offer or exchange offer if, upon consummation, such person or group would become an Acquiring Person. If, after the rights become exercisable, the Company becomes involved in a merger or certain other major corporate transactions, each right will entitle its holder, other than the Acquiring Person, to receive common shares with a deemed market value of twice such exercise price. There are 10,000,000 shares of preferred stock, no par value per share authorized for issuance. At December 31, 2002 and December 31, 2001, there were 140,000 shares of preferred stock that were reserved for issuance in connection with the Shareholder Rights Plan.
The Company repurchased through negotiated transactions and in the open market 404,400, 240,000, and 684,000 common shares during 2002, 2001 and 2000, respectively.
The components of unrealized appreciation on fixed maturity securities available for sale and equity securities in the balance sheet caption Unrealized Investment Gains and Losses (see Note 16) as of December 31 are as follows:
The following schedule reconciles the accumulated postretirement benefit obligation included in other liabilities on the balance sheets as of December 31:
The weighted-average discount rate is 6.75% and 7.25% for 2002 and 2001, respectively. At December 31, 2002, a 5.5% annual rate of increase in the per capita cost of covered medical benefits was assumed for 2003. The rate was to remain at 5.5% in 2004 and thereafter. At December 31, 2001, a 5.5% annual rate of increase in the per capita cost of covered medical benefits was assumed for 2002. The rate was to remain at 5.5% in 2003 and thereafter. Assumed health care cost trend rates have a significant effect on the amounts reported for the medical plans.
The Company has a retirement and savings plan for substantially all of its employees. The plan has features of both a profit sharing plan and a voluntary thrift plan qualified under Section 401(k) of the Internal Revenue Code. The profit sharing component of the Plan allows for contributions to be made to the Plan at the discretion of the Board of Directors. Contributions for this component of the Plan were $3,022,000, $2,975,000, and $2,271,000 in 2002, 2001, and 2000, respectively. The 401(k) component of the Plan allows employees to contribute to the Plan and the Company will make a matching contribution of up to 3% of the employees’ compensation. The Company’s matching contribution percentage may be changed at the discretion of the Company’s Board of Directors. The Company’s contributions for this component of the Plan were $1,551,000, $1,214,000, and $1,088,000 in 2002, 2001, and 2000, respectively.
The Company has a Performance Incentive Compensation Program (the “Program”) which provides that the Compensation Committee of the Board of Directors may grant: (a) incentive stock options within the meaning of Section 422 of the Internal Revenue Code; (b) non-qualified stock options; (c) performance units; (d) awards of restricted shares of the Company’s common stock; (e) awards of unrestricted shares of the Company’s common stock; (f) phantom stock units; (g) or any combination of the foregoing to outside directors, officers and key employees provided, however, that non-employee directors are not eligible to receive incentive stock options. Only common stock, not to exceed 5,000,000 shares, may be delivered under the Program; shares so delivered will be made available from the authorized but unissued shares or from shares reacquired by the Company, including shares purchased in the open market. The aggregate number of shares that may be acquired by any participant in the Program is limited to a maximum of 400,000 stock options during a single calendar year and a maximum of 100,000 shares of other stock-based awards during a single calendar year. As of December 31, 2002, 58 employees, officers and outside directors were participants in the Program.
Restricted shares awarded to participants under the Program generally vest either in equal annual installments or as a lump sum, generally over a five-year period commencing on the date the shares are awarded. Vesting of restricted shares may be contingent on the achievement of certain performance goals as established by the Compensation Committee at the time of the grant. Non-vested shares may not be assigned, transferred, pledged or otherwise encumbered or disposed of. During the applicable restriction period, the Company retains possession of the certificates for the restricted shares with executed stock powers attached. Participants are entitled to dividends and voting rights with respect to the restricted shares.
Of the non-qualified options outstanding, 454,259 were exercisable at December 31, 2002; 305,278 were exercisable at December 31, 2001; and 987,485 were exercisable at December 31, 2000. The options expire on various dates beginning June 15, 2003, and ending October 4, 2011.
Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. The Company’s pro forma information is as follows:
During 2000, in connection with the sale of the Company’s insurance operations, 129,875 unrestricted shares having a grant date fair value of $30.88 per share were granted to executives of the insurance operations and are included in the awarded and vested amounts disclosed above.
The following table summarizes information concerning currently outstanding and exercisable stock options:
At December 31, 2002, there were 661,088 shares of the Company’s stock reserved for future grants under the Program.
The provision for income taxes from continuing operations consists of the following:
Deferred income taxes reflect the tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The following table reconciles income tax from continuing operations computed at the U.S. federal statutory tax rates to income tax expense:
As of December 31, 2002, the Company has federal operating loss carryforwards of approximately $2,700,000. These were acquired by the Company through the purchase of WWAY-TV in December, 1998, and expire in 2015. They will be utilized against future earnings, but are limited to $1,600,000 per year. The Company also has state operating loss carryforwards of approximately $151,000,000 expiring from 2003 to 2017. The Company utilized state operating loss carryforwards of approximately $1,000,000 and $27,000,000 in 2002 and 2001, respectively. Income taxes paid were approximately $8,954,000, $663,000, and $139,399,000 in 2002, 2001, and 2000, respectively.
SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” requires the disclosure of the estimated fair value of all financial instruments, including both assets and liabilities unless specifically exempted. The following methods were used to estimate the fair values of the Company’s financial instruments.
Marketable equity securities: The fair values for the available-for-sale marketable equity securities are based on quoted market prices.
Investments in private equity securities, venture capital funds and low income housing tax credits: The Company determined that it was 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.
The Company operates primarily in the television broadcasting and cable advertising businesses. The Company currently owns and operates fifteen television stations, located principally in the Southeast and Midwest. Each of the stations is affiliated with a major network, with eight NBC affiliates, five ABC affiliates, and two CBS affiliates. The Company evaluates segment performance based on operating income, excluding unusual or non-operating items.
The following tables summarize financial information by segment for the periods ended December 31, 2002, 2001, and 2000, respectively:
Ernst & Young LLP, independent auditors, are engaged to audit and to render an opinion as to whether the Company’s financial statements, considered in the entirety, present the Company’s financial condition and operating results fairly. Their audit is conducted in accordance with auditing standards generally accepted in the United States, and their report is included on this page.
The Audit Committee of the Board of Directors, composed of three outside directors, reviews the Company’s accounting and auditing policies and meets regularly with the Company’s independent auditors.
We have audited the accompanying consolidated balance sheets of The Liberty Corporation and Subsidiaries as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedule listed in the index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
As discussed in Note 6 to the consolidated financial statements, the Company was required to adopt Financial Accounting Standards Statement No. 142 “Goodwill and Other Intangible Assets” as of January 1, 2002, and accordingly has changed its method of accounting for goodwill and other intangible assets.