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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
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER: 333-26427-01
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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)
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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)
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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 files 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 25, 1999, 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 collectively 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 five 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 programming from UPN including "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:
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YEAR ENDED DECEMBER 31,
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1996 1997 1998
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(DOLLARS IN THOUSANDS)
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Market revenue ................................. $ 41,988 $39,944 $ 44,699
Annual market revenue growth/(decline) ......... 10.2% (4.9%) 11.9%
Station rank within market ..................... 3 4 3
Television homes ............................... 373,630 383,000 388,000
KDSM audience share ............................ 8.3% 7.3% 7.3%
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KDSM had station broadcast revenues of $8.4 million and broadcast cash flow
of $3.7 million in 1998.
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 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 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
Preferred Securities and the Common Securities, representing undivided
beneficial interests in the assets of the Trust, (ii) purchasing the KDSM Senior
Debentures with the proceeds from sale of the Preferred
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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.
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 (as defined under "Description of
the Preferred Securities--Registrar and Transfer Agent"), the registering of
transfers of the Preferred Securities and the Common Securities and preparing
and filing on behalf of the Trust all United States 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
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 designated market area ("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 on its Fox station
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 57 stations in 36 DMAs reaching
approximately 26% of U.S. television households, 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.
Community Involvement
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 their 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.
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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.
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 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 and are subject to renewal upon application to the FCC. During certain
periods when renewal applications are pending, petitions to deny license
renewals can be filed by interested parties, including members of the public.
The FCC will generally grant a renewal application if it 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
license is granted in the vast majority of cases even when petitions to deny are
filed, there can be no assurance that the licenses of such stations will be
renewed.
Ownership Matters
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GENERAL
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, appropriate applications 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.
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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 the 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.
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 a pending 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. The Company cannot predict the outcome
of this proceeding or how it will affect the business.
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 equity interests combined with an
attributable interest in a 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 Company cannot
predict the outcome of this rulemaking.
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
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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. As a result of these
provisions, the licenses granted to Subsidiaries of the Company by the FCC could
be revoked if, among other restrictions imposed by the FCC, more than 25% of the
Company's stock were directly or indirectly owned or voted by Aliens.
TELEVISION
National Ownership Rule. Pursuant to the 1996 Act 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. KDSM is a UHF
station.
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 TV 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.
The Company cannot predict the outcome of the proceeding in which such changes
are being considered.
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 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
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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 the
implementation of this policy and 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 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. Waiver requests involving the common ownership of more
than two same service radio stations in the same market generally are granted,
but 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 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.
Expansion of Sinclair'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 or more of
the markets in which the Sinclair's stations are located, more specifically to
the extent that any of the Sinclair's competitors may have greater resources and
thereby be in a superior position to take advantage of such changes.
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Must-Carry/Retransmission Consent
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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 non-Fox affiliated stations
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. Sinclair's stations affiliated with Fox (including KDSM)
granted Fox their proxies to negotiate retransmission consent with the cable
systems. The agreements negotiated by Fox extend only through May of 1999.
Therefore, subject to Fox's approval, Sinclair will need to negotiate a
retransmission consent agreement for KDSM to attain carriage on the relevant
cable system 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.
The FCC has initiated a rulemaking proceeding to consider whether to apply
must-carry rules to require cable companies to carry both the analog and digital
signals of local broadcasters during the DTV transition period between 2002 and
2006 when television stations will be broadcasting both signals. If the FCC does
not require DTV must-carry, cable customers in the Company's broadcast market
may not receive the station's digital signal, which could have an adverse affect
on the Company.
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 duplicating network programming carried
on distant signals.
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 recently examined
legislation proposals which may eliminate or severely restrict the advertising
of beer and wine. Although no prediction can be made as to whether any or all of
the present 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.
The Communications Act and FCC rules also place restrictions on 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)
8
<PAGE>
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. Certain of the FCC's rules that required licensees to
develop and implement affirmative action programs designed to promote equal
employment opportunities and the annual submission of reports to the FCC with
respect to those matters were found unconstitutional by the U.S. Court of
Appeals. The FCC has initiated a rulemaking to revise these rules.
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 FCC has adopted rules that require generally that
(i) 100% of all new programming 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 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.
9
<PAGE>
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.
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
and further subject to the requirement that broadcasters pay a fee of 5% of
gross revenues on all DTV subscription services.
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, that affiliates of these networks in markets 11 through 30 begin
digital broadcasting by November 1999 and that all other stations begin digital
broadcasting by May 1, 2002. KDSM is required to commence digital operations by
May 1, 2002. Applications for such facilities are required to be filed by
November 1, 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 direct-to-home broadcast satellite television ("DBS")) that carries at
least one digital channel from each of the local stations in that market; or
(iii) 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 initiated separate proceedings to consider the surrender of
existing television channels and how these frequencies will be used after they
are eventually recovered from broadcasters. Additionally, the FCC has initiated
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. While the 1998 orders
of the FCC present current UHF stations with some options to overcome this
disparity, it is unknown whether the Company will benefit from such options.
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 will be able to increase revenue to offset such
costs. 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 ruled that broadcasters are subject
to the requirement to pay a fee of 5% of gross revenues on all subscription
services. The FCC is also considering imposing new public interest requirements
on television licensees in exchange for their receipt of DTV channels. In
addition, Congress has held hearings on broadcasters' plans for the use of their
digital spectrum.A governmental commission was appointed to consider
10
<PAGE>
whether additional public service obligations should be imposed on television
broadcasters. The commission issued its report in December 1998 making several
non-binding recommendations, including that broadcasters voluntarily provide
five minutes of free air time per evening to political candidates for thirty
days prior to an election. The Company cannot predict the impact of such
recommendations or 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 station and result in the loss of
audience share and advertising revenues for the Company's broadcast station. 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 property 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, the Internet 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 stations in its DMAs 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.
11
<PAGE>
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's television station is
located in a highly competitive DMA. In addition, the Company's DMA may be
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, cable channels, 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.
