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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER: __________
KDSM, INC.
(Exact name of Registrant as specified in its charter)
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MARYLAND 52-1975792
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 WEST 41ST STREET
BALTIMORE, MARYLAND 21211
(Address of principal executive offices)
(410) 467-5005
(Registrant's telephone number, including area code)
SINCLAIR CAPITAL
(Exact name of Registrant as specified in its charter)
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DELAWARE 52-2026076
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2000 WEST 41ST STREET
BALTIMORE, MARYLAND 21211
(Address of principal executive offices)
(410) 467-5005
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be files 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. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of March 27, 1998, there are 100 shares of Class A Common stock, $.01 par
value of KDSM, Inc., issued and outstanding.
In addition, 2,000,000 shares of $200 million aggregate liquidation value of 11
5/8 % High Yield Trust Offered Preferred Securities of Sinclair Capital, a
subsidiary trust of KDSM, Inc., are issued and outstanding.
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PART I
FORWARD-LOOKING STATEMENTS
The matters discussed in this Form 10-K include forward-looking statements.
In addition, when used in this Form 10-K, the words "intends to," "believes,"
"anticipates," "expects" and similar expressions are intended to identify
forward-looking statements. Such statements are subject to a number of risks and
uncertainties. Actual results in the future could differ materially and
adversely from those described in the forward-looking statements as a result of
various important factors, including the impact of changes in national and
regional economies, successful integration of acquired television and radio
stations (including achievement of synergies and cost reductions), pricing
fluctuations in local and national advertising, volatility in programming costs
and the other risk factors set forth in the Company's prospectus filed with the
Securities and Exchange Commission on March 17, 1997, pursuant to rule
424(b)(5). KDSM, Inc. undertakes no obligation to publicly release the result of
any revisions to these forward-looking statements that may be made to reflect
any future events or circumstances.
ITEM 1. BUSINESS
KDSM, Inc., which is referred to hereafter as "the Company" or "KDSM", is
an indirect wholly owned subsidiary of Sinclair Broadcast Group, Inc.
("Sinclair"), which owns all of the assets related to the operation of
television station KDSM.
KDSM, Channel 17, is located in Des Moines, the state capital of Iowa. The
Des Moines market is currently served by four commercial television stations,
all of which are network affiliated. KDSM, the Fox affiliate, is pursuing a
counter-programming strategy against the other network affiliates designed to
attract additional audience share in demographic groups not served by
programming on competing stations. KDSM also has a program license agreement
with UPN and carries such programming as "Star Trek: Voyager" and such
successful syndicated products as "Seinfeld," "Frasier," "Home Improvement,"
"Mad About You" and "The Simpsons."
The following table sets forth certain market revenue, size and audience
share information for the Des Moines DMA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1996 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Market revenue ................................. $ 38,089 $ 41,988 $39,944
Annual market revenue growth/(decline) ......... 7.9% 10.2% (4.9%)
Station rank within market ..................... 3 3 4
Television homes ............................... 369,410 373,630 383,000
KDSM audience share ............................ 8.0% 8.3% 7.3%
</TABLE>
KDSM had station broadcast revenues of $8.1 million and broadcast cash flow
of $3.6 million in 1997.
The principal office of KDSM is located at 2000 W. 41st Street, Baltimore,
MD 21211 and its telephone number is 410-467-5005.
SINCLAIR CAPITAL
Sinclair Capital (the "Trust") is a special purpose statutory business
trust created under Delaware law pursuant to (i) a trust agreement executed by
KDSM as depositor for the Trust, First Union National Bank of Maryland, as
Property Trustee (the "Property Trustee"), and First Union National Bank of
Delaware, as Delaware Trustee (the "Delaware Trustee"), and (ii) the filing of a
certificate of trust with the Delaware Secretary of State. The Property Trustee
acts as sole trustee under the Trust Agreement for the purposes of compliance
with the Trust Indenture Act. The Trust exists for the exclusive purposes of (i)
issuing the 11 5/8% High Yield Offered Preferred Securities (the "Preferred
Securities") and the common securities (the "Common Securities") representing
undivided beneficial interests in the Trust, (ii) purchasing the 11 5/8% Senior
Debentures due 2009 (the "KDSM Senior Debentures") with
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the proceeds from sale of the Preferred Securities and the Common Securities and
(iii) engaging in only those other activities necessary or incidental thereto.
All of the Common Securities of Sinclair Capital are owned by KDSM and KDSM has
agreed in the KDSM Senior Debenture Indenture to maintain such ownership. KDSM
acquired Common Securities having an aggregate liquidation amount equal to 3% of
the total capital of the Trust. The Trust has a term expiring in 2015, but may
terminate earlier as provided in the Trust Agreement. The Trust's business
affairs will be conducted by the Property Trustee, the Delaware Trustee and the
Administrative Trustee (as defined below). The holder of the Common Securities,
or the holders of at least a majority in the aggregate Liquidation Value of then
outstanding Preferred Securities if an Event of Default has occurred and is
continuing, will be entitled to appoint, remove or replace the Trustees of the
Trust.
The duties and obligations of the Trustees are governed by the Trust
Agreement. David D. Smith and David B. Amy, each an officer of Sinclair, were
appointed as administrative trustees of the Trust (in such capacity, the
"Administrative Trustees") pursuant to the terms of the Trust Agreement. Under
the Trust Agreement, the Administrative Trustees have certain duties and powers
including, but not limited to, the delivery of certain notices to the holders of
the Preferred Securities, the appointment of the Preferred Securities Paying
Agent and the Preferred Securities Registrar, the registering of transfers of
the Preferred Securities and the Common Securities and preparing and filing on
behalf of the Trust all federal, state and local tax information and returns and
reports required to be filed by or in respect of the Trust. Under the Trust
Agreement, the Property Trustee has certain duties and powers, including, but
not limited to, holding legal title to the KDSM Senior Debentures on behalf of
the Trust, the collection of payments in respect of the KDSM Senior Debentures,
maintenance of the Payment Account (as defined in the Trust Agreement), the
sending of default notices with respect to the Preferred Securities and the
distribution of the assets of the Trust in the event of a winding-up of the
Trust.
TELEVISION BROADCASTING
Operating Strategy
The Company's television operating strategy includes the following key
elements:
Attracting Viewership
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The Company seeks to attract viewership and expand its audience share
through selective, high-quality programming.
Popular Programming. The Company believes that an important factor in
attracting viewership is its network affiliation with Fox. The affiliation
enables the Company to attract viewers by virtue of the quality first-run
original programming provided by this network and the network's promotion of
such programming. The Company also seeks to obtain, at attractive prices,
popular syndicated programming that is complementary to the station's network
affiliation. Examples of popular syndicated programming obtained by the Company
for broadcast are "Mad About You," "Frasier," "The Simpsons," "Home Improvement"
and "Seinfeld."
Children's Programming. The Company seeks to be a leader in children's
programming in its DMA. KDSM carries the Fox Children's Network ("FCN"), which
includes significant amounts of animated programming throughout the week. In
addition to this animated programming, the Company broadcasts other forms of
children's programming, which may be produced by the Company or by Fox or
supplied by a syndicated programmer.
Counter-Programming. The Company's programming strategy also includes
"counter-programming," which consists of broadcasting programs that are
alternatives to the types of programs being shown concurrently on competing
stations. This strategy is designed to attract additional audience share in
demographic groups not served by concurrent programming on competing stations.
The Company believes that implementation of this strategy enables its station to
achieve competitive rankings in households in the 18-49 and 25-54 demographics
and to offer greater diversity of programming in its DMA.
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Popular Sporting Events. The Company attempts to capture a portion of
advertising dollars designated to sports programming. Affiliates of Fox are
subject to prohibitions against preemptions of network programming. The Company
has been able to acquire the local television broadcast rights for certain
sporting events, including Major League Baseball, NFL football, NHL hockey and
Big Ten football and Iowa and Big Ten basketball.
Innovative Local Sales and Marketing
- ------------------------------------
The Company believes that it is able to attract new advertisers to its
station and increase its share of existing customers' advertising budgets by
creating a sense of partnership with those advertisers. The Company develops
such relationships by training its sales forces to offer new marketing ideas and
campaigns to advertisers. These campaigns often involve the sponsorship by
advertisers of local promotional events that capitalize on the station's local
identity and programming franchises. For example, KDSM has a local Family Fair,
which allows station advertisers to reinforce their on-air advertising with
their target audience. Through its strong local sales and marketing focus, the
Company seeks to capture an increasing share of its revenues from local sources,
which are generally more stable than national advertising.
Control of Operating and Programming Costs
- ------------------------------------------
By employing a disciplined approach to managing programming acquisition and
other costs, Sinclair has been able to achieve operating margins that Sinclair
believes are among the highest in the television broadcast industry. Sinclair
has sought and will continue to seek to acquire quality programming for prices
at or below prices paid in the past which directly affects KDSM. As an owner or
provider of programming services to 35 stations in 24 DMAs. Sinclair believes
that it is able to negotiate favorable terms for the acquisition of programming.
Moreover, Sinclair emphasizes control of KDSM's programming and operating costs
through program-specific profit analysis, detailed budgeting, tight control over
staffing levels and detailed long-term planning models.
Attract and Retain High Quality Management
- ------------------------------------------
Sinclair believes that much of its success is due to its ability to attract
and retain highly skilled and motivated managers, both at the corporate and
local station levels. A portion of the compensation provided to general
managers, sales managers and other station managers is based on their achieving
certain operating results. Sinclair also provides its corporate and station
managers with deferred compensation plans offering options to acquire Class A
Common Stock.
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Community Involvement
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KDSM actively participates in various community activities and offers many
community services. KDSM's activities include broadcasting programming of local
interest and sponsorship of community and charitable events. The Company also
encourages its station employees to become active members of their communities
and to promote involvement in community and charitable affairs. The Company
believes that active community involvement by its station provides increased
exposure in its DMA and ultimately increases viewership and advertising support.
Programming and Affiliations
Sinclair continually reviews KDSM's existing programming inventory and
seeks to purchase the most profitable and cost-effective syndicated programs
available for each time period. In developing its selection of syndicated
programming, Sinclair balances the cost of available syndicated programs with
their potential to increase advertising revenue and the risk of their reduced
popularity during the term of the program contract. Sinclair seeks to purchase
only those programs with contractual periods that permit programming flexibility
and which complement a station's overall programming strategy and
counter-programming strategy. Programs that can perform successfully in more
than one time period are more attractive due to the long lead time and
multi-year commitments inherent in program purchasing.
On August 21, 1996, Sinclair entered into an agreement with Fox (the "Fox
Agreement") which, among other things, provides that the affiliation agreement
between Fox and KDSM would be amended to have a new five-year term commencing on
the date of the Fox Agreement. Fox has the option to extend the affiliation
agreement for an additional five-year term and must extend all of Sinclair's
affiliation agreements if it extends any (except that Fox may selectively renew
affiliation agreements if any station has breached its affiliation agreement).
The Fox Agreement also includes provisions limiting the ability of KDSM to
preempt Fox programming except where it has existing programming conflicts or
where KDSM preempts to serve a public purpose. Fox produces and distributes
programming in exchange for KDSM's commitment to air the programming at
specified times and for commercial announcement time during the programming.
USE OF DIGITAL TELEVISION TECHNOLOGY
The Company believes that television broadcasting may be enhanced
significantly by the development and increased availability of digital
broadcasting service technology. This technology has the potential to permit the
Company to provide viewers multiple channels of digital television over each of
its existing standard channels, to provide certain programming in a high
definition television format and to deliver various forms of data, including
data on the Internet, to home and business computers. These additional
capabilities may provide the Company with additional sources of revenue,
although the Company may be required to incur significant additional costs in
connection therewith. The Company is currently considering plans to provide high
definition television ("HDTV"), to provide multiple channels of television
including the provision of additional broadcast programming and transmitted data
on a subscription basis, and to continue its current TV program channels on its
allocated digital television ("DTV") channels. The 1996 Act allows the FCC to
charge a spectrum fee to broadcasters who use the digital spectrum to offer
subscription-based services, and the FCC has opened a rulemaking to consider the
spectrum fees to be charged to broadcasters for such use. In addition, Congress
has held hearings on broadcasters' plans for the use of their digital spectrum.
The Company cannot predict what future actions the FCC or Congress might take
with respect to DTV, nor can it predict the effect of the FCC's present DTV
implementation plan or such future actions on the Company's business. DTV
technology is not currently available to the viewing public and a successful
transition from the current analog broadcast format to a digital format may take
many years. There can be no assurance that the Company's efforts to take
advantage of the new technology will be commercially successful.
FEDERAL REGULATION OF TELEVISION BROADCASTING
The ownership, operation and sale of television stations are subject to the
jurisdiction of the FCC, which acts under authority granted by the
Communications Act. Among other things, the FCC assigns frequency bands for
broadcasting; determines the particular frequencies, locations and operating
power
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of stations; issues, renews, revokes and modifies station licenses; regulates
equipment used by stations; adopts and implements regulations and policies that
directly or indirectly affect the ownership, operation and employment practices
of stations; and has the power to impose penalties for violations of its rules
or the Communications Act.
The following is a brief summary of certain provisions of the
Communications Act, the 1996 Act and specific FCC regulations and policies.
Reference should be made to the Communications Act, the 1996 Act, FCC rules and
the public notices and rulings of the FCC for further information concerning the
nature and extent of federal regulation of broadcast stations.
License Grant and Renewal. Television stations operate pursuant to
broadcasting licenses that are granted by the FCC for maximum terms of eight
years.
