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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 COMMISSION FILE NUMBER:333-26427-01
KDSM, INC.
(Exact name of Registrant as specified in its charter)
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MARYLAND 52-1975792
(State of incorporation) (I.R.S. Employer Identification No.)
10706 BEAVER DAM ROAD
COCKEYSVILLE, MD 21030
(Address of principal executive offices)
(410) 568-1500
(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 of incorporation) (I.R.S. Employer Identification No.)
10706 BEAVER DAM ROAD
COCKEYSVILLE, MD 21030
(Address of principal executive offices)
(410) 568-1500
(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 checkmark 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 24, 2000, 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
This report includes or incorporates forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events. These forward-looking statements are subject to
risks, uncertainties and assumptions about us, including, among other things:
o the impact of changes in national and regional economies,
o pricing fluctuations in local and national advertising,
o volatility in programming costs and
o the effects of governmental regulation of broadcasting.
Other matters set forth in this report may also cause actual results in the
future to differ materially from those described in the forward-looking
statements. We undertake no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this report might not occur.
ITEM 1. BUSINESS
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.
The following table sets forth certain market revenue, size and audience
share information for the Des Moines designated market area:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
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(DOLLARS IN THOUSANDS)
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Market revenue ................................. $39,944 $ 44,699 $ 44,739
Annual market revenue growth/(decline) ......... (4.9%) 11.9% 0.1%
Station rank within market ..................... 4 3 3
Television homes ............................... 383,000 388,000 393,000
KDSM audience share ............................ 6.8% 6.3% 6.0%
KDSM had station broadcast revenues of $8.5 million and broadcast cash flow
of $3.4 million in 1999.
The principal office of KDSM is located at 10706 Beaver Dam Road,
Cockeysville, MD 21030 and its telephone number is 410-568-1500.
SINCLAIR CAPITAL
Sinclair Capital is a special purpose statutory business trust created
under Delaware law pursuant to 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 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:
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o issuing the preferred securities and the common securities,
representing undivided beneficial interests in the assets of the
trust,
o purchasing the KDSM senior debentures with the proceeds from sale of
the preferred securities and the common securities and
o 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, 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 , 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
Our television operating strategy includes the following key elements:
ATTRACTING VIEWERSHIP
We seek to attract viewership and expand our audience share through
selective, high-quality programming.
Popular Programming. We believe that an important factor in attracting
viewership is our network affiliation with Fox. The affiliation enables us to
attract viewers by virtue of the quality first-run original programming provided
by this network and the network's promotion of such programming. We also seek
to obtain, at attractive prices, popular syndicated programming that is
complementary to the station's network affiliation. Examples of popular
syndicated programming obtained by us for broadcast are "The Simpsons", "Home
Improvement", "Seinfeld", "Drew Carey", "Frasier", "Third Rock", "Caroline in
the City", and "Cheers".
Counter-Programming. Our programming strategy on our 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.
We believe that implementation of this strategy enables our 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. We attempt to capture a portion of advertising
dollars designated to sports programming. Affiliates of Fox are subject to
prohibitions against preemptions of network programming. We have been able to
acquire the local television broadcast rights for certain sporting events,
including Major League Baseball, NFL football, NHL hockey, Big Ten football, and
Iowa and Big Ten basketball.
INNOVATIVE LOCAL SALES AND MARKETING
We believe that we are able to attract new advertisers to our station and
increase our share of existing customers' advertising budgets by creating a
sense of partnership with those advertisers. We develop such relationships by
training our sales force 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 our strong local sales and marketing focus, we seek to capture
an increasing share of our 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 us. As an owner or
provider of programming services to 61 stations located in 40 geographically
diverse markets, Sinclair believes that it is able to negotiate favorable terms
for the acquisition of programming. Moreover, Sinclair emphasizes control of our
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
We believe that much of our success is due to our 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. We also provide our corporate and station managers with
deferred compensation plans offering options to acquire class A common stock.
COMMUNITY INVOLVEMENT
We actively participate in various community activities and offers many
community services. Our activities include broadcasting programming of local
interest and sponsorship of community and charitable events. We also encourage
our station employees to become active members of their communities and to
promote involvement in community and charitable affairs. We believe that active
community involvement by our station provides increased exposure in our DMA and
ultimately increases viewership and advertising support.