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's UHF broadcast station has suffered a competitive disadvantage in
comparison to stations with VHF broadcast frequencies. 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, DBS
entertainment services and multichannel multipoint distribution services
("MMDS"). DBS and cable operators in particular are competing more aggressively
than in the past for advertising revenues in our TV station's market. This
competition could adversely affect our station's revenues and performance in the
future. 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"
12
<PAGE>
programming. The 1996 Act permits telephone companies to provide video
distribution services via 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 what other video
technologies might be considered in the future, or the effect that technological
and regulatory changes will have on the broadcast television industry and on the
future profitability and value of a particular broadcast television station.
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 ruled that broadcasters are required to pay a fee of 5% of gross
revenues in all subscription services. 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. While DTV technology is currently
available in some of the top ten viewing markets, 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.
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,
its network affiliation and its local program acceptance. In addition, the
Company believes that it benefits from the operation of multiple broadcast
properties by Sinclair, affording it certain nonquantifiable economies of scale
and competitive advantages in the purchase of programming.
EMPLOYEES
As of December 31, 1998, the Company had approximately 47 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.
13
<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 market. The following table generally describes the Company's
principal owned and leased real property in the Des Moines market:
<TABLE>
<CAPTION>
Television Properties Type of Facility and Use Owned or Leased(a) Approximate Size (Sq. Feet)
- ----------------------- ----------------------------- ----------------------------- ----------------------------
<S> <C> <C> <C>
Des Moines Market 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 1998.
14
<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,
1994, 1995, 1996, 1997 and 1998 have been derived from the Company's audited
Consolidated Financial Statements. The Consolidated Financial Statements for the
years ended December 31, 1996, 1997 and 1998 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.
15
<PAGE>
<TABLE>
<CAPTION>
THE THE
PREDECESSOR COMBINED (A) COMPANY COMPANY
----------------------- -------------- ------------ ------------
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
----------- ----------- -------------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net broadcast revenues (b) ............................. $ 6,848 $ 7,478 $ 8,218 $ 8,140 $ 8,363
Barter revenues ........................................ -- -- 204 398 552
-------- -------- -------- ---------- ---------
Total revenues ......................................... 6,848 7,478 8,422 8,538 8,915
-------- -------- -------- ---------- ---------
Operating costs (c) .................................... 3,347 3,489 3,773 3,658 3,742
Expenses from barter arrangements ...................... -- -- 225 283 377
Depreciation and amortization (d) ...................... 2,979 3,338 2,616 3,521 4,349
Stock-based compensation ............................... -- -- -- 23 23
-------- -------- -------- ---------- ---------
Broadcast operating income ............................. 522 651 1,808 1,053 424
Parent preferred stock dividend income ................. -- -- -- 20,826 26,033
Subsidiary trust minority interest expense (e) ......... -- -- -- (18,600) (23,250)
-------- -------- -------- ---------- ---------
Interest and other income .............................. -- 12 -- -- 239
-------- -------- -------- ---------- ---------
Income before income taxes ............................. $ 522 $ 663 $ 1,808 $ 3,279 $ 3,446
======== ======== ======== ========== =========
Net income ............................................. $ 522 $ 663 $ 1,323 $ 1,895 $ 729
======== ======== ======== ========== =========
Net income available to common
shareholders .......................................... $ 522 $ 663 $ 1,323 $ 1,895 $ 729
======== ======== ======== ========== =========
OTHER DATA:
Broadcast cash flow (f) ................................ $ 2,908 $ 2,922 $ 3,727 $ 3,661 $ 3,693
Broadcast cash flow margin (g) ......................... 42.5% 39.1% 45.4% 45.0% 44.2%
Adjusted EBITDA (h) .................................... $ 2,551 $ 2,772 $ 3,291 $ 3,378 $ 3,423
Adjusted EBITDA margin (g) ............................. 37.3% 37.1% 40.0% 41.5% 40.9%
Program contract payments .............................. $ 950 $ 1,217 $ 1,133 $ 1,219 $ 1,373
Corporate overhead expense ............................. 357 150 436 283 270
Capital expenditures ................................... 140 139 190 197 235
Cash flows from operating activities ................... 2,679 2,813 1,647 4,060 4,210
Cash flows from investing activities ................... (140) (121) (190) (207,973) (235)
Cash flows from financing activities ................... (2,512) (2,686) (1,485) 203,921 (3,979)
BALANCE SHEET DATA:
Cash and cash equivalents .............................. $ 56 $ 62 $ 3 $ 11 $ 7
Total assets ........................................... 9,688 8,344 40,674 258,540 259,519
HYTOPS (i) ............................................. -- -- -- 200,000 200,000
Total equity of partnership 1994 and 1995, total
stockholders' equity 1996 to 1998 ..................... 7,069 5,046 37,516 53,749 54,478
</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).
(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
16
<PAGE>
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 revenues from local advertisers have continued to
trend upward and revenues from national advertisers have continued to trend
downward when measured as a percentage of total broadcast revenue. The Company
believes this trend is primarily resulting from an increase in the number of
media outlets providing national advertisers a means by which to advertise their
goods and services. The Company's efforts to mitigate this trend include
continuing its efforts to increase local revenues and the development of
innovative marketing strategies to sell traditional and non-traditional services
to 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 station promotional costs.
Amortization and depreciation of costs associated with the acquisition of the
station are also 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,
-----------------------------------------------------------------------------
1996 (A) 1997 1998
----------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Local/regional advertising ......... $ 5,790 61.3% $ 6,132 65.6% $ 6,618 69.2%
National advertising ............... 3,468 36.7% 3,146 33.7% 2,769 29.0%
Network compensation ............... -- 0.0% -- 0.0% 53 0.5%
Political advertising .............. 146 1.6% -- 0.0% 34 0.4%
Production ......................... 39 0.4% 66 0.7% 89 0.9%
-------- ----- -------- ----- -------- -----
Broadcast revenues ................. 9,443 100.0% 9,344 100.0% 9,563 100.0%
===== ======== ===== ======== =====
Less: agency commissions ........... (1,225) (1,204) (1,200)
-------- -------- --------
Broadcast revenues, net ............ 8,218 8,140 8,363
Barter revenues .................... 204 398 552
-------- -------- --------
Total revenues ..................... $ 8,422 $ 8,538 $ 8,915
======== ======== ========
</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, 1996 of KDSM, Inc. and subsidiaries (the
Company).