Television station licenses are subject to renewal upon application to the
FCC. During certain periods when renewal applications are pending, competing
applicants may file for the television frequency being used by the renewal
applicant. During the same periods, petitions to deny license renewal
applications may be filed by interested parties, including members of the
public. The FCC is required to hold hearings on renewal applications if it is
unable to determine that renewal of a license would serve the public interest,
convenience and necessity, or if a petition to deny raises a "substantial and
material question of fact" as to whether the grant of the renewal application
would be prima facie inconsistent with the public interest, convenience and
necessity. However, the FCC is prohibited from considering competing
applications for a renewal applicant's frequency, and is required to grant the
renewal application, if the FCC finds: (i) that the station has served the
public interest, convenience and necessity; (ii) that there have been no serious
violations by the licensee of the Communications Act or the rules and
regulations of the FCC; and (iii) that there have been no other violations by
the licensee of the Communications Act or the rules and regulations of the FCC
that, when taken together, would constitute a pattern of abuse.
KDSM's FCC license will expire on February 1, 2006. Although renewal of
licenses is granted in the vast majorities of cases even when petitions to deny
are filed, there can be no assurance that the license will be renewed.
Ownership Matters
General
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The Communications Act prohibits the assignment of a broadcast license or
the transfer of control of a broadcast licensee without the prior approval of
the FCC. In determining whether to permit the assignment or transfer of control
of, or the grant or renewal of, a broadcast license, the FCC considers a number
of factors pertaining to the licensee, including compliance with various rules
limiting common ownership of media properties, the "character" of the licensee
and those persons holding "attributable" interests therein, and compliance with
the Communications Act's limitations on alien ownership.
To obtain the FCC's prior consent to assign a broadcast license or transfer
control of a broadcast licensee, an appropriate application must be filed with
the FCC. If the application involves a "substantial change" in ownership or
control, the application must be placed on public notice for a period of
approximately 30 days during which petitions to deny the application may be
filed by interested parties, including members of the public. If the application
does not involve a "substantial change" in ownership or control, it is a "pro
forma" application. The "pro forma" application is not subject to petitions to
deny or a mandatory waiting period, but is nevertheless subject to having
informal objections filed against it. If the FCC grants an assignment or
transfer application, interested parties have approximately 30 days from public
notice of the grant to seek reconsideration or review of that grant. Generally,
parties that do not file initial petitions to deny or informal objections
against the application face difficulty in seeking reconsideration or review of
the grant. The FCC normally has approximately an additional 10 days to set aside
such grant on its own motion. When passing on an assignment or transfer
application, the FCC is prohibited from considering whether the public interest
might be served by an assignment or transfer to any party other than the
assignee or transferee specified in the application.
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The FCC generally applies its ownership limits to "attributable" interests
held by an individual, corporation, partnership or other association. In the
case of corporations holding, or through subsidiaries controlling, broadcast
licenses, the interests of officers, directors and those who, directly or
indirectly, have the right to vote 5% or more of the corporation's stock (or 10%
or more of such stock in the case of insurance companies, investment companies
and bank trust departments that are passive investors) are generally
attributable, except that, in general, no minority voting stock interest will be
attributable if there is a single holder of more than 50% of the outstanding
voting power of the corporation. The FCC has pending a rulemaking proceeding
that, among other things, seeks comment on whether the FCC should modify its
attribution rules by (i) raising the attribution stock benchmark from 5% to 10%;
(ii) raising the attribution stock benchmark for passive investors from 10% to
20%; (iii) restricting the availability of the single majority shareholder
exemption; and (iv) attributing certain interests such as non-voting stock, debt
and certain holdings by limited liability corporations in certain circumstances.
More recently, the FCC has solicited comment on proposed rules that would (i)
treat an otherwise nonattributable equity or debt interest in a licensee as an
attributable interest where the interest holder is a program supplier or the
owner of a broadcast station in the same market and the equity and/or debt
holding is greater than a specified benchmark; (ii) treat a licensee of a
television station which, under an LMA, brokers more than 15% of the time on
another television station serving the same market, as having an attributable
interest in the brokered station; and (iii) in certain circumstances, treat the
licensee of a broadcast station that sells advertising time on another station
in the same market pursuant to a JSA as having an attributable interest in the
station whose advertising is being sold.
Under its "cross-interest" policy, the FCC considers certain "meaningful"
relationships among competing media outlets in the same market, even if the
ownership rules do not specifically prohibit the relationship. Under this
policy, the FCC may consider significant nonattributable equity or debt
interests in a media outlet combined with an attributable interest in another
media outlet in the same market, joint ventures, and common key employees among
competitors. The cross-interest policy does not necessarily prohibit all of
these interests, but requires that the FCC consider whether, in a particular
market, the "meaningful" relationships between competitors could have a
significant adverse effect upon economic competition and program diversity.
Heretofore, the FCC has not applied its cross-interest policy to LMAs and JSAs
between broadcast stations. In its ongoing rulemaking proceeding concerning the
attribution rules, the FCC has sought comment on, among other things, (i)
whether the cross-interest policy should be applied only in smaller markets, and
(ii) whether non-equity financial relationships such as debt, when combined with
multiple business interrelationships such as LMAs and JSAs, raise concerns under
the cross-interest policy. Moreover, in its most recent proposals in its ongoing
attribution rulemaking proceeding, the FCC has proposed treating television
LMAs, television and radio JSAs, and presently nonattributable debt or equity
interests as attributable interests in certain circumstances without regard to
the cross-interest policy.
The Communications Act prohibits the issuance of broadcast licenses to, or
the holding of a broadcast license by, any corporation of which more than 20% of
the capital stock is owned of record or voted by non-U.S. citizens or their
representatives or by a foreign government or a representative thereof, or by
any corporation organized under the laws of a foreign country (collectively,
"Aliens"). The Communications Act also authorizes the FCC, if the FCC determines
that it would be in the public interest, to prohibit the issuance of a broadcast
license to, or the holding of a broadcast license by, any corporation directly
or indirectly controlled by any other corporation of which more than 25% of the
capital stock is owned of record or voted by Aliens. The Company has been
advised that the FCC staff has interpreted this provision to require a finding
that such grant or holding would be in the public interest before a broadcast
license may be granted to or held by any such corporation and that the FCC staff
has made such a finding only in limited circumstances. The FCC has issued
interpretations of existing law under which these restrictions in modified form
apply to other forms of business organizations, including partnerships.
Television
- ----------
National Ownership Rule. Prior to the 1996 Act, FCC rules generally
prohibited an individual or entity from having an attributable interest in more
than 12 television stations nationwide, or in television stations reaching more
than 25% of the national television viewing audience. Pursuant to the 1996 Act,
the FCC has modified its rules to eliminate any limitation on the number of
television stations an
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individual or entity may own nationwide, subject to the restriction that no
individual or entity may have an attributable interest in television stations
reaching more than 35% of the national television viewing audience.
Historically, VHF stations have shared a larger portion of the market than UHF
stations. Therefore, only half of the households in the market area of any UHF
station are included when calculating whether an entity or individual owns
television stations reaching more than 35% of the national television viewing
audience. All but six of the stations owned and operated by the Company, or to
which the Company provides programming services, are UHF. Upon completion of all
pending acquisitions and dispositions, the Company will reach approximately 14%
of U.S. television households using the FCC's method of calculation.
Duopoly Rule. On a local level, the television "duopoly" rule generally
prohibits a single individual or entity from having an attributable interest in
two or more television stations with overlapping Grade B service areas. While
the 1996 Act did not eliminate the television duopoly rule, it did direct the
FCC to initiate a rulemaking proceeding to determine whether to retain, modify,
or eliminate the rule. The FCC has pending a rulemaking proceeding in which it
has proposed, among other options, to modify the television duopoly rule to
permit the common ownership of television stations in different DMAs, so long as
the Grade A signal contours of the stations do not overlap. Pending resolution
of its rulemaking proceeding, the FCC has adopted an interim waiver policy that
permits the common ownership of television stations in different DMAs with no
overlapping Grade A signal contours, conditioned on the final outcome of the
rulemaking proceeding. The FCC has also sought comment on whether common
ownership of two television stations in a market should be permitted (i) where
one or more of the commonly owned stations is UHF, (ii) where one of the
stations is in bankruptcy or has been off the air for a substantial period of
time and (iii) where the commonly owned stations have very small audience or
advertising shares, are located in a very large market, and/or a specified
number of independently owned media voices would remain after the acquisition.
Other Ownership Matters
- -----------------------
There remain in place after the 1996 Act a number of additional
cross-ownership rules and prohibitions pertaining to licensees of television
stations. FCC rules, the Communications Act, or both generally prohibit an
individual or entity from having an attributable interest in both a television
station and a radio station, a daily newspaper, or a cable television system
that is located in or serves the same market area.
Antitrust Regulation. The DOJ and the Federal Trade Commission have
increased their scrutiny of the television and radio industry since the adoption
of the 1996 Act, and have indicated their intention to review matters related to
the concentration of ownership within markets (including LMAs and JSAs) even
when the ownership or LMA or JSA in question is permitted under the laws
administered by the FCC or by FCC rules and regulations. For instance, the DOJ
has for some time taken the position that an LMA entered into in anticipation of
a station's acquisition with the proposed buyer of the station constitutes a
change in beneficial ownership of the station which, if subject to filing under
the HSR Act, cannot be implemented until the waiting period required by that
statute has ended or been terminated.
Radio/Television Cross-Ownership Rule. The FCC's radio/television
cross-ownership rule (the "one to a market" rule) generally prohibits a single
individual or entity from having an attributable interest in a television
station and a radio station serving the same market. However, in each of the 25
largest local markets in the United States, provided that there remain at least
30 separately owned television and radio stations in the particular market after
the acquisition in question, the FCC has traditionally employed a policy that
presumptively allows waivers of the one to a market rule to permit the common
ownership of one AM, one FM and one TV station in the market. The 1996 Act
directs the FCC to extend this policy to each of the top 50 markets. Moreover,
the FCC has pending a rulemaking proceeding in which it has solicited comment on
whether the one to a market rule should be eliminated altogether.
However, the FCC does not apply its presumptive waiver policy in cases
involving the common ownership of one television station, and two or more radio
stations in the same service (AM or FM), in the same market. Pending its ongoing
rulemaking proceeding to reexamine the one to a market rule, the
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FCC has stated that it will consider waivers of the rule in such instances on a
case-by-case basis, considering (i) the public service benefits that will arise
from the joint operation of the facilities such as economies of scale, cost
savings and programming and service benefits; (ii) the types of facilities
involved; (iii) the number of media outlets owned by the applicant in the
relevant market; (iv) the financial difficulties of the stations involved; and
(v) the nature of the relevant market in light of the level of competition and
diversity after joint operation is implemented. Generally, any such waivers that
are granted, and which allow common ownership of a television station and more
than two same-service radio stations in the same market, are temporary and
conditioned on the outcome of the rulemaking proceeding.
In its ongoing rulemaking proceeding to reexamine the one to a market rule,
the FCC has proposed the following options for modifying the rule in the event
it is not eliminated: (i) extending the presumptive waiver policy to any
television market in which a specified number of independently owned media
"voices" would remain after common ownership of a television station and one or
more radio stations is effectuated; (ii) extending the presumptive waiver policy
to entities that seek to own more than one FM and/or one AM radio station; (iii)
reducing the minimum number of independently owned voices that must remain after
a transaction is effectuated; and (iv) modifying the five-factor case-by-case
test for waivers.
Local Television/Cable Cross-Ownership Rule. While the 1996 Act eliminates
a previous statutory prohibition against the common ownership of a television
broadcast station and a cable system that serve the same local market, the 1996
Act leaves the current FCC rule in place. The legislative history of the Act
indicates that the repeal of the statutory ban should not prejudge the outcome
of any FCC review of the rule.
Broadcast Network/Cable Cross-Ownership Rule. The 1996 Act directs the FCC
to eliminate its rules which formerly prohibited the common ownership of a
broadcast network and a cable system, subject to the provision that the FCC
revise its rules as necessary to ensure carriage, channel positioning, and
non-discriminatory treatment of non-affiliated broadcast stations by cable
systems affiliated with a broadcast network. In March 1996, the FCC issued an
order implementing this legislative change.
Broadcast/Daily Newspaper Cross-Ownership Rule. The FCC's rules prohibit
the common ownership of a radio or television broadcast station and a daily
newspaper in the same market. The 1996 Act does not eliminate or modify this
prohibition. In October 1996, however, the FCC initiated a rulemaking proceeding
to determine whether it should liberalize its waiver policy with respect to
cross-ownership of a daily newspaper and one or more radio stations in the same
market.
Dual Network Rule. The 1996 Act directs the FCC to repeal its rule which
formerly prohibited an entity from operating more than one television network.
In March 1996, the FCC issued an order implementing this legislative change.
Under the modified rule, a network entity is permitted to operate more than one
television network, provided, however, that ABC, CBS, NBC, and/or Fox are
prohibited from merging with each other or with another network television
entity such as WB or UPN.
The 1996 Act requires the FCC to review its broadcast ownership rules every
two years to "determine whether any of such rules are necessary in the public
interest as the result of competition," and to repeal or modify any rules that
are determined to be no longer in the public interest. In March 1998, the FCC
initiated a rulemaking proceeding to review certain of its broadcast ownership
rules pursuant to the statutory mandate, including: (i) the rule limiting
ownership of television stations nationally to stations reaching 35% of the
national television audience; (ii) the rule attributing only 50% of television
households in a market to the audience reach of a UHF television station for
purposes of the 35% national audience reach limit; (iii) the rule prohibiting
common ownership of a broadcast station and a daily newspaper in the same
market; (iv) the rule prohibiting common ownership of a broadcast television
station and a cable system in the same market; (v) the local radio multiple
ownership rules; and (vi) the dual network rule. Additionally, the FCC stated
that its already-pending proceedings to review the television duopoly and "one
to a market" rules satisfy the 1996 Act's biennial review requirements.
Expansion of the Company's broadcast operations on both a local and
national level will continue to be subject to the FCC's ownership rules and any
changes the FCC or Congress may adopt. Concomitantly, any further relaxation of
the FCC's ownership rules may increase the level of competition in one
8
<PAGE>
or more of the markets in which the Company's stations are located, more
specifically to the extent that any of the Company's competitors may have
greater resources and thereby be in a superior position to take advantage of
such changes.