PROGRAMMING AND AFFILIATIONS
Sinclair continually reviews our 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 and radio stations are
subject to the jurisdiction of the FCC, which acts under authority granted by
the Communications Act of 1934, as amended (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 Telecommunications Act of 1996 (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 and radio 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:
o that the station has served the public interest, convenience and
necessity;
o that there have been no serious violations by the licensee of the
Communications Act or the rules and regulations of the FCC; and
o 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
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
in that licensee, 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
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approximately 30 days during which petitions to deny the application may be
filed by interested parties, including members of the public. If the application
does not involve a "substantial change" in ownership or control, it is a "pro
forma" application. The "pro forma" application is not subject to petitions to
deny or a mandatory waiting period, but is nevertheless subject to having
informal objections filed against it. If the FCC grants an assignment or
transfer application, interested parties have approximately 30 days from public
notice of the grant to seek reconsideration or review of 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 20%
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. In August, 1999, the FCC revised its
attribution and multiple ownership rules, and adopted the equity-debt-plus rule
that causes certain creditors or investors to be attributable owners of a
station, regardless of whether there is a single majority stockholder or other
applicable exception to the FCC's attribution rules. Under this new rule, a
major programming supplier (any programming supplier that provides more than 15%
of the station's weekly programming hours) or same-market media entity will be
an attributable owner of a station if the supplier or same-market media entity
holds debt or equity, or both, in the station that is greater than 33% of the
value of the station's total debt plus equity. For purposes of this rule, equity
includes all stock, whether voting or non-voting, and equity held by insulated
limited partners in partnerships. Debt includes all liabilities whether
long-term or short-term.
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 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 our subsidiaries
by the FCC could be revoked if, among other restrictions imposed by the FCC,
more than 25% of our stock were directly or indirectly owned or voted by aliens.
Sinclair and its subsidiaries are domestic corporations, and the members of the
Smith family (who together hold over 90% of the common voting rights of
Sinclair) are all United States citizens. The amended and restated articles of
incorporation of Sinclair (the amended certificate) contain limitations on alien
ownership and control that are substantially similar to those contained in the
Communications Act. Pursuant to the amended certificate, Sinclair has the right
to repurchase alien-owned shares at their fair market value to the extent
necessary, in the judgment of its board of directors, to comply with the alien
ownership restrictions.
Radio/Television Cross-Ownership Rule. The FCC's radio/television
cross-ownership rule (the "one to a market" rule) generally permits a party to
own a combination of up to two television stations and six radio stations
depending on the number of independent media voices in the market.
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
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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. In October 1996, 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. A network entity is permitted to operate more than one
television network, provided, however, that ABC, CBS, NBC, and/or Fox are
currently prohibited from merging with each other or with another network
television entity such as WB or UPN.
Antitrust Regulation. The DOJ and the Federal Trade Commission have
increased their scrutiny of the television and radio industry since the adoption
of the 1996 Act, and have reviewed 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.
National Ownership Rule. No individual or entity may have an attributable
interest in television stations reaching more than 35% of the national
television viewing audience. Historically, VHF stations have shared a larger
portion of the market than UHF stations. Therefore, only half of the households
in the market area of any UHF station are included when calculating whether an
entity or individual owns television stations reaching more than 35% of the
national television viewing audience. All but seven of the stations owned and
operated by us, or to which we provide programming services, are UHF. KDSM is a
UHF station.
Duopoly Rule. Under the FCC's new local television ownership rules, a
party may own two television stations in the same market:
o if there is no Grade B overlap between the stations;
o if the stations are in two different Nielsen Designated Market Areas;
or
o if the market containing both the stations contains at least eight
separately-owned full-power television stations and not more than one
station is among the top-four rated stations in the market.
In addition, a party may request a waiver of the rule to acquire a second
station in the market if the station to be acquired is economically distressed
or unbuilt and there is no party who does not own a local television station who
would purchase the station for a reasonable price.
Expansion of our 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 the market in which
KDSM is located, more specifically to the extent that any of our competitors may
have greater resources and thereby be in a superior position to take advantage
of such changes.