17
<PAGE>
The Company's primary types of programming and their approximate
percentages of 1998 net broadcast revenues were syndicated programming (56.6%),
network programming (20.6%), sports programming (14.3%), paid programming (4.7%)
and children's programming (3.8%). Similarly, the Company's six largest
categories of advertising and their approximate percentages of 1998 net
broadcast revenues were automotive (21%), restaurants (11%), food (10%),
services (9%), retail/department stores (8%) and soft drinks (7%). No other
advertising category accounted for more than 7% of the Company's net broadcast
revenues in 1998. No individual advertiser accounted for more than 5% of the
station's net broadcast revenues in 1998.
The following table sets forth certain operating data of the Company for
the years ended December 31, 1996, 1997 and 1998. For definitions of items, see
footnotes on pages 19 and 20 of this document.
OPERATING DATA
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1996 (A) 1997 1998
---------- ------------ ------------
<S> <C> <C> <C>
Net broadcast revenues (b) ................................... $ 8,218 $ 8,140 $ 8,363
Barter revenues .............................................. 204 398 552
-------- ---------- ---------
Total revenues ............................................... 8,422 8,538 8,915
-------- ---------- ---------
Operating costs (c) .......................................... 3,773 3,658 3,742
Expenses from barter arrangements ............................ 225 283 377
Depreciation and amortization (d) ............................ 2,616 3,521 4,349
Stock-based compensation ..................................... -- 23 23
-------- ---------- ---------
Broadcast operating income ................................... 1,808 1,053 424
Parent preferred stock dividend income ....................... -- 20,826 26,033
Subsidiary trust minority interest expense (e) ............... -- (18,600) (23,250)
-------- ---------- ---------
Interest and other income .................................... -- -- 239
-------- ---------- ---------
Income before income taxes ................................... $ 1,808 $ 3,279 $ 3,446
-------- ---------- ---------
Net income ................................................... $ 1,323 $ 1,895 $ 729
Basic and diluted net income available to common shareholders. $ 1,323 $ 1,895 $ 729
======== ========== =========
BROADCAST CASH FLOW (BCF)
DATA:
BCF (f) ..................................................... $ 3,727 $ 3,661 $ 3,693
BCF margin (g) .............................................. 45.4% 45.0% 44.2%
OTHER DATA:
Adjusted EBITDA (h) ......................................... $ 3,291 $ 3,378 $ 3,423
Adjusted EBITDA margin (g) .................................. 40.0% 41.5% 40.9%
Program contract payments ................................... $ 1,133 $ 1,219 $ 1,373
Corporate overhead expense .................................. 436 283 270
Capital expenditures ........................................ 190 197 235
Cash flows from operating activities ........................ 1,647 4,060 4,210
Cash flows from investing activities ........................ (190) (207,973) (235)
Cash flows from financing activities ........................ (1,485) 203,921 (3,979)
</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, 1996 of KDSM,
Inc. and subsidiaries (the Company).
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1998 AND 1997
Total revenues increased to $8.9 million for the year ended December 31,
1998 from $8.5 million for the year ended December 31, 1997, or 4.7%. Excluding
the effects of non-cash barter transactions, net broadcast revenues for the year
ended December 31, 1998 increased by 2.7% when compared to the year ended
December 31, 1997. When comparing the year ended December 31, 1998 to the year
ended
18
<PAGE>
December 31, 1997, revenues from local advertisers increased approximately
$486,000 or 7.9% and revenues from national advertisers decreased approximately
$377,000 or 12.0%. The Company's decrease in national advertising was mitigated
by an offsetting increase in local advertising revenue. The decrease in national
revenue is a trend that the Company believes is resulting from an increase in
the number of media outlets providing national advertisers a means by which to
advertise their goods and services.
Station operating costs for the year ended December 31, 1998 remained
consistent compared to the year ended December 31, 1997.
Broadcast operating income decreased to $424,000 for the twelve months
ended December 31, 1998 from $1.1 million for the twelve months ended December
31, 1997, or 61.5%. The decrease in broadcast operating income for the year
ended December 31, 1998 as compared to the year ended December 31, 1997 was
primarily attributable to increases in amortization and selling general and
administrative expenses partially offset by an increase in total revenues.
Parent preferred stock dividend income of $26.0 million for the year ended
December 31, 1998 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 $23.3
million for the year ended December 31, 1998 is related to the private placement
of the subsidiary trust preferred securities (the "HYTOPS"). 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 $2.7 million for the year ended
December 31, 1998 from $1.4 million for the year ended December 31, 1997. The
increase for the year ended December 31, 1998 as compared to the combined twelve
months ended December 31, 1997 is attributable to deferred tax liabilities
associated with the HYTOPS. The Company's effective tax rate for the year ended
December 31, 1998 was 78.8% as compared to 42.2% for the year ended December 31,
1997. The increase in the Company's effective tax rate for 1998 primarily
resulted from the deferred tax liability associated with the HYTOPS.
Deferred state tax liability increased to $846,000 as of December 31, 1998
from $334,000 as of December 31, 1997. The increase in the Company's deferred
tax liability as of December 31, 1998 as compared to December 31, 1997 is
primarily due to pre-tax income for the year ended December 31, 1998. 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, 1998 was $729,000 compared to
net income of $1.9 million for the year ended December 31, 1997.
Adjusted EBITDA and Broadcast Cash Flow for the year ended December 31,
1998 remained consistent compared to the year ended December 31, 1997.
The Company's Broadcast cash flow margin decreased to 44.2% for the year
ended December 31, 1998 from 45.0% for the year ended December 31, 1997. The
decrease in Broadcast cash flow margins for the year ended December 31, 1998 as
compared to the year ended December 31, 1997 primarily resulted from decreases
in national revenues as noted above combined with increases in program contract
payments.
The Company's Adjusted EBITDA margin decreased to 40.9% for the year ended
December 31, 1998 from 41.5% for the year ended December 31, 1997. The decrease
in Adjusted EBITDA margin for the year ended December 31, 1998 as compared to
the year ended December 31, 1997 primarily resulted from decreases in national
revenues as noted above combined with increases in program contract payments.