Must-Carry/Retransmission Consent
Pursuant to the Cable Act of 1992, television broadcasters are required to
make triennial elections to exercise either certain "must-carry" or
"retransmission consent" rights in connection with their carriage by cable
systems in each broadcaster's local market. By electing the must-carry rights, a
broadcaster demands carriage on a specified channel on cable systems within its
Area of Dominant Influence, in general as defined by the Arbitron 1991-92
Television Market Guide. These must-carry rights are not absolute, and their
exercise is dependent on variables such as (i) the number of activated channels
on a cable system; (ii) the location and size of a cable system; and (iii) the
amount of programming on a broadcast station that duplicates the programming of
another broadcast station carried by the cable system. Therefore, under certain
circumstances, a cable system may decline to carry a given station.
Alternatively, if a broadcaster chooses to exercise retransmission consent
rights, it can prohibit cable systems from carrying its signal or grant the
appropriate cable system the authority to retransmit the broadcast signal for a
fee or other consideration. In October 1996, Sinclair elected must-carry or
retransmission consent with respect to each of its markets based on its
evaluation of the respective markets and the position of Sinclair's owned or
programmed station(s) within the market. KDSM continues to be carried on the
pertinent cable system, and the Company does not believe that its elections have
resulted in the shifting of its station to less desirable cable channel
locations. Since the Company is affiliated with Fox it is required to elect
retransmission consent because Fox's retransmission consent negotiations on
behalf of the Company resulted in agreements which extend into 1998. Therefore,
the Company will need to negotiate a retransmission consent agreement to attain
carriage on the relevant cable systems for the balance of this triennial period
(i.e., through December 31, 1999). For subsequent elections beginning with the
election to be made by October 1, 1999, the must-carry market will be the
station's DMA, in general as defined by the Nielsen DMA Market and Demographic
Rank Report of the prior year.
Syndicated Exclusivity/Territorial Exclusivity
The FCC has imposed syndicated exclusivity rules and expanded existing
network nonduplication rules. The syndicated exclusivity rules allow local
broadcast television stations to demand that cable operators black out
syndicated non-network programming carried on "distant signals" (i.e., signals
of broadcast stations, including so-called "superstations," which serve areas
substantially removed from the cable system's local community). The network
non-duplication rules allow local broadcast network television affiliates to
require that cable operators black out duplicative network programming carried
on distant signals. However, in a number of markets in which the Company owns or
programs stations affiliated with a network, a station that is affiliated with
the same network in a nearby market is carried on cable systems in the Company's
market. This is not in violation of the FCC's network nonduplication rules.
However, the carriage of two network stations on the same cable system could
result in a decline of viewership adversely affecting the revenues of the
Company owned or programmed station.
Restrictions on Broadcast Advertising
Advertising of cigarettes and certain other tobacco products on broadcast
stations has been banned for many years. Various states restrict the advertising
of alcoholic beverages. Congressional committees have examined legislation
proposals which would eliminate or severely restrict the advertising of beer and
wine. Although no prediction can be made as to whether any or all of such
proposals will be enacted into law, the elimination of all beer and wine
advertising would have an adverse effect upon the revenues of the Company's
stations, as well as the revenues of other stations which carry beer and wine
advertising.
The FCC has imposed commercial time limitations in children's television
programming pursuant to legislation. In television programs designed for viewing
by children of 12 years of age and under, commercial matter is limited to 12
minutes per hour on weekdays and 10.5 minutes per hour on weekends.
9
<PAGE>
The Communications Act and FCC rules also impose regulations regarding the
broadcasting of advertisements by legally qualified candidates for elective
office. Among other things, (i) stations must provide "reasonable access" for
the purchase of time by legally qualified candidates for federal office; (ii)
stations must provide "equal opportunities" for the purchase of equivalent
amounts of comparable broadcast time by opposing candidates for the same
elective office; and (iii) during the 45 days preceding a primary or primary
run-off election and during the 60 days preceding a general or special election,
legally qualified candidates for elective office may be charged no more than the
station's "lowest unit charge" for the same class of advertisement, length of
advertisement, and daypart. Recently, both the President of the United States
and the Chairman of the FCC have called for rules that would require broadcast
stations to provide free airtime to political candidates. The Company cannot
predict the effect of such a requirement on its advertising revenues.
Programming and Operation
General. The Communications Act requires broadcasters to serve the "public
interest." The FCC has relaxed or eliminated many of the more formalized
procedures it had developed in the past to promote the broadcast of certain
types of programming responsive to the needs of a station's community of
license. FCC licensees continue to be required, however, to present programming
that is responsive to their communities' issues, and to maintain certain records
demonstrating such responsiveness. Complaints from viewers concerning a
station's programming may be considered by the FCC when it evaluates renewal
applications of a licensee, although such complaints may be filed at any time
and generally may be considered by the FCC at any time. Stations also must pay
regulatory and application fees, and follow various rules promulgated under the
Communications Act that regulate, among other things, political advertising,
sponsorship identifications, the advertisement of contests and lotteries,
obscene and indecent broadcasts, and technical operations, including limits on
radio frequency radiation. In addition, licensees must develop and implement
affirmative action programs designed to promote equal employment opportunities,
and must submit reports to the FCC with respect to these matters on an annual
basis and in connection with a renewal application. Failure to observe these or
other rules and policies can result in the imposition of various sanctions,
including monetary forfeitures, the grant of a renewal for a "short" (i.e., less
than the full) license term, or, for particularly egregious violations, the
denial of a license renewal application or the revocation of a license.
Children's Television Programming. Pursuant to rules adopted in 1996,
television stations are required to broadcast a minimum of three hours per week
of "core" children's educational programming, which the FCC defines as
programming that (i) has serving the educational and informational needs of
children 16 years of age and under as a significant purpose; (ii) is regularly
scheduled, weekly and at least 30 minutes in duration; and (iii) is aired
between the hours of 7:00 a.m. and 10:00 p.m. Furthermore, "core" children's
educational programs, in order to qualify as such, are required to be identified
as educational and informational programs over the air at the time they are
broadcast, and are required to be identified in the children's programming
reports required to be placed in stations' public inspection files.
Additionally, television stations are required to identify and provide
information concerning "core" children's programming to publishers of program
guides and listings.
Television Violence. The 1996 Act contains a number of provisions relating
to television violence. First, pursuant to the 1996 Act, the television industry
has developed a ratings system which the FCC has approved. Furthermore, also
pursuant to the 1996 Act the FCC has adopted rules requiring certain television
sets to include the so-called "V-chip," a computer chip that allows blocking of
rated programming. Under these rules, half of television receiver models with
picture screens 13 inches or greater will be required to have the "V-chip" by
July 1, 1999, and all such models will be required to have the "V-chip" by
January 1, 2000. In addition, the 1996 Act requires that all television license
renewal applications filed after May 1, 1995 contain summaries of written
comments and suggestions received by the station from the public regarding
violent programming.
Closed Captioning. The 1996 Act directs the FCC to adopt rules requiring
closed captioning of all broadcast television programming, except where
captioning would be "economically burdensome." The FCC has recently adopted such
rules. The rules require generally that (i) 95% of all new programming
10
<PAGE>
first published or exhibited on or after January 1, 1998 must be closed
captioned within eight years, and (ii) 75% of "old" programming which first
aired prior to January 1, 1998 must be closed captioned within 10 years, subject
to certain exemptions.
Digital Television
The FCC has taken a number of steps to implement digital television ("DTV")
broadcasting service in the United States. In December 1996, the FCC adopted a
DTV broadcast standard and, in April 1997, adopted decisions in several pending
rulemaking proceedings that establish service rules and a plan for implementing
DTV. The FCC adopted a DTV table of allotments that provides all authorized
television stations with a second channel on which to broadcast a DTV signal. In
February 1998, the FCC made slight revisions to the DTV rules and table of
allotments in acting upon a number of appeals in the DTV proceeding. The FCC has
attempted to provide DTV coverage areas that are comparable to stations'
existing service areas. The FCC has ruled that television broadcast licensees
may use their digital channels for a wide variety of services such as
high-definition television, multiple standard definition television programming,
audio, data, and other types of communications, subject to the requirement that
each broadcaster provide at least one free video channel equal in quality to the
current technical standard.
DTV channels will generally be located in the range of channels from
channel 2 through channel 51. The FCC is requiring that affiliates of ABC, CBS,
Fox and NBC in the top 10 television markets begin digital broadcasting by May
1, 1999 (many stations affiliated with these networks in the top 10 markets have
voluntarily committed to begin digital broadcasting by November 1998), and that
affiliates of these networks in markets 11 through 30 begin digital broadcasting
by November 1999. The FCC's plan calls for the DTV transition period to end in
the year 2006, at which time the FCC expects that television broadcasters will
cease non-digital broadcasting and return one of their two channels to the
government, allowing that spectrum to be recovered for other uses. Under the
Balanced Budget Act, however, the FCC is authorized to extend the December 31,
2006 deadline for reclamation of a television station's non-digital channel if,
in any given case: (i) one or more television stations affiliated with ABC, CBS,
NBC or Fox in a market is not broadcasting digitally, and the FCC determines
that such stations have "exercised due diligence" in attempting to convert to
digital broadcasting; or (ii) less than 85% of the television households in the
station's market subscribe to a multichannel video service (cable, wireless
cable or DBS) that carries at least one digital channel from each of the local
stations in that market, and less than 85% of the television households in the
market can receive digital signals off the air using either a set-top converter
box for an analog television set or a new DTV television set. The Balanced
Budget Act also directs the FCC to auction the non-digital channels by September
30, 2002 even though they are not to be reclaimed by the government until at
least December 31, 2006. The Balanced Budget Act also permits broadcasters to
bid on the non-digital channels in cities with populations greater than 400,000,
provided the channels are used for DTV. Thus, it is possible a broadcaster could
own two channels in a market. The FCC has concluded a separate proceeding in
which it reallocated television channels 60 through 69 to other services while
protecting existing television stations on those channels from interference
during the DTV transition period. Additionally, the FCC will open a separate
proceeding to consider to what extent the cable must-carry requirements will
apply to DTV signals.
Implementation of digital television will improve the technical quality of
television signals received by viewers. Under certain circumstances, however,
conversion to digital operation may reduce a station's geographic coverage area
or result in some increased interference. The FCC's DTV allotment plan allows
present UHF stations that move to DTV channels considerably less signal power
than present VHF stations that move to UHF DTV channels. Additionally, the DTV
transmission standard adopted by the FCC may not allow certain stations to
provide a DTV signal of adequate strength to be reliably received by certain
viewers using inside television set antennas. Implementation of digital
television will also impose substantial additional costs on television stations
because of the need to replace equipment and because some stations will need to
operate at higher utility costs and there can be no assurance that the Company's
television stations will be able to increase revenue to offset such costs. The
FCC is also considering imposing new public interest requirements on television
licensees in exchange for their receipt of DTV channels. The Company is
currently considering plans to provide HDTV, to provide multiple channels of
television, including the provision of additional broadcast programming and
trans-
11
<PAGE>
mitted data on a subscription basis, and to continue its current TV program
channels on its allocated DTV channels. The 1996 Act allows the FCC to charge a
spectrum fee to broadcasters who use the digital spectrum to offer
subscription-based services. The FCC has opened a rulemaking to consider the
spectrum fees to be charged to broadcasters for such use. In addition, Congress
has held hearings on broadcasters' plans for the use of their digital spectrum.
The Company cannot predict what future actions the FCC might take with respect
to DTV, nor can it predict the effect of the FCC's present DTV implementation
plan or such future actions on the Company's business.
Proposed Changes
The Congress and the FCC have under consideration, and in the future may
consider and adopt, new laws, regulations and policies regarding a wide variety
of matters that could affect, directly or indirectly, the operation, ownership
and profitability of the Company's broadcast stations, result in the loss of
audience share and advertising revenues for the Company's broadcast stations,
and affect the ability of the Company to acquire additional broadcast stations
or finance such acquisitions. In addition to the changes and proposed changes
noted above, such matters may include, for example, the license renewal process,
spectrum use fees, political advertising rates, potential restrictions on the
advertising of certain products (beer, wine and hard liquor, for example), and
the rules and policies to be applied in enforcing the FCC's equal employment
opportunity regulations. Other matters that could affect the Company's broadcast
properties include technological innovations and developments generally
affecting competition in the mass communications industry, such as direct radio
and television broadcast satellite service, the continued establishment of
wireless cable systems and low power television stations, digital television and
radio technologies, and the advent of telephone company participation in the
provision of video programming service.
Other Considerations
The foregoing summary does not purport to be a complete discussion of all
provisions of the Communications Act or other congressional acts or of the
regulations and policies of the FCC. For further information, reference should
be made to the Communications Act, other congressional acts, and regulations and
public notices promulgated from time to time by the FCC. There are additional
regulations and policies of the FCC and other federal agencies that govern
political broadcasts, public affairs programming, equal employment opportunity,
and other matters affecting the Company's business and operations.
ENVIRONMENTAL REGULATION
Prior to the Company's ownership or operation of its facilities, substances
or waste that are or might be considered hazardous under applicable
environmental laws may have been generated, used, stored or disposed of at
certain of those facilities. In addition, environmental conditions relating to
the soil and groundwater at or under the Company's facilities may be affected by
the proximity of nearby properties that have generated, used, stored or disposed
of hazardous substances. As a result, it is possible that the Company could
become subject to environmental liabilities in the future in connection with
these facilities under applicable environmental laws and regulations. Although
the Company believes that it is in substantial compliance with such
environmental requirements, and has not in the past been required to incur
significant costs in connection therewith, there can be no assurance that the
Company's costs to comply with such requirements will not increase in the
future. The Company presently believes that none of its properties have any
condition that is likely to have a material adverse effect on the Company's
financial condition or results of operations.