THE SATELLITE HOME VIEWER ACT (SHVA). In 1988, Congress enacted SHVA which
enabled satellite carriers to provide broadcast programming to those satellite
subscribers who were unable to obtain broadcast network programming
over-the-air. SHVA did not permit satellite carriers to retransmit local
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broadcast television signals directly to their subscribers. The Satellite Home
Viewer Act of 1999 (SHIVA) revised SHVA to reflect changes in the satellite and
broadcasting industry. This new legislation allows satellite carriers to provide
local television signals by satellite within a station market, but does not
require satellite carriers to carry all local signals in a market until 2002.
Satellite carriers now are permitted to carry these local television station
signals without the express consent of broadcasters for a six-month period until
the end of May 2000. During that six-month period, broadcasters are required to
participate in good faith in retransmission consent negotiations with satellite
carriers and other multichannel video programming distributors. If an agreement
has not been reached by the end of the six-month period, the television station
signal may not be carried without the express consent of the broadcaster. We
cannot predict the impact of SHIVA or any modifications of the FCC's regulations
as a result of those changes.
MUST-CARRY/RETRANSMISSION CONSENT
Pursuant to the Cable Act of 1992, television broadcasters are required to
make triennial elections to exercise either certain "must-carry" or
"retransmission consent" rights in connection with their carriage by cable
systems in each broadcaster's local market. By electing the must-carry rights, a
broadcaster demands carriage on a specified channel on cable systems within its
Designated Market Area, in general as defined by the Nielsen DMA Market and
Demographic Rank Report of the prior year. These must-carry rights are not
absolute, and their exercise is dependent on variables such as
o the number of activated channels on a cable system,
o the location and size of a cable system, and
o 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 1999, we elected
must-carry or retransmission consent with respect to each of the non-Fox
affiliated stations based on our evaluation of the respective markets and the
position of our owned or programmed station(s) within the market. Our stations
continue to be carried on all pertinent cable systems, and we do not believe
that our elections have resulted in the shifting of our stations to less
desirable cable channel locations. Many of the agreements we have negotiated for
cable carriage are short term, subject to month-to-month extensions.
Accordingly, we may need to negotiate new long term retransmission consent
agreements for our stations to ensure carriage on those relevant cable systems
for the balance of this triennial period (i.e., through December 31, 2002).
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 our broadcast markets may not
receive the station's digital signal.
SYNDICATED EXCLUSIVITY/TERRITORIAL EXCLUSIVITY
The FCC's 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 FCC's network non-duplication
rules allow local broadcast network television affiliates to require that cable
operators black out duplicating network programming carried on distant signals.
However, in a number of markets in which we own or program stations affiliated
with a network, a station that is affiliated with the same network in a nearby
market is carried on cable systems
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in our market. This is not in violation of the FCC's network non-duplication
rules. However, the carriage of two network stations on the same cable system
could result in a decline of viewership adversely affecting the revenues of our
owned or programmed station.
RESTRICTIONS ON BROADCAST ADVERTISING
Advertising of cigarettes and certain other tobacco products on broadcast
stations has been banned for many years. Various states also restrict the
advertising of alcoholic beverages.
The Communications Act and FCC rules also place restrictions on the
broadcasting of advertisements by legally qualified candidates for elective
office. Among other things,
o stations must provide "reasonable access" for the purchase of time by
legally qualified candidates for federal office,
o stations must provide "equal opportunities" for the purchase of
equivalent amounts of comparable broadcast time by opposing candidates
for the same elective office, and
o 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.
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. We cannot predict the effect of such a requirement on
our stations' 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. The FCC recently adopted rules reaffirming its
authority to have an Equal Employment Opportunity (EEO) nondiscrimination rule
and policies and to require broadcast licensees to create equal employment
outreach programs and maintain records and make filings with the FCC evidencing
such efforts.
Children's Television Programming. 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
o services the educational and informational needs of children 16 years
of age and under as a significant purpose;
o is regularly scheduled, weekly and at least 30 minutes in duration;
and
o 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 quarterly in stations' public inspection files and filed
annually with the FCC.
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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 television industry has developed a ratings system
that has been approved by the FCC. Furthermore, the FCC requires certain
television sets to include the so-called "V-chip," a computer chip that allows
blocking of rated programming.