COMBINED PERIODS DECEMBER 31, 1997 AND YEAR ENDED 1996
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
19
<PAGE>
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
9.3%. 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 the HYTOPS 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 private placement
of 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.
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.
20
<PAGE>
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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Company had cash balances of approximately
$7,000 and working capital of approximately $768,000. 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.
The Company does not anticipate capital expenditures in the coming year to
exceed historical capital expenditures, which were approximately $235,000 in
1998. 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.
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. In
addition, revenues from political advertising tend to be higher in even numbered
years.
YEAR 2000 COMPLIANCE
The Company has commenced a process to assure Year 2000 compliance of all
hardware, software, broadcast equipment and ancillary equipment that are date
dependent. The process involves four phases:
Phase I - Inventory and Data Collection. This phase involves an
identification of all items that are date dependent. The Company commenced this
phase in the third quarter of 1998, and Management estimates it has completed
approximately 50% of this phase as of the date hereof. The Company expects to
complete this phase by the end of the second quarter of 1999.
Phase II - Compliance Requests. This phase involves requests to information
technology systems vendors for verification that the systems identified in Phase
I are Year 2000 compliant. The Company will identify and begin to replace items
that cannot be updated or certified as compliant. Sinclair has completed the
compliance request phase of its plan as of the date hereof. In addition, the
Company has verified that its accounting, traffic, payroll, and local and wide
area network hardware and software systems are compliant. In addition, the
Company is currently in the process of ascertaining that all of its personal
computers and PC applications are compliant. The Company is currently reviewing
its news-room systems, building control systems, security systems and other
miscellaneous systems. The Company expects to complete this phase by the end of
the second quarter of 1999.
Phase III - Test, Fix and Verify. This phase involves testing all items
that are date dependent and upgrading all non-compliant devices. The Company
expects to complete this phase during the first, second and third quarters of
1999.
Phase IV - Final Testing, New Item Compliance. This phase involves review
of all inventories for compliance and retesting as necessary. During this phase,
all new equipment will be tested for compliance. The Company expects to complete
this phase by the end of the third quarter of 1999.
21
<PAGE>
The Company has developed a contingency/emergency plan to address Year 2000
worst case scenarios. The contingency plan includes, but is not limited to,
addressing (i) regional power facilities, (ii) interruption of satellite
delivered programming, (iii) replacement or repair of equipment not discovered
or fixed during the year 2000 compliance process and (iv) local security
measures that may become necessary relating to the Company's properties. The
contingency plan involves obtaining alternative sources if existing sources of
these goods and services are not available. Although the contingency plan is
designed to reduce the impact of disruptions from these sources, there is no
assurance that the plan will avoid material disruptions in the event one or more
of these events occurs.
To date, the Company believes that its major systems are Year 2000
compliant. This substantial compliance has been achieved without the need to
acquire new hardware, software or systems other than in the ordinary course of
replacing such systems. The Company is not aware of any non-compliance that
would be material to repair or replace or that would have a material effect on
the Company's business if compliance were not achieved. The Company does not
believe that non-compliance in any systems that have not yet been reviewed would
result in material costs or disruption. Neither is the Company aware of any
non-compliance by its customers or suppliers that would have a material impact
on Sinclair's business. Nevertheless, there can be no assurance that
unanticipated non-compliance will not occur, and such non-compliance could
require material costs to repair or could cause material disruptions if not
repaired.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISK
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, certain key employees and persons expected to become
executive officers, directors or key employees.
<TABLE>
<CAPTION>
NAME AGE TITLE
- ------------------------------- ----- -----------------------
<S> <C> <C>
David D. Smith ................ 48 President and Director
David B. Amy .................. 46 Secretary and Director
Dr. David C. McCarus .......... 47 Director
</TABLE>
Members of the Board of Directors are elected for one-year terms and until
their successors are duly elected and qualified. Executive officers are
appointed by the Board of Directors annually to serve for one-year terms and
until their successors are duly appointed and qualified.
David D. Smith has served as President since April of 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, Pittsburgh, Pennsylvania, from 1984, and
assumed the financial and engineering responsibility for Sinclair, including the
construction of WTTE, Columbus, Ohio, 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
served as Chief Financial Officer ("CFO") of Sinclair Broadcast Group, Inc.
since October of 1994 and as Secretary of Sinclair Communications, Inc., the
Sinclair 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 fourteen years of broadcast experience, having
joined Sinclair as a business manager for WCWB in Pittsburgh. Mr. Amy received
an MBA degree from the University of Pittsburgh in 1981.
Dr. David C. McCarus has served as Director of the Company since February
9, 1999. Dr. McCarus is Board Certified in Obstetrics and Gynecology and has
been in private practice since 1983. Dr. McCarus has served on various
committees and medical staff for the Greater Baltimore Medical Center. He
currently serves as a member of the Quality Assurance Committee of Aetna
USHealthcare and is an active member of the St. Joseph Medical Center staff. He
also serves as the Head of the Division of Gynecology for MedTrend Health
Systems, Inc. and Towson Surgery Center, located in Maryland. Dr. McCarus
received his M.D. Degree from the West Virginia University School of Medicine
and completed his residency training at the Greater Baltimore Medical Center.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation paid by Sinclair for services rendered in all capacities
during the year ended December 31, 1998 by the President and the other officers
of the Company who received total annual salary and bonus of $100,000 or more in
1998 (the "Named Executive Officers"):
23
<PAGE>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND ------------------------------------ SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (A) OPTIONS GRANTED (#) COMPENSATION (B)
- ------------------------ ------ ------------- ----------- ----------------------- -----------------
<S> <C> <C> <C> <C> <C>
David D. Smith ......... 1998 $1,290,000 $502,526 -- $ 6,515
President ............. 1997 1,354,490 98,224 -- 6,306
1996 767,308 317,913 -- 6,748
David B. Amy ........... 1998 200,000 75,000 135,000 11,136
Secretary ............. 1997 189,000 50,000 25,000 10,140
1996 173,582 31,000 -- 7,766
</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
We have set forth below certain information concerning the grant and
exercise of options to purchase Sinclair Class A Common Stock during 1998 to
each of the Named Executive Officers.