COMPETITION
The Company competes for audience share and advertising revenue with other
television and radio stations in its DMA as well as with other advertising
media, such as newspapers, magazines, outdoor advertising, transit advertising,
yellow page directories, direct mail and local cable and wireless cable systems.
Some competitors are part of larger organizations with substantially greater
financial, technical and other resources than the Company.
12
<PAGE>
Television Competition. Competition in the television broadcasting industry
occurs primarily in individual DMAs. Generally, a television broadcasting
station in one DMA does not compete with stations in other DMAs. The Company is
located in a highly competitive DMA. In addition, certain of the Company's DMAs
are overlapped by both over-the-air and cable carriage of stations in adjacent
DMAs, which tends to spread viewership and advertising expenditures over a
larger number of television stations.
Broadcast television stations compete for advertising revenues primarily
with other broadcast television stations, radio stations and cable system
operators serving the same market. Traditional Network programming generally
achieves higher household audience levels than Fox, WB and UPN programming and
syndicated programming aired by independent stations. This can be attributed to
a combination of factors, including the Traditional Networks' efforts to reach a
broader audience, generally better signal carriage available when broadcasting
over VHF channels 2 through 13 versus broadcasting over UHF channels 14 through
69 and the higher number of hours of Traditional Network programming being
broadcast weekly. However, greater amounts of advertising time are available for
sale during Fox programming and non-network syndicated programming, and as a
result the Company believes that the Company's programming typically achieves a
share of television market advertising revenues greater than its share of the
market's audience.
Television stations compete for audience share primarily on the basis of
program popularity, which has a direct effect on advertising rates. A large
amount of the Company's prime time programming is supplied by Fox. In those
periods, the Company is totally dependent upon the performance of Fox programs
in attracting viewers. Non-network time periods are programmed by the station
primarily with syndicated programs purchased for cash, cash and barter, or
barter-only, and also through self-produced news, public affairs and other
entertainment programming.
Television advertising rates are based upon factors which include the size
of the DMA in which the station operates, a program's popularity among the
viewers that an advertiser wishes to attract, the number of advertisers
competing for the available time, the demographic makeup of the DMA served by
the station, the availability of alternative advertising media in the DMA
(including radio and cable), the aggressiveness and knowledge of sales forces in
the DMA and development of projects, features and programs that tie advertiser
messages to programming. The Company believes that its sales and programming
strategies allow it to compete effectively for advertising within its DMA.
Other factors that are material to a television station's competitive
position include signal coverage, local program acceptance, network affiliation,
audience characteristics and assigned broadcast frequency. Historically, the
Company has suffered a competitive disadvantage in comparison to stations with
VHF broadcast frequencies due to its UHF broadcast frequency. This historic
disadvantage has gradually declined through (i) carriage on cable systems, (ii)
improvement in television receivers, (iii) improvement in television
transmitters, (iv) wider use of all channel antennae, (v) increased availability
of programming, and (vi) the development of new networks such as Fox, WB and
UPN.
The broadcasting industry is continuously faced with technical changes and
innovations, the popularity of competing entertainment and communications media,
changes in labor conditions, and governmental restrictions or actions of federal
regulatory bodies, including the FCC, any of which could possibly have a
material effect on a television station's operations and profits. There are
sources of video service other than conventional television stations, the most
common being cable television, which can increase competition for a broadcast
television station by bringing into its market distant broadcasting signals not
otherwise available to the station's audience, serving as a distribution system
for national satellite-delivered programming and other non-broadcast programming
originated on a cable system and selling advertising time to local advertisers.
Other principal sources of competition include home video exhibition,
direct-to-home broadcast satellite television ("DBS") entertainment services and
multichannel multipoint distribution services ("MMDS"). Moreover, technology
advances and regulatory changes affecting programming delivery through fiber
optic telephone lines and video compression could lower entry barriers for new
video channels and encourage the development of increasingly specialized "niche"
programming. The 1996 Act permits telephone companies to provide video
distribution services via
13
<PAGE>
radio communication, on a common carrier basis, as "cable systems" or as "open
video systems," each pursuant to different regulatory schemes. The Company is
unable to predict the effect that technological and regulatory changes will have
on the broadcast television industry and on the future profitability and value
of the Company's broadcast television station.
The FCC authorizes DBS services throughout the United States. Currently,
two FCC permitees, DirecTV and United States Satellite Broadcasting, provide
subscription DBS services via high-power communications satellites and small
dish receivers, and other companies provide direct-to-home video service using
lower powered satellites and larger receivers. Additional companies are expected
to commence direct-to-home operations in the near future. DBS and MMDS, as well
as other new technologies, will further increase competition in the delivery of
video programming.
The Company cannot predict what other matters might be considered in the
future, nor can it judge in advance what impact, if any, the implementation of
any of these proposals or changes might have on its business.
The Company believes that television broadcasting may be enhanced
significantly by the development and increased availability of DTV technology.
This technology has the potential to permit the Company to provide viewers
multiple channels of digital television over each of its existing standard
channels, to provide certain programming in a high definition television format
and to deliver various forms of data, including data on the Internet, to home
and business computers. These additional capabilities may provide the Company
with additional sources of revenue. The Company is currently considering plans
to provide HDTV, to provide multiple channels of television including the
provision of additional broadcast programming and transmitted data on a
subscription basis, and to continue its current TV program channels on its
allocated DTV channels. The 1996 Act allows the FCC to charge a spectrum fee to
broadcasters who use the digital spectrum to offer subscription-based services.
The FCC has opened a rulemaking to consider the spectrum fees to be charged to
broadcasters for such use. In addition, Congress has held hearings on
broadcasters' plans for the use of their digital spectrum. The Company cannot
predict what future actions the FCC or Congress might take with respect to DTV,
nor can it predict the effect of the FCC's present DTV implementation plan or
such future actions on the Company's business. DTV technology is not currently
available to the viewing public and a successful transition from the current
analog television format to a digital format may take many years. There can be
no assurance that the Company's efforts to take advantage of the new technology
will be commercially successful.
Sinclair also competes for programming, which involves negotiating with
national program distributors or syndicators that sell first-run and rerun
packages of programming. Sinclair's stations compete for exclusive access to
those programs against in-market broadcast station competitors for syndicated
products. Cable systems generally do not compete with local stations for
programming, although various national cable networks from time to time have
acquired programs that would have otherwise been offered to local television
stations. Public broadcasting stations generally compete with commercial
broadcasters for viewers but not for advertising dollars.
Historically, the cost of programming has increased because of an increase
in the number of new Independent stations and a shortage of quality programming.
However, the Company believes that over the past five years program prices
generally have stabilized.
The Company believes it competes favorably against other television
stations because of its management skill and experience, the ability of the
Company historically to generate revenue share greater than its audience share,
the network affiliations and its local program acceptance. In addition, Sinclair
believes that it benefits from the operation of multiple broadcast properties,
affording it certain nonquantifiable economies of scale and competitive
advantages in the purchase of programming.
EMPLOYEES
As of December 31, 1997, the Company had approximately 44 employees. None
of the employees are represented by labor unions under any collective bargaining
agreement. No significant labor problems have been experienced by the Company,
and the Company considers its overall labor relations to be good.
14
<PAGE>
ITEM 2. PROPERTIES
The Company has facilities consisting of offices, studios and tower sites.
Transmitter and tower sites are located to provide maximum signal coverage of
the stations' markets. The following table generally describes the Company's
principal owned and leased real property in the Des Moines market:
<TABLE>
<CAPTION>
Type of Facility and Use Owned or Leased(a) Approximate Size (Sq. Feet)
- ----------------------------- ----------------------------- ----------------------------
<S> <C> <C>
KDSM Studio & Office Site Owned 13,000
KDSM Transmitter bldg/tower Owned 2,000
KDSM Transmitter land Leased (expires 11/08/2034) 40 Acres
KDSM Translator tower/shed Leased (expires 12/31/98) 48
</TABLE>
The Company believes that all of its properties, both owned and leased, are
generally in good operating condition, subject to normal wear and tear, and are
suitable and adequate for the Company's current business operations.
ITEM 3. LEGAL PROCEEDINGS
Lawsuits and claims are filed against the Company from time to time in the
ordinary course of business. These actions are in various preliminary stages,
and no judgments or decisions have been rendered by hearing boards or courts.
Management, after reviewing developments to date with legal counsel, is of the
opinion that the outcome of such matters will not have a material adverse effect
on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 1997.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
None
ITEM 6. SELECTED FINANCIAL DATA
The selected consolidated financial data for the years ended December 31,
1993, 1994, 1995, 1996 and 1997 have been derived from the Company's audited
Consolidated Financial Statements. The Consolidated Financial Statements for the
years ended December 31, 1995, 1996 and 1997 are included elsewhere in this Form
10-K.
The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere in this Form 10-K.
16
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<TABLE>
<CAPTION>
THE
PREDECESSOR COMBINED (A) COMPANY
-------------------------------------- -------------- ------------
YEARS ENDED DECEMBER 31, 1993 1994 1995 1996 1997
- ---------------------------------------------------- ---------- ----------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net broadcast revenues (b) ......................... $ 6,172 $ 6,848 $ 7,478 $ 8,218 $ 8,140
Barter revenues .................................... -- -- -- 204 398
------- -------- -------- --------- ----------
Total revenues ..................................... 6,172 6,848 7,478 8,422 8,538
------- -------- -------- --------- ----------
Operating costs (c) ................................ 3,161 3,347 3,489 3,773 3,658
Expenses from barter arrangements .................. -- -- -- 225 283
Depreciation and amortization (d) .................. 2,963 2,979 3,338 2,616 3,521
Stock-based compensation ........................... -- -- -- -- 23
------- -------- -------- --------- ----------
Broadcast operating income ......................... 48 522 651 1,808 1,053
Parent preferred stock dividend income ............. -- -- -- -- 20,826
Subsidiary trust minority interest expense (e) ..... -- -- -- -- (18,600)
Interest and other income .......................... (45) -- 12 -- --
------- -------- -------- --------- ----------
Income before income taxes ......................... $ 3 $ 522 $ 663 $ 1,808 $ 3,279
======= ======== ======== ========= ==========
Net income ......................................... $ 3 $ 522 $ 663 $ 1,323 $ 1,895
======= ======== ======== ========= ==========
Net income available to common shareholders ........ $ 3 $ 522 $ 663 $ 1,323 $ 1,895
======= ======== ======== ========= ==========
OTHER DATA:
Broadcast cash flow (f) ............................ $ 2,233 $ 2,908 $ 2,922 $ 3,727 $ 3,661
Broadcast cash flow margin (g) ..................... 36.2% 42.5% 39.1% 45.4% 45.0%
Adjusted EBITDA (h) ................................ $ 2,056 $ 2,551 $ 2,772 $ 3,291 $ 3,378
Adjusted EBITDA margin (g) ......................... 33.3% 37.3% 37.1% 40.0% 41.5%
Program contract payments .......................... 955 950 1,217 1,133 1,219
Corporate overhead expense ......................... 177 357 150 436 283
Capital expenditures ............................... 113 140 139 190 197
Cash flows from operating activities ............... N/A 2,679 2,813 1,647 4,060
Cash flows from investing activities ............... N/A (140) (121) (190) (207,973)
Cash flows from financing activities ............... N/A (2,512) (2,686) (1,485) 203,921
BALANCE SHEET DATA:
Cash and cash equivalents .......................... $ 28 $ 56 $ 62 $ 3 $ 11
Total assets ....................................... 11,466 9,688 8,344 40,674 258,540
HYTOPS (i) ......................................... -- -- -- -- 200,000
Total equity of partnership 1993 to 1995, total
stockholder's equity 1996 to 1997 ................. 9,058 7,069 5,046 37,516 53,749
</TABLE>
- ----------
(a) The combined column represents the results of operations for the five
months ended May 31, 1996 of KDSM-TV, a division of River City
Broadcasting, L.P. (the Predecessor) and the results of operations for the
seven months ended December 31, 1996 of KDSM, Inc. and subsidiaries (the
Company).
(b) "Net broadcast revenues" are defined as broadcast revenues net of agency
commissions.
(c) Operating costs include program and production expenses and selling,
general and administrative expenses.
(d) Depreciation and amortization includes amortization of program contract
costs and net realizable value adjustments, depreciation and amortization
of property and equipment, and amortization of acquired intangible
broadcasting assets and other assets including amortization of deferred
financing costs and costs related to excess syndicated programming.
(e) Subsidiary trust minority interest expense represents the distributions on
the HYTOPS (see footnote h).
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(f) "Broadcast cash flow" is defined as broadcast operating income plus
corporate overhead expense, special bonuses paid to executive officers,
stock-based compensation, depreciation and amortization (including film
amortization and excess syndicated programming), less cash payments for
program rights. Cash program payments represent cash payments made for
current programs payable and do not necessarily correspond to program
usage. Special bonuses paid to executive officers are considered unusual
and non-recurring. The Company has presented broadcast cash flow data,
which the Company believes are comparable to the data provided by other
companies in the industry, because such data are commonly used as a measure
of performance for broadcast companies. However, broadcast cash flow does
not purport to represent cash provided by operating activities as reflected
in the Company's consolidated statements of cash flows, is not a measure of
financial performance under generally accepted accounting principles and
should not be considered in isolation or as a substitute for measures of
performance prepared in accordance with generally accepted accounting
principles.
(g) "Broadcast cash flow margin" is defined as broadcast cash flow divided by
net broadcast revenues. "Adjusted EBITDA margin" is defined as Adjusted
EBITDA divided by net broadcast revenues.
(h) "Adjusted EBITDA" is defined as broadcast cash flow less corporate expenses
and is a commonly used measure of performance for broadcast companies.
Adjusted EBITDA does not purport to represent cash provided by operating
activities as reflected in the Company's consolidated statements of cash
flows, is not a measure of financial performance under generally accepted
accounting principles and should not be considered in isolation or as a
substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(i) HYTOPS represents Company Obligated Mandatorily Redeemable Security of
Subsidiary Trust Holding Solely KDSM Senior Debentures representing $200
million aggregate liquidation value.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The operating revenues of the Company are derived from local and national
advertisers. The Company's primary operating expenses involved in owning,
operating or programming the television station are syndicated program rights
fees, commissions on revenues, employee salaries and promotion. Amortization and
depreciation of costs associated with the acquisition of the station are
significant factors in determining the Company's overall profitability.
Set forth below are the principal types of broadcast revenues received by
the Company's station for the periods indicated and the percentage contribution
of each type to the Company's total gross broadcast revenues:
BROADCAST REVENUES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1995 1996 (A) 1997
----------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Local/regional advertising ......... $ 5,203 60.6% $ 5,790 61.3% $ 6,132 65.6%
National advertising ............... 3,346 39.0% 3,468 36.7% 3,146 33.7%
Political advertising .............. 5 0.1% 146 1.6% -- 0.0%
Production ......................... 25 0.3% 39 0.4% 66 0.7%
-------- ----- -------- ----- -------- -----
Broadcast revenues ................. 8,579 100.0% 9,443 100.0% 9,344 100.0%
===== ===== =====
Less: agency commissions ........... (1,101) (1,225) (1,204)
-------- -------- --------
Broadcast revenues, net ............ 7,478 8,218 8,140
Barter revenues .................... -- 204 398
-------- -------- --------
Total revenues ..................... $ 7,478 $ 8,422 $ 8,538
======== ======== ========
</TABLE>
- ----------
(a) For presentation purposes, the results of operations for the five months
ended May 31, 1996 of KDSM-TV, a division of River City Broadcasting, L.P.
(the Predecessor) have been combined with the results of operations for the
seven months ended December 31, 1997 of KDSM, Inc. and subsidiaries (the
Company).
18
<PAGE>
The Company's primary types of programming and their approximate
percentages of 1997 net broadcast revenues were network programming (16.3%),
children's programming (7.5%), sports programming (8.8%) and other syndicated
programming (63.5%). Similarly, the Company's six largest categories of
advertising and their approximate percentages of 1997 net broadcast revenues
were automotive (17.3%), restaurants (12.8%), services (9.3%), retail/department
stores (8.4%), soft drinks (6.7%) and food (6.0%). No other advertising category
accounted for more than 6% of the Company's net broadcast revenues in 1997. No
individual advertiser accounted for more than 5% of any individual Company
station's net broadcast revenues in 1997.
The following table sets forth certain operating data of the Company for
the years ended December 31, 1995, 1996 and 1997. For definitions of items, see
footnotes on pages 17 and 18 of this document.
OPERATING DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 (A) 1997
----------- ---------- -----------
<S> <C> <C> <C>
Net broadcast revenues (b) ................ $ 7,478 $ 8,218 $ 8,140
Barter revenues ........................... -- 204 398
------- ------- -------
Total revenues ............................ 7,478 8,422 8,538
------- ------- -------
Operating costs (c) ....................... 3,489 3,773 3,658
Expenses from barter arrangements ......... -- 225 283
Depreciation and amortization (d) ......... 3,338 2,616 3,521
Stock-based compensation .................. -- -- 23
------- ------- -------
Broadcast operating income ................ $ 651 $ 1,808 $ 1,053
======= ======= =======
BROADCAST CASH FLOW (BCF) DATA:
BCF (f) ................................ $ 2,922 $ 3,727 $ 3,661
BCF margin (g) ......................... 39.1% 45.4% 45.0%
OTHER DATA:
Adjusted EBITDA (h) ...................... $ 2,772 $ 3,291 $ 3,378
Adjusted EBITDA margin (g) ............... 37.1% 40.0% 41.5%
Program contract payments ................ $ 1,217 $ 1,133 $ 1,219
Corporate overhead expense ............... $ 150 $ 436 $ 283
Capital expenditures ..................... $ 139 $ 190 $ 197
</TABLE>
- ----------
(a) For presentation purposes, the results of operations for the five months
ended May 31, 1996 of KDSM-TV, a division of River City Broadcasting, L.P.
(the Predecessor) have been combined with the results of operations for the
seven months ended December 31, 1997 of KDSM, Inc. and subsidiaries (the
Company).
19
<PAGE>
RESULTS OF OPERATIONS
COMBINED PERIODS DECEMBER 31, 1996 AND YEAR ENDED 1997
Total revenues increased to $8.5 million for the year ended December 31,
1997 from $8.4 million for the combined twelve months ended December 31, 1996,
or 1.2%. Excluding the effects of non-cash barter transactions, net broadcast
revenues for the year ended December 31, 1997 decreased by 0.9% when compared to
the combined twelve months ended December 31, 1996. When comparing the year
ended December 31, 1997 to the combined twelve months ended December 31, 1996,
revenues from local advertisers increased approximately $342,000 or 6.0% and
revenues from national advertisers decreased approximately $322,000 or 9.0%.
Revenue growth from local advertisers primarily resulted from an increase in
market revenue growth. The decrease in revenue from national advertisers
primarily resulted from a decrease in market share.
Station operating costs decreased to $3.7 million for the year ended
December 31, 1997 from $3.8 million for the combined twelve months ended
December 31, 1996, or 2.6%. The decrease in station operating expenses for the
year ended December 31, 1997 as compared to the combined twelve months ended
December 31, 1996 was primarily related to decreases in corporate management
fees and sales commissions related to national advertising revenues.
Broadcast operating income decreased to $1.1 million for the twelve months
ended December 31, 1997 from $1.8 million for the combined twelve months ended
December 31, 1996, or 38.9%. The decrease in broadcast operating income for the
year ended December 31, 1997 as compared to the combined twelve months ended
December 31, 1996 was primarily attributable to increases in amortization of
intangibles related to the acquisition and costs related to the private
placement of $200 million aggregate liquidation value 11 5/8% High Yield Trust
Offered Preferred Securities (the "Trust Preferred Securities") of Sinclair
Capital, a subsidiary trust of the Company, completed March 12, 1997.
Parent preferred stock dividend income of $20.8 million for the year ended
December 31, 1997 is related to the Company's investment in 12 5/8% Series C
Preferred Stock (the "Parent Preferred Securities") issued by Sinclair,
completed March 12, 1997. Subsidiary trust minority interest expense of $18.6
million for the year ended December 31, 1997 is related to the Trust Preferred
Securities. The Company's ability to make future subsidiary trust minority
interest payments is directly contingent upon the Parent's ability to pay
dividends on Parent Preferred Stock.
The income tax provision increased to $1.4 million for the year ended
December 31, 1997 from $485,000 for the combined twelve months ended December
31, 1996. The increase for the year ended December 31, 1997 as compared to the
combined twelve months ended December 31, 1996 is attributable to the
Predecessor's difference in structure in which there were no taxes for the five
months ended May 31, 1996. The Predecessor was a partnership and as such the
related tax attributes were deemed to be distributed to, and to be reportable by
the partners of the partnership. The Company's effective tax rate for the year
ended December 31, 1997 was 42.2%.
Deferred state taxes increased to $334,000 as of December 31, 1997 from
$73,000 as of December 31, 1996. The increase in the Company's deferred tax
liability as of December 31, 1997 as compared to December 31, 1996 is primarily
due to pre-tax income for the twelve months ended December 31, 1997. Federal
income taxes are allocated to the Company by Sinclair at the statutory rate, are
considered payable currently and are reflected as an adjustment to Due from
Parent in the Company's balance sheet.
Net income for the year ended December 31, 1997 was $1.9 million compared
to net income of $1.3 million for the combined twelve months ended December 31,
1996.
Broadcast cash flow decreased to $3.6 million for the year ended December
31, 1997 from $3.7 million for the combined twelve months ended December 31,
1996, or 2.7%. The decrease in Broadcast cash flow for the year ended December
31, 1997 as compared to the combined twelve months ended December 31, 1996
primarily resulted from decreases in national revenues as noted above combined
with increases in program contract payments.
20
<PAGE>
Adjusted EBITDA increased to $3.4 million for the year ended December 31,
1997 from $3.3 million for the combined twelve months ended December 31, 1996,
or 3.0%. The increase in Adjusted EBITDA for the year ended December 31, 1997 as
compared to the combined twelve months ended December 31, 1996 resulted from
decreases in operating expenses as noted above.
The Company's Broadcast cash flow margin decreased to 45.0% for the year
ended December 31, 1997 from 45.4% for the combined twelve months ended December
31, 1996. The decrease in Broadcast cash flow margins for the year ended
December 31, 1997 as compared to the combined twelve months ended December 31,
1996 primarily resulted from decreases in national revenues as noted above
combined with increases in program contract payments.
The Company's Adjusted EBITDA margin increased to 41.5% for the year ended
December 31, 1997 from 40.0% for the combined twelve months ended December 31,
1996. The increase in Adjusted EBITDA margin for the year ended December 31,
1997 as compared to the combined twelve months ended December 31, 1996 primarily
resulted from decreases in operating expenses as noted above.
YEAR ENDED DECEMBER 31, 1995 AND COMBINED TWELVE MONTHS ENDED DECEMBER 31, 1996
Net broadcast revenues increased to $8.2 million for the combined twelve
months ended December 31, 1996 from $7.5 million for the year ended December 31,
1995, or 9.3%. The increase in net broadcast revenues was primarily the result
of an increase in market revenue and improvements in programming.
Station operating costs excluding depreciation and amortization increased
to $3.8 million for the combined twelve months ended December 31, 1996 from $3.5
million for the year ended December 31, 1995, or 8.6%. The increase in expenses
for the combined twelve months ended December 31, 1996 as compared to the year
ended December 31, 1995 was largely attributable to proportional-expense
increases for increased sales.
Broadcast operating income increased to $1.8 million for the combined
twelve months ended December 31, 1996, from $0.7 million for the year ended
December 31, 1995, or 157.1%. The increase in broadcast operating income for the
combined twelve months ended December 31, 1996 as compared to the year ended
December 31, 1995 was primarily the result of an increase in market revenue,
improvements in programming and decreases in depreciation and amortization
expenses as a result of the acquisition of the Non-License Assets of KDSM-TV by
Sinclair on May 31, 1996.
Net income increased to $1.3 million for the combined twelve months ended
December 31, 1996 from $0.7 million for the year ended December 31, 1995, or
85.7%. The increase in net income for the combined twelve months ended December
31, 1996 as compared to the year ended December 31, 1995 was primarily the
result of an increase in market revenue, improvements in programming and
decreases in depreciation and amortization expenses as a result of the
acquisition of the Non-License Assets of KDSM-TV by Sinclair on May 31, 1996.
Broadcast cash flow increased to $3.7 million for the combined twelve
months ended December 31, 1996 from $2.9 million for the year ended December 31,
1995, or 27.6%. The increase in broadcast cash flow for the combined twelve
months ended December 31, 1996 as compared to the year ended December 31, 1995
was primarily the result of an increase in market revenue and improvements in
programming.
Adjusted EBITDA increased to $3.3 million for the combined twelve months
ended December 31, 1996 from $2.8 million for the year ended December 31, 1995,
or 17.9%. The increase in Adjusted EBITDA for the combined twelve months ended
December 31, 1996 as compared to the year ended December 31, 1995 was primarily
the result of an increase in market revenue and improvements in programming.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1997, the Company had cash balances of approximately
$11,000 and working capital of approximately $1.2 million. The Company's primary
source of liquidity is cash from operations which management believes to be
sufficient to meet operating cash requirements. Cash requirements or excess cash
from operations are funded by or deposited into Sinclair's centralized banking
system utilized by all of its wholly owned subsidiaries.
21
<PAGE>
In June 1997, the Parent contributed to the Company its station premises
and building through a capital contribution which was recorded at its fair value
of $562,000. The Company does not anticipate capital expenditures in the coming
year to exceed historical capital expenditures, which were approximately
$197,000 in 1997. If the Company is required to make capital expenditures to
keep up with emerging technologies, management believes it will be able to fund
such expenditures from its cash flow and from the proceeds of indebtedness or
financing that is allowed to be incurred or obtained under the Company's Senior
Debenture Indenture (provided that the Company's debt to Adjusted EBITDA ratio
is 4 to 1 or less) or from capital contributions from Sinclair to the extent
permitted under Sinclair's debt instruments. Under these instruments, Sinclair
would currently be able to make capital contributions to the Company in an
amount sufficient to cover such costs if it chose to do so.
In March 1997, the Company completed a private placement of the Trust
Preferred Securities, generating net proceeds of $192.8 million. Simultaneously
with the private placement of the Trust Preferred Securities, the Company
utilized the net proceeds from the offering combined with proceeds from Sinclair
capital contributions to acquire $206.2 million of the Parent Preferred
Securities. The Company has and will receive dividend payments relating to its
investment in the Parent Preferred Securities that are sufficient to meet
dividend payments requirements of the Trust Preferred Securities.
SEASONALITY
The Company's results usually are subject to seasonal fluctuations, which
result in fourth quarter broadcast operating income being greater usually than
first, second and third quarter broadcast operating income. This seasonality is
primarily attributable to increased expenditures by advertisers in anticipation
of holiday season spending and an increase in viewership during this period.
YEAR 2000
Certain computer programs have been written using two digits rather than
four to define the applicable year, which could result in the computer
recognizing a date using "00" as the year 1900 rather than the year 2000. This,
in turn, could result in major system failures in miscalculations, and is
generally referred to as the "Year 2000" problem. The Company and all of its
subsidiaries have implemented computer systems which run substantially all of
the Company's principal data processing and financial reporting software
applications. The applications software used in these systems are Year 2000
compliant. Presently, the Company does not believe that Year 2000 compliance
will result in any material investments, nor does the Company anticipate that
the Year 2000 problem will have material adverse effects in the business
operations or financial performance of the Company. In addition, the Company is
not aware of Year 2000 problems of its customers, suppliers or network
affiliates that will have a material adverse effect on the business, operations
or financial performance of the Company. There can be no assurance, however,
that the Year 2000 problem will not adversely affect the Company and its
business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKETPLACE
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statement and supplementary data of the Company required by
this item are filed as exhibits hereto, are listed under Item 14(a)(1) and (2),
and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING FINANCIAL DISCLOSURE
None
22
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information relating to the Company's executive
officers, directors and certain key employees.