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO
UNDERLYING EMPLOYEES IN
NAME OPTIONS GRANTED FISCAL YEAR
- ------------------------ ----------------- -------------------
<S> <C> <C>
David D. Smith ......... -- --
David B. Amy ........... 135,000 2.5%
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
FOR OPTION TERM (A)
EXERCISE EXPIRATION ---------------------------------------
NAME PRICE PER SHARE DATE 0% 5% 10%
- ------------------------ ----------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
David D. Smith ......... -- -- -- -- --
David B. Amy ........... $ 24.20 2/16/08 $259,875 $2,477,908 $5,880,805
</TABLE>
- ----------
Aggregated Option Exercises in Last Fiscal Year and December 31, 1998 Option
Values
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS "IN-THE-MONEY" OPTIONS
AT DECEMBER 31, 1998 AT DECEMBER 31, 1998
SHARES ACQUIRED VALUE ----------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------------- --------- ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
David D. Smith ......... -- $-- -- -- -- --
David B. Amy ........... -- -- 37,500 162,500 $237,375 $47,570
</TABLE>
(a) An "In-the-Money" option is an option for which the option price of the
underlying stock is less than the market price at December 31, 1998, and all
of the value shown reflects stock price appreciation since the granting of
the option.
EMPLOYMENT AGREEMENTS
Sinclair entered into an employment agreement with David D. Smith,
President and Chief Executive Officer of the Company, on June 12, 1995, which
expired on June 12, 1998. Sinclair has not entered into a new agreement with Mr.
Smith and does not currently anticipate entering into a new agreement. As of
January 1, 1999, David Smith receives a base salary of approximately $1,290,000.
In September 1998, Sinclair entered into an amended employment agreement
with David B. Amy, Vice President and Chief Financial Officer of Sinclair and
Secretary of the Company. The agreement does not have any specified termination
date, and Sinclair has the right to terminate the employment of Mr. Amy at any
time, with or without cause, subject to the payment of severance payments for
termination without cause. The severance payment due upon termination without
cause is equal to one
24
<PAGE>
month's base salary in effect at the time of termination times the number of
years of continuous employment by Sinclair or its predecessor. During each
year, Mr. Amy will be entitled to receive compensation as determined by the
Compensation Committee of Sinclair in consultation with the Chief Executive
Officer of Sinclair. Mr. Amy's compensation may include a bonus in the sole
discretion of the Compensation Committee of Sinclair. The agreement also
contains non-competition and confidentiality restrictions on Mr. Amy.
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 and David Amy, both of whom are executive
officers and directors of the Company, is a director and/or executive officer of
Sinclair.
During 1998, 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.
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 25, 1999, 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 following financial statements required by this item are submitted in a
separate section beginning on page F-1 of this report.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Index to Financial Statements ...................................................... F-1
Report of Independent Public Accountants ........................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998 ....................... F-3
Consolidated Statements of Operations for the Five Months Ended May 31, 1996, the
Seven Months Ended December 31, 1996 and the Years Ended December 31, 1997
and 1998 ......................................................................... F-4
Consolidated Statements of Changes in Undistributed Earnings for 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 Years Ended
December 31, 1997 and 1998 ....................................................... F-5
Consolidated Statements of Cash Flows for the Five Months Ended May 31, 1996, the
Seven Months Ended December 31, 1996 and the Years Ended December 31, 1997
and 1998 ......................................................................... F-6
Notes to Consolidated Financial Statements ......................................... F-7
</TABLE>
(a) (2) Index to Financial Statements Schedules
The following financial statements schedules required by this item are
submitted on pages S-1 through S-3 of this Report.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Index to Schedules ........................................ S-1
Report of Independent Public Accountants .................. S-2
Schedule II -- Valuation and Qualifying Accounts .......... S-3
</TABLE>
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) Index to 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>
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report on Form 10-K/A
to be signed on its behalf by the undersigned, thereto duly authorized on March
31, 1999.
KDSM, INC.
By: /s/ David D. Smith
------------------------------------
David D. Smith
President
Principal Executive Officer
SINCLAIR CAPITAL
By: /s/ David B. Amy
------------------------------------
David B. Amy
Administrative Trustee
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- ------------------------------ ---------------
<S> <C> <C>
/s/ David D. Smith President and Director March 31, 1999
- ------------------------- (Principal Executive Officer)
David D. Smith KDSM, Inc.
Administrative Trustee
(Principal Executive Officer)
Sinclair Capital
/s/ David B. Amy Vice President and Director March 31, 1999
- ------------------------- (Principal Financial and
David B. Amy Accounting Officer)
KDSM, Inc.
Administrative Trustee
(Principal Financial and
Accounting Officer)
Sinclair Capital
</TABLE>
27
<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, 1997 and 1998 ........................... F-3
Consolidated Statements of Operations for the Five Months Ended May 31, 1996, the Seven
Months Ended December 31, 1996 and the Years Ended December 31, 1997 and 1998 ........ F-4
Consolidated Statements of Changes in Undistributed Earnings for 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 Years Ended December 31, 1997 and 1998 .. F-5
Consolidated Statements of Cash Flows for the Five Months Ended May 31, 1996, the
Seven Months Ended December 31, 1996 and the Years Ended December 31, 1997 and 1998.. 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, 1997 and 1998,
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 five months ended May 31, 1996, 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 years ended
December 31, 1997 and 1998. 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, 1997 and 1998, and the results of operations and cash flows
of KDSM-TV, a division of River City Broadcasting (the Predecessor), a limited
partnership, for the five months ended May 31, 1996, and the results of its
operations and its cash flows of KDSM, Inc. and subsidiaries for the seven
months ended December 31, 1996 and the years ended December 31, 1997 and 1998
and in conformity with generally accepted accounting principles.