NAME AGE TITLE
- ------------------------------- ----- -----------------------
David D. Smith ................ 47 President
David B. Amy .................. 45 Secretary
Michael Granados .............. 43 Regional Director, SCI
Theodore J. Stephens .......... 49 General Manager, KDSM
Jeff Potthoff ................. 36 Business Manager, KDSM
David D. Smith has served as President since April 1996. In addition, Mr.
Smith has served as President, Chief Executive Officer and Chairman of the Board
for Sinclair Broadcast Group, Inc. since September 1990. Prior to that, he
served as General Manager of WPTT from 1984, and assumed the financial and
engineering responsibility for Sinclair, including the construction of WTTE in
1984. In 1980, Mr. Smith founded Comark Television, Inc., which applied for and
was granted the permit for WPXT-TV in Portland, Maine and which purchased
WDSI-TV in Chattanooga, Tennessee. WPXT-TV was sold one year after construction
and WDSI-TV was sold two years after its acquisition. From 1978 to 1986, Mr.
Smith co-founded and served as an officer and director of Comark Communications,
Inc., a company engaged in the manufacture of high power transmitters for UHF
television stations. His television career began with WBFF in Baltimore, where
he helped in the construction of the station and was in charge of technical
maintenance until 1978.
David B. Amy has served as Secretary since April 1996. In addition, he has
served as Chief Financial Officer ("CFO") of Sinclair Broadcast Group since
October 1994 and as Secretary of Sinclair Communications, Inc., Sinclair's
subsidiary which owns and operates the broadcasting operations. Prior to his
appointment as CFO, Mr. Amy served as the Corporate Controller of Sinclair
beginning in 1986 and has been Sinclair's Chief Accounting Officer since that
time. Mr. Amy has over thirteen years of broadcast experience, having joined
Sinclair as a business manager for WPTT in Pittsburgh. Mr. Amy received an MBA
degree from the University of Pittsburgh in 1981.
Michael Granados has served as a Regional Director of Sinclair Broadcast
Group since July 1996. As a Regional Director, Mr. Granados is responsible for
the San Antonio, Des Moines, Peoria and Las Vegas markets. Prior to July 1996,
Mr. Granados has served in various positions with the Company and, before the
River City Acquisition, with River City. He served as the General Sales Manager
of KABB from 1989 to 1993, the Station Manager and Director of Sales of WTTV
from 1993 to 1994 and the General Manager of WTTV prior to his appointment as
Regional Director in 1996.
Theodore J. Stephens has served as General Manager of KDSM, Inc. and
KDSM-TV, the Predecessor of KDSM, Inc., since February 1996. Prior to that time,
Mr. Stephens was employed by KDSM-TV in various positions including station
manager and sales manager since January 1987. Mr. Stephens received a B.S. in
Journalism from the University of Wisconsin.
Jeff Potthoff has served as Business Manager of KDSM, Inc. and KDSM-TV, the
Predecessor of KDSM, Inc. since May 1995. Prior to that time, Meredith
Corporation employed Mr. Potthoff for nine years, four of which were served as
the Financial Manager of Meredith Broadcast Group. Mr. Potthoff also was
employed two years by the public accounting firm KPMG. Mr. Potthoff received a
B.B.A. in Accounting from the University of Iowa and is a Certified Public
Accountant.
23
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation by Sinclair for services rendered in all capacities
during the year ended December 31, 1997 by the President and Secretary of the
Company as to whom the total annual salary and bonus exceeded $100,000 in 1997:
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION COMPENSATION (B)
NAME AND -------------------------------- SECURITIES UNDERLYING -----------------
PRINCIPAL POSITION YEAR SALARY BONUS (A) OPTIONS GRANTED (#)
- -------------------- ------ ------------- ----------- ----------------------
<S> <C> <C> <C> <C> <C>
David D. Smith 1997 $1,354,490 $ 98,224 -- $ 6,306
President ......... 1996 767,308 317,913 -- 6,748
1995 450,000 343,213 -- 4,592
David B. Amy 1997 189,000 50,000 25,000 10,140
Secretary ......... 1996 173,582 31,000 -- 7,766
1995 132,310 20,000 7,500 7,868
</TABLE>
- ----------
(a) The bonuses reported in this column represent amounts awarded and paid
during the fiscal years noted but relate to the fiscal year immediately
prior to the year noted.
(b) All other compensation consists of income deemed received for personal use
of Company-leased automobiles, the Company's 401 (k) contribution, life
insurance and long-term disability coverage.
STOCK OPTIONS
No grants of stock options were made during 1997 to the Named Executive
Officers.
EMPLOYMENT AGREEMENTS
Sinclair has entered into an employment agreement with David D. Smith,
President and Chief Executive Officer of the Company. David Smith's employment
agreement has an initial term of three years and is renewable for additional
one-year terms, unless either party gives notice of termination not less than 60
days prior to the expiration of the then current term. Effective January 1,
1997, Sinclair's Compensation Committee increased Mr. Smith's total compensation
from $1,200,000 to $1,290,000. Mr. Smith is also entitled to participate in
Sinclair's Executive Bonus Plan based upon the performance of the Company during
the year. The employment agreement provides that Sinclair may terminate Mr.
Smith's employment prior to expiration of the agreement's term as a result of
(i) a breach by Mr. Smith of any material covenant, promise or agreement
contained in the employment agreement; (ii) a dissolution or winding up of
Sinclair; (iii) the disability of Mr. Smith for more than 210 days in any twelve
month period (as determined under the employment agreement); or (iv) for cause,
which includes conviction of certain crimes, breach of a fiduciary duty to
Sinclair or the stockholders, or repeated failure to exercise or undertake his
duties as an officer of Sinclair (each, a "Termination Event").
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Other than as follows, no Named Executive Officer is a director of a
corporation that has a director or executive officer who is also a director of
the Company. Each of David D. Smith, Frederick G. Smith, J. Duncan Smith and
Robert E. Smith (the "Controlling Stockholders") (all of whom are directors of
the Company and Named Executive Officers) is a director and/or executive officer
of each of various other corporations controlled by the Controlling
Stockholders.
During 1996, none of the Named Executive Officers participated in any
deliberations of the Company's Board of Directors or the Compensation Committee
relating to compensation of the Named Executive Officers.
24
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of KDSM, Inc. common stock as of March 27, 1998, by holders having
beneficial ownership of more than five percent of KDSM, Inc.
common stock.
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
- -------------------------------------------- ------------------ -----------------
<S> <C> <C>
Sinclair Communications, Inc. ......... 100 100%
2000 West 41st Street
Baltimore, MD 21211
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
25
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) Index to Financial Statements
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this report.
(a) (2) Index to Financial Statements Schedules
The financial statements schedules required by this item are submitted on
pages S-1 through S-3 of this Report.
All other schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the notes thereto.
(a) (3) Exhibits
See Index to Exhibits.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed by the Registrant during the fourth
quarter of the fiscal year ended December 31, 1997.
(c) Exhibits
The exhibits required by this Item are listed under Item 14 (a) (3).
(d) Financial Statements Schedules
The financial statement schedules required by this Item are listed under
Item 14 (a) (2).
26
<PAGE>
KDSM, INC. AND SUBSIDIARIES AND
KDSM-TV, A DIVISION OF RIVER CITY BROADCASTING, L.P. (THE "PREDECESSOR")
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
KDSM, INC. AND SUBSIDIARIES
Report of Independent Public Accountants... ........................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 .......................... F-3
Consolidated Statements of Operations for the Year Ended December 31, 1995, the Five
Months Ended May 31, 1996, the Seven Months Ended December 31, 1996 and the Year
Ended December 31, 1997 ............................................................. F-4
Consolidated Statements of Changes in Undistributed Earnings for the Year Ended Decem-
ber 31, 1995 and the Five Months Ended May 31, 1996, and Consolidated Statements of
Changes in Stockholder's Equity for the Seven Months Ended December 31, 1996 and the
Year Ended December 31, 1997.. ...................................................... F-5
Consolidated Statements of Cash Flows for the Year Ended December 31, 1995, the Five
Months Ended May 31, 1996, the Seven Months Ended December 31, 1996 and the Year
Ended December 31, 1997 ............................................................. F-6
Notes to Consolidated Financial Statements ............................................ F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc.:
We have audited the accompanying balance sheets of KDSM, Inc. (a Maryland
corporation) and subsidiaries (the Company) as of December 31, 1996 and 1997,
and the related statements of operations, stockholder's equity and cash flows of
KDSM, Inc. and subsidiaries for the seven months ended December 31, 1996 and the
year ended December 31, 1997, and the statements of operations, changes in
undistributed earnings and cash flows of KDSM-TV, a division of River City
Broadcasting (the Predecessor), a limited partnership, for the year ended
December 31, 1995 and the five months ended May 31, 1996. These financial
statements are the responsibility of the Company's and the Predecessor's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of KDSM, Inc. and subsidiaries
as of December 31, 1996 and 1997, and the results of its operations and its cash
flows for the seven months ended December 31, 1996 and the year ended December
31, 1997 and the results of operations and cash flows of KDSM-TV, a division of
River City Broadcasting, a limited partnership, for the year ended December 31,
1995 and the five months ended May 31, 1996, in conformity with generally
accepted accounting principles.
/s/ Arthur Andersen
Baltimore, Maryland,
March 10, 1998
F-2
<PAGE>
KDSM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1996 1997
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ................................................................. $ 3 $ 11
Accounts receivable, net of allowance for doubtful accounts of $39 and
$30, respectively................................................... 2,052 2,150
Dividends receivable from parent ..................................... -- 1,085
Current portion of program contract costs ............................ 860 988
Prepaid expenses and other current assets ............................ 86 33
Deferred barter costs ................................................ 50 100
------- --------
Total current assets ............................................... 3,051 4,367
PROPERTY AND EQUIPMENT, net ........................................... 2,803 3,208
PROGRAM CONTRACT COSTS, less current portion .......................... 794 925
INVESTMENT IN PARENT PREFERRED SECURITIES ............................. -- 206,200
DUE FROM PARENT ....................................................... 496 2,673
OTHER ASSETS .......................................................... 4,075 7,757
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net of accumu-
lated amortization of $486 and $1,468, respectively .................. 29,455 33,410
------- --------
Total Assets ....................................................... $40,674 $258,540
======= ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES: ..................................................
Accounts payable ..................................................... $ 292 $ 30
Accrued liabilities .................................................. 410 396
Current portion of program contracts payable ......................... 1,384 1,612
Deferred barter revenues ............................................. 120 209
Subsidiary trust minority interest expense payable ................... -- 969
------- --------
Total current liabilities .......................................... 2,206 3,216
PROGRAM CONTRACTS PAYABLE ............................................. 879 1,241
DEFERRED STATE TAXES .................................................. 73 334
------- --------
Total liabilities .................................................. 3,158 4,791
------- --------
COMMITMENTS AND CONTINGENCIES
COMPANY OBLIGATED MANDATORILY REDEEMABLE SECURI-
TIES OF SUBSIDIARY TRUST HOLDING SOLELY KDSM SENIOR
DEBENTURES ........................................................... -- 200,000
------- --------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 1,000 shares authorized and 100 shares
issued and outstanding ............................................. -- --
Additional paid-in capital ........................................... 36,811 51,149
Retained earnings .................................................... 705 2,600
------- --------
Total stockholder's equity ......................................... 37,516 53,749
------- --------
Total Liabilities and Stockholder's Equity ......................... $40,674 $258,540
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE>
KDSM, INC. AND SUBSIDIARIES AND
KDSM-TV, A DIVISION OF RIVER CITY BROADCASTING, L.P. (THE "PREDECESSOR"),
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995, THE FIVE MONTHS ENDED MAY 31, 1996, THE
SEVEN MONTHS ENDED DECEMBER 31, 1996 AND THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
FIVE MONTHS SEVEN MONTHS
ENDED ENDED
PREDECESSOR MAY 31, DECEMBER 31, COMPANY
1995 1996 1996 1997
------------- ------------- -------------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Station broadcast revenues, net of agency commissions of
$1,101, $494, $731 and $1,204, respectively ................. $7,478 $ 3,478 $4,740 $ 8,140
Revenues realized from station barter arrangements ............ -- 85 119 398
------ ------- ------ ---------
Total revenues .............................................. 7,478 $ 3,563 $4,859 8,538
------ ------- ------ ---------
OPERATING EXPENSES:
Program and production ........................................ 1,822 509 627 1,199
Selling, general and administrative ........................... 1,667 1,321 1,316 2,459
Expenses realized from station barter arrangements ............ -- 98 127 283
Amortization of program contract costs and net realizable
value adjustments ........................................... 1,504 507 864 1,579
Stock-based compensation ...................................... -- -- -- 23
Depreciation and amortization of property and equipment ....... 897 233 191 354
Amortization of acquired intangible broadcasting assets and
other assets ................................................ 937 277 544 1,588
------ ------- ------ ---------
Total operating expenses .................................... 6,827 2,945 3,669 7,485
------ ------- ------ ---------
Broadcast operating income .................................. 651 618 1,190 1,053
------ ------- ------ ---------
OTHER INCOME (EXPENSE):
Parent preferred stock dividend income ........................ -- -- -- 20,826
Subsidiary trust minority interest expense .................... -- -- -- (18,600)
Other income .................................................. 12 -- -- --
------ ------- ------ ---------
Income before allocation of consolidated federal income
taxes and state income taxes ............................... 663 618 1,190 3,279
ALLOCATION OF CONSOLIDATED FEDERAL INCOME
TAXES ......................................................... -- -- 412 1,123
STATE INCOME TAXES ............................................. -- -- 73 261
------ ------- ------ ---------
NET INCOME ..................................................... $ 663 $ 618 $ 705 $ 1,895
====== ======= ====== =========
Net income per common share .................................... $ -- $ -- $7,050 $ 18,950
====== ======= ====== =========
WEIGHTED AVERAGE COMMON SHARES OUTSTAND-
ING ........................................................... -- -- 100 100
====== ======= ====== =========
PRO FORMA NET INCOME AFTER IMPUTING AN IN-
COME TAX PROVISON:
Net income, as reported ........................................ $ 663 $ 618
Imputed income tax provision ................................... 265 247
------ -------
Pro forma net income .......................................... $ 398 $ 371
====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
KDSM, INC. AND SUBSIDIARIES AND
KDSM-TV, A DIVISION OF RIVER CITY BROADCASTING, L.P. (THE "PREDECESSOR")
CONSOLIDATED STATEMENTS OF CHANGES IN UNDISTRIBUTED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE FIVE MONTHS ENDED MAY 31, 1996,
AND CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY FOR THE SEVEN
MONTHS ENDED DECEMBER 31, 1996 AND THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
TOTAL
UNDISTRIBUTED
PREDECESSOR EARNINGS
- ------------------------------------- --------------
BALANCE, December 31, 1994 .......... $ 7,069
Net Income ......................... 663
Partnership transfers, net ......... (2,686)
--------
BALANCE, December 31, 1995 .......... 5,046
Net Income ......................... 618
--------
BALANCE, May 31, 1996 ............... $ 5,664
========
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
COMPANY STOCK CAPITAL EARNINGS EQUITY
- --------------------------------------- -------- ------------ ---------- --------------
<S> <C> <C> <C> <C>
BALANCE, June 1, 1996 ................. $ -- $36,811 $ -- $36,811
Net income ........................... -- -- 705 705
---- ------- ------ -------
BALANCE, December 31, 1996 ............ -- 36,811 705 37,516
Parent capital contributions ......... -- 14,338 -- 14,338
Net income ........................... -- -- 1,895 1,895
---- ------- ------ -------
BALANCE, December 31, 1997 ............ $ -- $51,149 $2,600 $53,749
==== ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
KDSM, INC. AND SUBSIDIARIES AND
KDSM-TV, A DIVISION OF RIVER CITY BROADCASTING, L.P. (THE "PREDECESSOR"),
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995, THE FIVE MONTHS ENDED MAY 31, 1996, THE
SEVEN MONTHS ENDED DECEMBER 31, 1996 AND THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
FIVE MONTHS
ENDED
PREDECESSOR MAY 31,
1995 1996
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 663 $ 618
Adjustments to reconcile net income to net cash flows from operat-
ing activities -
Gain on disposal of property and equipment ............................. (12) --
Depreciation and amortization of property and equipment ................ 897 233
Amortization of acquired intangible broadcasting assets and other
assets ............................................................... 937 277
Amortization of program contract costs and net realizable value
adjustments .......................................................... 1,504 507
Stock-based compensation ............................................... -- --
Changes in assets and liabilities, net of effects of acquisitions and
dispositions-
(Increase) decrease in accounts receivable, net ........................ (78) 21
Increase in dividend receivable from parent ............................ -- --
Decrease (increase) in prepaid expenses and other current assets. 52 82
Increase (decrease) in accounts payable and accrued liabilities ........ 67 79
Increase in deferred state taxes ....................................... -- --
Net effect of change in deferred barter revenues and deferred
barter costs ......................................................... -- 61
Increase in subsidiary trust minority interest expense payable ......... -- --
Payments on program contracts payable ................................... (1,217) (891)
--------- ------
Net cash flows from operating activities ................................ 2,813 987
--------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Parent Preferred Securities ............................... -- --
Payment for exercise of purchase option ................................. -- --
Acquisition of property and equipment ................................... (139) (29)
Proceeds from disposal of property and equipment ........................ 18 --
--------- ------
Net cash flows from investing activities ................................ (121) (29)
--------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in due from parent ........................................... (2,686) (773)
Contributions of capital ................................................ -- --
Prepayment of excess syndicated program contract liabilities ............ -- (216)
Net proceeds from subsidiary trust securities offering .................. -- --
--------- ------
Net cash flows from financing activities ............................... (2,686) (989)
--------- ------
NET INCREASE (DECREASE) IN CASH .......................................... 6 (31)
CASH, beginning of period ................................................ 56 62
--------- ------
CASH, end of period ...................................................... $ 62 $ 31
========= ======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Contribution of capital - building ...................................... $ -- $ --
========= ======
Subsidiary trust minority interest ...................................... $ -- $ --
========= ======
Parent preferred stock dividends ........................................ $ -- $ --
========= ======
<CAPTION>
COMPANY
SEVEN MONTHS
ENDED
DECEMBER 31, COMPANY
1996 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 705 $ 1,895
Adjustments to reconcile net income to net cash flows from operat-
ing activities -
Gain on disposal of property and equipment ............................. -- --
Depreciation and amortization of property and equipment ................ 191 354
Amortization of acquired intangible broadcasting assets and other
assets ............................................................... 544 1,588
Amortization of program contract costs and net realizable value
adjustments .......................................................... 864 1,579
Stock-based compensation ............................................... -- 23
Changes in assets and liabilities, net of effects of acquisitions and
dispositions-
(Increase) decrease in accounts receivable, net ........................ (2,053) (98)
Increase in dividend receivable from parent ............................ -- (1,085)
Decrease (increase) in prepaid expenses and other current assets. (67) 53
Increase (decrease) in accounts payable and accrued liabilities ........ 636 (299)
Increase in deferred state taxes ....................................... 73 261
Net effect of change in deferred barter revenues and deferred
barter costs ......................................................... 9 39
Increase in subsidiary trust minority interest expense payable ......... -- 969
Payments on program contracts payable ................................... (242) (1,219)
--------- -----------
Net cash flows from operating activities ................................ 660 4,060
--------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Parent Preferred Securities ............................... -- (206,200)
Payment for exercise of purchase option ................................. -- (1,576)
Acquisition of property and equipment ................................... (161) (197)
Proceeds from disposal of property and equipment ........................ -- --
--------- -----------
Net cash flows from investing activities ................................ (161) (207,973)
--------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in due from parent ........................................... (496) (2,611)
Contributions of capital ................................................ -- 13,776
Prepayment of excess syndicated program contract liabilities ............ -- --
Net proceeds from subsidiary trust securities offering .................. -- 192,756
--------- -----------
Net cash flows from financing activities ............................... (496) 203,921
--------- -----------
NET INCREASE (DECREASE) IN CASH .......................................... 3 8
CASH, beginning of period ................................................ -- 3
--------- -----------
CASH, end of period ...................................................... $ 3 $ 11
========= ===========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Contribution of capital - building ...................................... $ -- $ 562
========= ===========
Subsidiary trust minority interest ...................................... $ -- $ 17,631
========= ===========
Parent preferred stock dividends ........................................ $ -- $ 19,742
========= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
- ---------------------
The accompanying consolidated financial statements include the accounts of KDSM,
Inc., Sinclair Capital (a subsidiary trust), and KDSM Licensee, Inc., which are
collectively referred to hereafter as "the Company" or "KDSM." The Company is a
television broadcaster serving the Des Moines, Iowa, area through station KDSM
on Channel 17, a Fox affiliate. This station was wholly owned and operated by
River City Broadcasting, L.P. (RCB) through its ownership in KDSM-TV, a division
of RCB (the "Predecessor") through May 31, 1996. Sinclair Broadcast Group, Inc.
(Sinclair) purchased the non-license assets of KDSM-TV from RCB on May 31, 1996,
and exercised its option to acquire the license assets of KDSM-TV from RCB on
April 22, 1997. KDSM owns all of the issued and outstanding common stock of KDSM
Licensee, Inc. and all of the common trust interests of Sinclair Capital. All
intercompany amounts are eliminated in consolidation.
The accompanying December 31, 1996 and 1997 consolidated balance sheets and
related statements of operations and cash flows for the seven-month period ended
December 31, 1996 and the year ended December 31, 1997, are presented on a new
basis of accounting. The accompanying financial statements for the year ended
December 31, 1995 and the five-month period ended May 31, 1996, are presented as
"predecessor" financial statements (see Note 9).
USE OF ESTIMATES
- ----------------
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses in the
financial statements and in the disclosures of contingent assets and
liabilities. While actual results could differ from those estimates, management
believes that actual results will not be materially different from amounts
provided in the accompanying consolidated financial statements.
FAIR VALUE OF FINANCIAL INSTRUMENTS
- -----------------------------------
Unless otherwise stated, the financial instruments in the accompanying balance
sheets approximate fair value.
PROGRAMMING
- -----------
The Company has agreements with distributors for the rights to television
programming over contract periods which generally run from one to seven years.
Contract payments are made in installments over terms that are generally shorter
than the contract period. Each contract is recorded as an asset and a liability
when the license period begins and the program is available for its first
showing. The portion of the program contracts payable within one year is
reflected as a current liability in the accompanying consolidated balance
sheets.
The rights to program materials are reflected in the accompanying consolidated
balance sheets at the lower of unamortized cost or estimated net realizable
value. Estimated net realizable values are based upon management's expectation
of future advertising revenues net of sales commissions to be generated by the
program material. Amortization of program contract costs is generally computed
under either a four year accelerated method or based on usage, whichever yields
the greater amortization for each program. Program contract costs estimated by
management to be amortized in the succeeding year are classified as current
assets. Payments of program contract liabilities are typically paid on a
scheduled basis and are not affected by adjustments for amortization or
estimated net realizable value.
F-7
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED )
BARTER ARRANGEMENTS
- -------------------
Certain program contracts provide for the exchange of advertising air time in
lieu of cash payments for the rights to such programming. These contracts are
recorded as the programs are aired at the estimated fair value of the
advertising air time given in exchange for the program rights. Network
programming is excluded from these calculations.
The Company broadcasts certain customers' advertising in exchange for equipment,
merchandise and services. The estimated fair value of the equipment, merchandise
or services received is recorded as deferred barter costs and the corresponding
obligation to broadcast advertising is recorded as deferred barter revenues. The
deferred barter costs are expensed or capitalized as they are used, consumed or
received. Deferred barter revenues are recognized as the related advertising is
aired.
OTHER ASSETS
- ------------
Other assets as of December 31, 1996 and 1997 consist of the following (in
thousands):
1996 1997
-------- ---------
Unamortized debt acquisition costs .......... $ 685 $7,757
Purchase options ............................ 3,390 --
------ ------
$4,075 $7,757
ACQUIRED INTANGIBLE BROADCASTING ASSETS
- ---------------------------------------
Acquired intangible broadcasting assets are being amortized over periods of 15
to 40 years. These amounts result from the acquisition of the broadcasting
assets of KDSM-TV by Sinclair from RCB. The Company monitors and continually
evaluates the realizability of intangible and tangible assets and the existence
of any impairment to its recoverability based on the projected undiscounted cash
flows of the respective stations.
Intangible assets, at cost, as of December 31, 1996 and 1997, consist of the
following (in thousands):
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1996 1997
------------- ---------- ----------
<S> <C> <C> <C>
Goodwill ............................... 40 years $26,806 $ 26,777
Decaying advertiser base ............... 15 years 1,452 1,452
FCC licenses ........................... 25 years -- 4,966
Network affiliations ................... 25 years 1,683 1,683
--------
29,941 34,878
Less- Accumulated amortization ......... (486) (1,468)
------- --------
$29,455 $ 33,410
======= ========
</TABLE>
ACCRUED LIABILITIES
- -------------------
Accrued liabilities consist of the following as of December 31, 1996 and 1997
(in thousands):
1996 1997
------ -------
Compensation .......... $223 $230
Other ................. 187 166
---- ----
$410 $396
==== ====
F-8
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED )
REVENUES
- --------
Broadcasting revenues are derived principally from the sale of program time and
spot announcements to local, regional and national advertisers. Advertising
revenue is recognized in the period during which the program time and spot
announcements are broadcast.
RECLASSIFICATIONS
- -----------------
Certain reclassifications have been made to the prior years' financial
statements to conform with the current year presentation.
2. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed under the straight-line method over the following
estimated useful lives:
Buildings and improvements ............. 10--35 years
Station equipment ...................... 5--10 years
Office furniture and equipment ......... 5--10 years
Leasehold improvements ................. 10--31 years
Automotive equipment ................... 3--5 years
Property and equipment consisted of the following as of December 31, 1996 and
1997 (in thousands):
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Buildings and improvements ............................... $ 95 751
Station equipment ........................................ 2,635 2,693
Office furniture and equipment ........................... 236 249
Leasehold improvements ................................... 2 34
Automotive equipment ..................................... 26 26
------ -----
2,994 3,753
Less- Accumulated depreciation and amortization .......... (191) (545)
------ -----
$2,803 $3,208
====== ======
</TABLE>
F-9
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED )
3. PROGRAM CONTRACTS PAYABLE:
Future payments required under program contracts payable as of December 31,
1997, are as follows (in thousands):
1998 ................................................... $ 1,612
1999 ................................................... 859
2000 ................................................... 288
2001 ................................................... 47
2002 ................................................... 47
--------
2,853
Less: Current portion .................................. (1,612)
--------
Long-term portion of program contracts payable ......... $ 1,241
========
Included in the current portion amounts are payments due in arrears of $542,000.
In addition, the Company has entered into noncancelable commitments for future
program rights aggregating $186,000 as of December 31, 1997.
The estimated fair value of program contract payables and noncancelable
commitments is approximately $1.9 million and $2.8 million at December 31, 1996
and 1997, respectively, based on future cash flows discounted at the Company's
current borrowing rate.
4. PREPAYMENT OF SYNDICATED PROGRAM CONTRACT LIABILITIES:
In connection with the acquisition described in Note 9, the Company prepaid
certain syndicated program contracts payable for which the underlying value of
the associated syndicated program assets was determined to be of little or no
value. During 1996, KDSM made cash payments of $216,000 relating to these
syndicated program contracts payable. The related assets had been written down
to their net realizable value prior to the prepayment.