Baltimore, Maryland,
March 23, 1999
F-2
<PAGE>
KDSM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ...................................................................... $ 11 $ 7
Accounts receivable, net of allowance for doubtful accounts of $30 and $33,
respectively ............................................................ 2,150 2,107
Dividends receivable from parent .......................................... 1,085 1,085
Current portion of program contract costs ................................. 988 910
Prepaid expenses and other current assets ................................. 33 25
Deferred barter costs ..................................................... 100 28
-------- --------
Total current assets .................................................... 4,367 4,162
PROPERTY AND EQUIPMENT, net ................................................ 3,208 3,062
PROGRAM CONTRACT COSTS, less current portion ............................... 925 534
INVESTMENT IN PARENT PREFERRED SECURITIES .................................. 206,200 206,200
DUE FROM PARENT ............................................................ 2,673 6,652
OTHER ASSETS, net of accumulated amortization of $664 and $1,889,
respectively .............................................................. 7,757 6,532
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net of
accumulated amortization of $1,468 and $2,501, respectively................ 33,410 32,377
-------- --------
Total Assets ............................................................ $258,540 $259,519
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable .......................................................... $ 30 $ 17
Accrued liabilities ....................................................... 396 386
Current portion of program contracts payable .............................. 1,612 1,920
Deferred barter revenues .................................................. 209 102
Subsidiary trust minority interest expense payable ........................ 969 969
-------- --------
Total current liabilities ............................................... 3,216 3,394
PROGRAM CONTRACTS PAYABLE .................................................. 1,241 801
DEFERRED STATE TAXES ....................................................... 334 846
-------- --------
Total liabilities ....................................................... 4,791 5,041
-------- --------
COMMITMENTS AND CONTINGENCIES
COMPANY OBLIGATED MANDATORILY REDEEMABLE
SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY KDSM
SENIOR DEBENTURES ......................................................... 200,000 200,000
-------- --------
STOCKHOLDER'S EQUITY:
Common stock, $.01 par value, 1,000 shares authorized and 100 shares
issued and outstanding .................................................. -- --
Additional paid-in capital ................................................ 51,149 51,149
Retained earnings ......................................................... 2,600 3,329
-------- --------
Total stockholder's equity .............................................. 53,749 54,478
-------- --------
Total Liabilities and Stockholder's Equity .............................. $258,540 $259,519
======== ========
</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 FIVE MONTHS ENDED MAY 31, 1996,
THE SEVEN MONTHS ENDED DECEMBER 31, 1996
AND THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
FIVE MONTHS SEVEN MONTHS
ENDED ENDED
MAY 31, DECEMBER 31, COMPANY COMPANY
1996 1996 1997 1998
------------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Station broadcast revenues, net of agency commissions of $494,
$731, $1,204 and $1,200 respectively............................... $ 3,478 $4,740 $ 8,140 $ 8,363
Revenues realized from station barter arrangements ................. 85 119 398 552
------- ------ --------- ---------
Total revenues .................................................... $ 3,563 $4,859 8,538 8,915
------- ------ --------- ---------
OPERATING EXPENSES:
Program and production ............................................. 509 627 1,199 1,153
Selling, general and administrative ................................ 1,321 1,316 2,482 2,612
Expenses realized from station barter arrangements ................. 98 127 283 377
Amortization of program contract costs and net realizable value
adjustments ....................................................... 507 864 1,579 1,710
Depreciation and amortization of property and equipment ............ 233 191 354 381
Amortization of acquired intangible broadcasting assets and other
assets ............................................................ 277 544 1,588 2,258
------- ------ --------- ---------
Total operating expenses .......................................... 2,945 3,669 7,485 8,491
------- ------ --------- ---------
Broadcast operating income ........................................ 618 1,190 1,053 424
------- ------ --------- ---------
OTHER INCOME (EXPENSE):
Parent preferred stock dividend income ............................. -- -- 20,826 26,033
Subsidiary trust minority interest expense ......................... -- -- (18,600) (23,250)
Interest income .................................................... -- -- -- 239
------- ------ --------- ---------
Income before allocation of consolidated federal income taxes
and state income taxes .......................................... 618 1,190 3,279 3,446
ALLOCATION OF CONSOLIDATED FEDERAL INCOME
TAXES .............................................................. -- 412 1,123 2,205
STATE INCOME TAXES .................................................. -- 73 261 512
------- ------ --------- ---------
NET INCOME .......................................................... $ 618 $ 705 $ 1,895 $ 729
======= ====== ========= =========
Basic and diluted net income per common share ....................... $ -- $7,050 $ 18,950 $ 7,290
======= ====== ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING........................... -- 100 100 100
======= ====== ========= =========
PRO FORMA NET INCOME AFTER IMPUTING AN INCOME
TAX PROVISION:
Net income, as reported ............................................. $ 618
Imputed income tax provision ........................................ 247
-------
Pro forma net income ............................................... $ 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 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 YEARS ENDED
DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
TOTAL
UNDISTRIBUTED
PREDECESSOR EARNINGS
- ------------------------------------ --------------
<S> <C>
BALANCE, December 31, 1995 ......... $5,046
Net Income ........................ 618
------
BALANCE, May 31, 1996 .............. $5,664
======
</TABLE>
<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
Net income ........................... -- -- 729 729
---- ------- ------ -------
BALANCE, December 31, 1998 ............ $ -- $51,149 $3,329 $54,478
==== ======= ====== =======
</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 FIVE MONTHS ENDED MAY 31, 1996,
THE SEVEN MONTHS ENDED DECEMBER 31, 1996
AND THE YEARS ENDED DECEMBER 31, 1997 AND 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR
FIVE MONTHS
ENDED
MAY 31,
1996
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 618
Adjustments to reconcile net income to net cash flows from
operating activities -
Depreciation and amortization of property and equipment ................ 233
Amortization of acquired intangible broadcasting assets and other
assetsassets...... ................................................... 277
Amortization of program contract costs and net realizable value
adjustments .......................................................... 507
Changes in assets and liabilities, net of effects of acquisitions and
dispositions-
(Increase) decrease in accounts receivable, net ........................ 21
Increase in dividend receivable from parent ............................ --
Decrease (increase) in prepaid expenses and other current assets. 82
Increase (decrease) in accounts payable and accrued liabilities ........ 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 ................................... (891)
------
Net cash flows from operating activities ................................ 987
------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Parent Preferred Securities ............................... --
Payment for exercise of purchase option ................................. --
Acquisition of property and equipment ................................... (29)
Proceeds from disposal of property and equipment ........................ --
------