5. RELATED PARTY TRANSACTIONS:
The Predecessor's financial statements of KDSM-TV are included in the
consolidated financial statements of RCB, Limited Partnership. RCB corporate
expenses were allocated to KDSM-TV and each of RCB's stations to cover the
salaries and expenses of senior management. Total management fees and expenses,
including allocated corporate expenses, for the year ended December 31, 1995 and
the five months ended May 31, 1996, totaled approximately $150,000 and $290,000,
respectively.
The financial statements of KDSM, Inc. and subsidiaries are included in the
consolidated financial statements of Sinclair. Sinclair corporate expenses are
allocated to KDSM and each of the Sinclair subsidiaries to cover the salaries
and expenses of senior management. Total management fees and expenses, including
allocated corporate expenses, for the seven months ended December 31, 1996 and
the year ended December 31, 1997, were approximately $146,000 and $283,000,
respectively. Management believes these amounts approximate the charges which
would have been incurred had the services been provided by independent third
parties. Sinclair also provides and receives short-term cash advances to and
from the Company through a central cash management system. The total amount due
from Sinclair was approximately $496,000 and $2.7 million as of December 31,
1996 and 1997.
In connection with the acquisition of KDSM's non-license assets by Sinclair, on
May 31, 1996, Sinclair entered into a local marketing agreement (LMA) with RCB
to provide programming services. Sinclair made specified periodic payments to
RCB in exchange for the right to program and sell advertising. During the seven
months ended December 31, 1996, Sinclair made payments of approximately $172,000
F-10
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED )
to RCB in connection with the LMA. In addition, during 1997, Sinclair made
$8,000 of payments related to the LMA with RCB before the FCC license was
transferred to KDSM (see Note 12). These payments are included in the
accompanying statement of operations as program and production expenses for the
seven months ended December 31, 1996 and year ended December 31, 1997.
6. INCOME TAXES:
No income tax provision has been included in the Predecessor's financial
statements for the year ended December 31, 1995 and the five months ended May
31, 1996, since profit and loss and the related tax attributes are deemed to be
distributed to, and reportable by, the partners of RCB on their respective
income tax returns.
A pro forma income tax provision, along with the related pro forma effect on net
income, is presented in the accompanying statement of operations. The pro forma
income taxes for the year ended December 31, 1995 and 1996 are the product of
multiplying the estimated blended federal and state statutory rate of 40% by net
income as reported in the statement of operations.
Sinclair files a consolidated federal tax return, and separate state tax returns
for each of its subsidiaries. It is Sinclair's policy to charge KDSM for its
federal income tax provision through intercompany charges, and KDSM is directly
responsible for its current state tax liabilities. The accompanying financial
statements have been prepared in accordance with the separate return method of
FASB 109, whereby the allocation of federal tax provision due to the Parent is
based on what the subsidiary's current and deferred federal tax provision would
have been had the subsidiary filed a federal income tax return outside its
consolidated group. Given that KDSM is required to reimburse Sinclair for its
federal tax provision, the federal income tax provision is recorded as an
intercompany charge and included as a reduction of the due from Parent amount in
the accompanying consolidated balance sheets as a current obligation.
Accordingly, KDSM has no federal deferred income taxes. Since KDSM is directly
responsible for its state taxes, all deferred tax assets or liabilities are
related to state income taxes. The Company had no alternative minimum tax credit
carryforwards as of December 31, 1996 and 1997.
The allocation of consolidated income taxes consists of the following for the
seven months ended December 31, 1996 and the year ended December 31, 1997 (in
thousands):
1996 1997
------ ---------
Current
Federal ............... $412 $1,123
State ................. -- --
---- ------
412 1,123
---- ------
Deferred
Federal ............... -- --
State ................. 73 261
---- ------
$485 $1,384
---- ------
F-11
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED )
The following table summarizes the tax effects of the significant types of
temporary differences between financial reporting basis and tax basis which were
generated during the seven months ended December 31, 1996 and the year ended
December 31, 1997 (in thousands):
1996 1997
---------- -----------
Net operating losses .............. $ 40 $ 8,187
Film amortization ................. (37) 69
Fixed asset depreciation .......... (278) (437)
Intangible amortization ........... (261) (1,031)
Parent preferred stock ............ -- (8,726)
Other ............................. 51 51
------ --------
$ (485) $ (1,887)
====== ========
The deferred state tax liability represents the state tax benefits related to
the temporary differences listed above. The estimated blended federal and state
statutory rate was 40.0% and 41.9% for the seven months ended December 31, 1996
and the year ended December 31, 1997, respectively.
7. EMPLOYEE BENEFITS:
Substantially all employees of KDSM, as of May 31, 1996, were covered under a
qualified profit-sharing plan administered by RCB, which included a thrift
provision qualifying under Section 401(k) of the Internal Revenue Code. The
provision allowed the participants to contribute up to 12% of their compensation
in the plan year, subject to statutory limitations.
As of May 31, 1996, KDSM participates in Sinclair's retirement savings plan
under Section 401(k) of the Internal Revenue Code. This plan covers
substantially all employees of the Company who meet minimum age or service
requirements and allows participants to defer a portion of their annual
compensation on a pre-tax basis. Contributions from the Company are made on a
monthly basis in an amount equal to 50% of the participating employee
contributions, to the extent such contributions do not exceed 6% of the
employees' eligible compensation during the month.
8. COMMITMENTS AND CONTINGENCIES:
LITIGATION
- ----------
The Company is involved in certain litigation matters arising in the normal
course of business. In the opinion of management, these matters are not
significant and will not have a material adverse effect on the Company's
financial position.
F-12
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED )
OPERATING LEASES
- ----------------
The Company leases certain property and equipment under noncancellable operating
lease agreements. Rental expense charged to income for the year ended December
31, 1995, the five months ended May 31, 1996, the seven months ended December
31, 1996 and the year ended December 31, 1997, was approximately $81,000,
$5,000, $7,000 and 25,000, respectively. Future minimum lease payments under
noncancellable operating leases are approximately (in thousands):
1998 ........................ $ 24
1999 ........................ 16
2000 ........................ 14
2001 ........................ 10
2002 ........................ 10
2003 and thereafter ......... 333
----
$407
====
9. ACQUISITION OF BUSINESS:
On May 31, 1996, Sinclair acquired all of the non-license assets of KDSM-TV from
RCB for approximately $36.8 million. In connection with this purchase, the
Company purchased an option to acquire the license assets of KDSM for
approximately $3.4 million, with an option exercise price of $1.6 million and
entered into an LMA with RCB as described in Note 5. None of the current assets
of KDSM were acquired. The acquisition was accounted for under the purchase
method of accounting whereby the purchase price was allocated to property and
equipment, acquired intangible broadcasting assets, other intangible assets and
purchase options of $2.8 million, $3.1 million, $27.5 million and $3.4 million,
respectively.
10. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY KDSM SENIOR DEBENTURES:
In March 1997, the Company completed a private placement of $200 million
aggregate liquidation value of 11 5/8% High Yield Trust Offered Preferred
Securities (the "Trust Preferred Securities") of Sinclair Capital, a subsidiary
trust of the Company. The Trust Preferred Securities were issued March 12, 1997,
mature March 15, 2009, are mandatorily redeemable at maturity, and provide for
quarterly distributions to be paid in arrears beginning June 15, 1997. The Trust
Preferred Securities were sold to "qualified institutional buyers" (as defined
in Rule 144A under the Securities Act of 1933, as amended) and a limited number
of institutional "accredited investors" and the offering was exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"), pursuant to Section # 4(2) of the Securities Act and Rule 144A
thereunder. The Company utilized the proceeds of the private placement combined
with other capital contributions to acquire $206.2 million of 12 5/8% Series C
Preferred Stock (the "Parent Preferred Securities") of Sinclair.
Pursuant to a Registration Rights Agreement entered into in connection with the
private placement of the Trust Preferred Securities, Sinclair Capital offered
holders of the Trust Preferred Securities the right to exchange the Trust
Preferred Securities with new Trust Preferred Securities having the same terms
as the existing securities, except that the exchange of the new Trust Preferred
Securities for the existing Trust Preferred Securities has been registered under
the Securities Act. On May 2, 1997, the Company filed a registration statement
on Form S-4 with the Securities and Exchange Commission for the purpose of
registering the new Trust Preferred Securities to be offered in exchange for the
aforementioned existing Trust Preferred Securities issued by the Company in
March 1997 (the "Exchange Offer"). The Company's Exchange Offer was closed and
became effective on August 11, 1997, at which time all of the existing Trust
Preferred Securities were exchanged for new Trust Preferred Securities.
F-13
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 - (CONTINUED )
11. PARENT PREFERRED SECURITIES:
In March 1997, the Company utilized the proceeds of the Trust Preferred
Securities combined with other capital contributions to acquire $206.2 million
of 12 5/8% Parent Preferred Securities, issued by Sinclair. The Parent Preferred
Securities were issued March 12, 1997, mature March 15, 2009, are mandatorily
redeemable at maturity, and provide for quarterly distributions to be paid in
arrears beginning June 15, 1997.
Pursuant to a Registration Rights Agreement entered into in connection with the
private placement of the Trust Preferred Securities, Sinclair was obligated to
exchange the existing Parent Preferred Securities (the "Old Parent Preferred")
with New Parent Preferred Securities (the "New Parent Preferred") registered
under the Securities Act. The terms of the New Parent Preferred are identical in
all material respects to those of the Old Parent Preferred. A registration
statement was filed on May 2, 1997 with respect to registering the New Parent
Preferred, and was declared effective on July 14, 1997 and the exchange has been
completed.
12. EXERCISE OF OPTION TO ACQUIRE LICENSE ASSETS:
During 1997, the FCC granted approval for transfer of the FCC license of KDSM
from RCB to the Company. The Company exercised its option to acquire the License
Assets of KDSM from RCB for an option exercise payment of $1.6 million.
F-14
<PAGE>
KDSM, INC. AND SUBSIDIARIES
INDEX TO SCHEDULES
PAGE
-------
Schedule II -- Valuation and Qualifying Accounts .......... S -- 3
All schedules except those listed above are omitted as not applicable or not
required or the required information is included in the consolidated financial
statements or in the notes thereto.
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated balance sheets, statements of operations, changes in stockholder's
equity and cash flows of KDSM, Inc. and Subsidiaries included in this Form 10-K
and have issued our report thereon dated March 10, 1998. Our audit was made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the accompanying index is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commissions rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing procedures applied
in the audit of the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to be set forth
therein in relation to the basic financial statements taken as a whole.
/s/ Arthur Andersen
Baltimore, Maryland,
March 10, 1998
S-2
<PAGE>
SCHEDULE II
KDSM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------------------ ------------ ------------ ------------ ----------
<S> <C> <C> <C> <C>
Predecessor 1995
Allowance for doubtful accounts ......... $23 $55 $66 $12
Predecessor 1996
Allowance for doubtful accounts ......... 12 38 -- 50
Company 1996
Allowance for doubtful accounts ......... -- 39 -- 39
Company 1997
Allowance for doubtful accounts ......... 39 39 48 30
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------------ ---------------------------------------------------------------------------------------------
<S> <C>
3.1(a) Amended and Restated Trust Agreement, dated as of March 12, 1997 among KDSM, Inc.,
First Union National Bank of Maryland, First Union Bank of Delaware, David D. Smith and
David B. Amy
3.2(a) Articles of Incorporation of KDSM, Inc., as of April 22, 1996
3.3(a) By-Laws of KDSM, Inc.
4.1(a) Indenture, dated as of March 12, 1997 among KDSM, Inc., Sinclair Broadcast Group, Inc.
and First Union National Bank of Maryland
4.2(a) Registration Rights Agreement, dated as of March 5, 1997 among Sinclair Broadcast Group,
Inc., KDSM, Inc., Sinclair Capital, Smith Barney Inc. and Chase Securities Inc.
4.3(a) Pledge and Security Agreement dated as of March 12, 1997 between KDSM, Inc. and First
Union National Bank of Maryland
4.4(a) Form of 11 5/8% High Yield Trust Offered Preferred Securities of Sinclair Capital
4.5(a) Form of 11 5/8% Senior Debentures due 2009 of KDSM, Inc. (included in Exhibit 4.1)
4.6(a) Form of Parent Guarantee Agreement between Sinclair Broadcast Group, Inc. and First
Union National Bank of Maryland
12.1 Calculation of Ratio of Earnings to Fixed Charges of Sinclair Broadcast Group, Inc. (Includ-
ed in "Historical and Pro Forma Ratio of Earnings to Fixed Charges" in the Registration
Statement)
24 Powers of Attorney (Included in the signature pages to the Report)
27 Financial Data Schedule of KDSM, Inc.
</TABLE>
- ----------
(a) Incorporated by reference from the Company's Registration Statement on Form
S-4, No. 333-26427.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF OPERATIONS OF KDSM, INC
FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<CIK> 0001039583
<NAME> KDSM, INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 11
<SECURITIES> 0
<RECEIVABLES> 2,180
<ALLOWANCES> 30
<INVENTORY> 0
<CURRENT-ASSETS> 4,367
<PP&E> 3,753
<DEPRECIATION> 545
<TOTAL-ASSETS> 258,540
<CURRENT-LIABILITIES> 3,216
<BONDS> 0
200,000
0
<COMMON> 0
<OTHER-SE> 53,749
<TOTAL-LIABILITY-AND-EQUITY> 258,540
<SALES> 0
<TOTAL-REVENUES> 8,538
<CGS> 0
<TOTAL-COSTS> 7,485
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (2,226)
<INCOME-PRETAX> 3,279
<INCOME-TAX> 1,384
<INCOME-CONTINUING> 1,895
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,895
<EPS-PRIMARY> 18,950
<EPS-DILUTED> 18.950
</TABLE>