Net cash flows from investing activities ................................ (29)
------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in due from parent ........................................... (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 ............................... (989)
------
NET INCREASE (DECREASE) IN CASH .......................................... (31)
CASH, beginning of period ................................................ 62
------
CASH, end of period ...................................................... $ 31
======
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Contribution of capital - building ...................................... $ --
======
Subsidiary trust minority interest payments ............................. $ --
======
Parent preferred stock dividend income .................................. $ --
======
<CAPTION>
COMPANY
SEVEN MONTHS
ENDED
DECEMBER 31, COMPANY COMPANY
1996 1997 1998
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 705 $ 1,895 $ 729
Adjustments to reconcile net income to net cash flows from
operating activities -
Depreciation and amortization of property and equipment ................ 191 354 381
Amortization of acquired intangible broadcasting assets and other
assetsassets...... ................................................... 544 1,588 2,258
Amortization of program contract costs and net realizable value
adjustments .......................................................... 864 1,579 1,710
Changes in assets and liabilities, net of effects of acquisitions and
dispositions-
(Increase) decrease in accounts receivable, net ........................ (2,053) (98) 43
Increase in dividend receivable from parent ............................ -- (1,085) --
Decrease (increase) in prepaid expenses and other current assets. (67) 53 8
Increase (decrease) in accounts payable and accrued liabilities ........ 636 (276) (23)
Increase in deferred state taxes ....................................... 73 261 512
Net effect of change in deferred barter revenues and deferred
barter costs ......................................................... 9 39 (35)
Increase in subsidiary trust minority interest expense payable ......... -- 969 --
Payments on program contracts payable ................................... (242) (1,219) (1,373)
--------- ----------- --------
Net cash flows from operating activities ................................ 660 4,060 4,210
--------- ----------- --------
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) (235)
Proceeds from disposal of property and equipment ........................ -- -- --
--------- ----------- --------
Net cash flows from investing activities ................................ (161) (207,973) (235)
--------- ----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in due from parent ........................................... (496) (2,611) (3,979)
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 (3,979)
--------- ----------- --------
NET INCREASE (DECREASE) IN CASH .......................................... 3 8 (4)
CASH, beginning of period ................................................ -- 3 11
--------- ----------- ---------
CASH, end of period ...................................................... $ 3 $ 11 $ 7
========= =========== =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Contribution of capital - building ...................................... $ -- $ 562 $ --
========= =========== =========
Subsidiary trust minority interest payments ............................. $ -- $ 17,631 $23,250
========= =========== =========
Parent preferred stock dividend income .................................. $ -- $ 19,742 $26,033
========= =========== =========
</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, 1996, 1997 AND 1998
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, 1997 and 1998 consolidated balance sheets and
related statements of operations and cash flows for the seven-month period ended
December 31, 1996 and the years ended December 31, 1997 and 1998, are presented
on a new basis of accounting. The accompanying financial statements for the
five-month period ended May 31, 1996, are presented as "predecessor" financial
statements (see Note 8).
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, 1996, 1997 AND 1998 - (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 primarily consist of costs related to the issuance of the HYTOPS in
March of 1997. These costs are being amortized on a straight-line basis over a
12 year period which represents the date they are mandatorily redeemable.
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. Management believes that the carrying amounts
of the Company's tangible and intangible assets have not been impaired.
Intangible assets, at cost, as of December 31, 1997 and 1998, consist of the
following (in thousands):
<TABLE>
<CAPTION>
AMORTIZATION
PERIOD 1997 1998
------------- ---------- ----------
<S> <C> <C> <C>
Goodwill .............................. 40 years $ 26,777 $ 26,777
Decaying advertiser base .............. 15 years 1,452 1,452
FCC licenses .......................... 25 years 4,966 4,966
Network affiliations .................. 25 years 1,683 1,683
-------- --------
34,878 34,878
Less-Accumulated amortization ......... (1,468) (2,501)
-------- --------
$ 33,410 $ 32,377
======== ========
</TABLE>
ACCRUED LIABILITIES
- -------------------
Accrued liabilities consist of the following as of December 31, 1997 and 1998
(in thousands):
<TABLE>
<CAPTION>
1997 1998
------ -------
<S> <C> <C>
Compensation ................. $230 $206
Other ........................ 166 180
---- ----
$396 $386
==== ====
</TABLE>
F-8
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (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:
<TABLE>
<S> <C>
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
</TABLE>
Property and equipment consisted of the following as of December 31, 1997 and
1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Buildings and improvements .............. 751 800
Station equipment ....................... 2,693 2,843
Office furniture and equipment .......... 249 285
Leasehold improvements .................. 34 34
Automotive equipment .................... 26 26
----- -----
3,753 3,988
Less-Accumulated depreciation and
amortization ........................... (545) (926)
----- -----
$3,208 $3,062
====== ======
</TABLE>
3. PROGRAM CONTRACTS PAYABLE:
Future payments required under program contracts payable as of December 31,
1998, are as follows (in thousands):
<TABLE>
<S> <C>
1999 .......................................... $ 1,920
2000 .......................................... 495
2001 .......................................... 259
2002 .......................................... 47
--------
2,721
Less: Current portion ......................... (1,920)
--------
Long-term portion of program contracts payable. $ 801
========
</TABLE>
F-9
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED)
Included in the current portion amounts are payments due in arrears of $388,000.
In addition, the Company has entered into noncancelable commitments for future
program rights aggregating $2.6 million as of December 31, 1998.
The Company has estimated the fair value of its program contract payables and
noncancelable commitments at approximately $2.7 million and $164,000,
respectively, as of December 31, 1997, and $2.4 million and $2.0 million,
respectively, at December 31, 1998, based on future cash flows discounted at the
Company's current borrowing rate.
4. RELATED PARTY TRANSACTIONS:
The Predecessor's financial statements of KDSM-TV were included in the
consolidated financial statements of RCB. 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 five months ended May 31, 1996, totaled
approximately $290,000.
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 years ended December 31, 1997 and 1998, were approximately $146,000,
$283,000 and $270,000, respectively. Management believes these amounts
approximate the charges which would have been incurred had the services been
purchased from 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 $2.7
million and $6.7 million as of December 31, 1997 and 1998.
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
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 11). These payments were included in the
accompanying statement of operations as program and production expenses for the
seven months ended December 31, 1996 and the year ended December 31, 1997. KDSM
reimbursed Sinclair for these payments, and any amounts due to Sinclair have
been included in the net due from Parent amount in the accompanying consolidated
balance sheets.
5. INCOME TAXES:
No income tax provision has been included in the Predecessor's financial
statements for 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, 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
F-10
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED)
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, 1997 and 1998.
The allocation of consolidated income taxes consists of the following for the
years ended December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Current .................
Federal ................. $1,123 $2,205
State ................... -- --
------ ------
1,123 2,205
------ ------
Deferred ................
Federal ................. -- --
State ................... 261 512
------ ------
$1,384 $2,717
====== ======
</TABLE>
The following is a reconciliation of federal income taxes at the applicable
statutory rate to the recorded provision:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Statutory federal income taxes ........................ 35.0% 35.0%
Adjustments- ..........................................
State income taxes ................................... 7.9 7.9
Non-deductible expense items ......................... -- 0.2
Tax liability related to dividends on Parent Preferred
Stock (a) ........................................... -- 35.6
Other ................................................ (0.7) 0.1
---- ----
Provision for income taxes ............................ 42.2% 78.8%
==== ====
</TABLE>
(a) In March 1997, the Company issued the HYTOPS securities. In connection with
this transaction, Sinclair Broadcast Group, Inc. (the "Parent") issued
$206.2 million of Series C Preferred Stock (the "Parent Preferred Stock") to
KDSM, Inc., a wholly owned subsidiary. Parent Preferred Stock dividends paid
to KDSM, Inc. are considered taxable income for Federal tax purposes and not
considered income for book purposes. Also for Federal tax purposes, KDSM,
Inc. is allowed a tax deduction for dividends received on the Parent
Preferred Stock in an amount e
qual to Parent Preferred Stock dividends
received in each taxable year limited to the extent that the Parent's
consolidated group has "earnings and profits." To the extent that dividends
received by KDSM, Inc. are in excess of the Parent's consolidated group
earnings and profits, the Parent will reduce its tax basis in the Parent
Preferred Stock which gives rise to a deferred tax liability (to be
recognized upon redemption) and KDSM, Inc.'s dividend income is treated as a
permanent difference between taxable income and book income. During the
years ended December 31, 1997 and 1998, the Parent did not generate
"earnings and profits" in an amount greater than or equal to dividends paid
on the Parent Preferred Stock. This resulted in a reduction in basis of the
Parent's Series C Preferred Stock and generated a related deferred tax
liability.
The following table summarizes the state tax effects of the significant types of
temporary differences between financial reporting basis and tax basis which were
generated during the years ended December 31, 1997 and 1998 (in thousands):
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Net operating losses .............. $1,446 $2,572
Film amortization ................. 12 42
Fixed asset depreciation .......... (77) (89)
</TABLE>
F-11
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED)
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Intangible amortization ........................................... (182) (241)
Parent preferred stock deferred tax liability [see (a) above] ..... (1,541) (3,152)
Other ............................................................. 10 22
------ ------
$ (334) $ (846)
======== ========
</TABLE>
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 41.9% for the years ended December 31, 1997 and 1998.
6. 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 an annual basis in an amount equal to 50% of the
participating employee contributions, to the extent such contributions do not
exceed 4% of the employees' eligible compensation during the year.
7. 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.
OPERATING LEASES
- ----------------
The Company leases certain property and equipment under noncancellable operating
lease agreements. Rental expense charged to income for the five months ended May
31, 1996, the seven months ended December 31, 1996 and the years ended December
31, 1997 and 1998, was approximately $5,000, $7,000, $25,000 and $31,000,
respectively. Future minimum lease payments under noncancellable operating
leases are approximately (in thousands):
<TABLE>
<S> <C>
1999 ............................... $ 22
2000 ............................... 15
2001 ............................... 10
2002 ............................... 10
2003 ............................... 10
2004 and thereafter ................ 323
----
$390
====
</TABLE>
8. ACQUISITION OF BUSINESS:
On May 31, 1996, Sinclair acquired all of the non-license assets of the Company
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 approximately $1.6
million and entered into an LMA with RCB as described in Note 4. None of the
F-12
<PAGE>
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998 - (CONTINUED)
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.
9. 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.
10. 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.
11. 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 (the assets essential for broadcasting a television signal in compliance
with regulatory guidelines) of KDSM from RCB for an option exercise payment of
approximately $1.6 million.
F-13
<PAGE>
KDSM, INC. AND SUBSIDIARIES
INDEX TO SCHEDULES
<TABLE>
<S> <C>
Report of Independent Public Accountants ................. S-2
Schedule II -- Valuation and Qualifying Accounts ......... S-3
</TABLE>
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 23, 1999. 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.
Baltimore, Maryland,
March 23, 1999
S-2
<PAGE>
SCHEDULE II
KDSM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(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 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
Company 1998
Allowance for doubtful accounts ......... 30 13 10 33
</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) Pledge and Security Agreement dated as of March 12, 1997 between KDSM, Inc. and First
Union National Bank of Maryland
4.3(a) Form of 11 5/8% High Yield Trust Offered Preferred Securities of Sinclair Capital
4.4(a) Form of 11 5/8% Senior Debentures due 2009 of KDSM, Inc. (included in Exhibit 4.1)
4.5(a) Form of Parent Guarantee Agreement between Sinclair Broadcast Group, Inc. and First
Union National Bank of Maryland
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>
(Replace this text with the legend)
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLAR
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 7
<SECURITIES> 0
<RECEIVABLES> 2,140
<ALLOWANCES> 33
<INVENTORY> 0
<CURRENT-ASSETS> 4,162
<PP&E> 3,988
<DEPRECIATION> 926
<TOTAL-ASSETS> 259,519
<CURRENT-LIABILITIES> 3,394
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 51,149
<TOTAL-LIABILITY-AND-EQUITY> 259,519
<SALES> 0
<TOTAL-REVENUES> 8,915
<CGS> 0
<TOTAL-COSTS> 8,491
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,250
<INCOME-PRETAX> 3,446
<INCOME-TAX> 2,717
<INCOME-CONTINUING> 729
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 729
<EPS-PRIMARY> 7,290
<EPS-DILUTED> 7,290
</TABLE>