DIGITAL TELEVISION
The FCC has taken a number of steps to implement digital television (DTV)
broading services. The FCC has adopted an allotment table that provides all
authorized television stations with a second channel on which to broadcast a DTV
signal. 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 are generally located in the range of channels from channel 2
through channel 51. The FCC required that affiliates of ABC, CBS, Fox and NBC in
the top 10 television markets begin digital broadcasting by May 1, 1999 and that
affiliates of these networks in markets 11 through 30 begin digital broadcasting
by November 1999. All other commercial stations are required to begin digital
broadcasting by May 1, 2002. The majority of our stations are required to
commence digital operations by May 1, 2002. Applications for digital facilities
for all of our stations were 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. The FCC has been authorized by Congress to extend the December
31, 2006 deadline for reclamation of a television station's non-digital channel
if, in any given case:
o 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
o 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
o 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.
Congress also directed 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. Broadcasters are permitted to bid on the
non-digital channels in cities with populations greater than 400,000, provided
the channels are used for DTV. 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.
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 our television stations will be able to increase
revenue to offset such costs. The FCC has also proposed 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. As part of its first biennial review of the
DTV transition process, the FCC has issued a rulemaking seeking comments on a
number of issues effecting the transition, including a review of the digital
transmission standard.
10
PENDING MATTERS
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 our broadcast stations, result in the loss of audience
share and advertising revenues for our broadcast stations, and affect our
ability to acquire additional broadcast stations or finance such acquisitions.
In addition to the changes and proposed changes noted above, such matters may
include, for example, the license renewal process, spectrum use fees, political
advertising rates, potential restrictions on the advertising of certain products
(beer, wine and hard liquor, for example), and the rules and policies to be
applied in enforcing the FCC's equal employment opportunity regulations.
Other matters that could affect our broadcast properties include
technological innovations and developments generally affecting competition in
the mass communications industry, such as direct radio and television broadcast
satellite service, creation of low power radio and class A television services,
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, advertising, equal employment opportunity, and other
matters affecting our business and operations.
EMPLOYEES
As of December 31, 1999, we had approximately 49 employees. None of the
employees are represented by labor unions under any collective bargaining
agreement. We have not experienced significant labor problems and we consider
our overall labor relations to be good.
ITEM 2. PROPERTIES
We have facilities consisting of offices, studios and tower sites.
Transmitter and tower sites are located to provide maximum signal coverage of
the stations' markets. The following table generally describes our principal
owned and leased real property in the Des Moines market:
TELEVISION PROPERTIES TYPE OF FACILITY AND USE OWNED OR LEASED(A) APPROXIMATE SIZE (SQ. FEET)
- ----------------------- ----------------------------- ----------------------------- ----------------------------
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
We believe that all of our properties, both owned and leased, are generally
in good operating condition, subject to normal wear and tear, and are suitable
and adequate for our current business operations.
ITEM 3. LEGAL PROCEEDINGS
Lawsuits and claims are filed against us 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 us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of 1999.
11
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,
1995, 1996, 1997, 1998 and 1999 have been derived from our audited Consolidated
Financial Statements. The Consolidated Financial Statements for the years ended
December 31, 1997, 1998 and 1999 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.
12
PREDECESSOR COMBINED (A) THE COMPANY
------------- -------------- --------------------------------------
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
------------- -------------- ------------ ------------ ------------
(DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA
Net broadcast revenues (b) ......................... $ 7,478 $ 8,218 $ 8,140 $ 8,363 $ 8,461
Barter revenues .................................... -- 204 398 552 541
--------- --------- ---------- --------- ---------
Total revenues ..................................... 7,478 8,422 8,538 8,915 9,002
--------- --------- ---------- --------- ---------
Operating costs (c) ................................ 3,489 3,773 3,658 3,742 3,997
Expenses from barter arrangements .................. -- 225 283 377 392
Depreciation and amortization (d) .................. 3,338 2,616 3,521 4,349 3,555
Stock-based compensation ........................... -- -- 23 23 23
--------- --------- ---------- --------- ---------
Broadcast operating income ......................... 651 1,808 1,053 424 1,035
Parent preferred stock dividend income ............. -- -- 20,826 26,033 26,033
Subsidiary trust minority interest expense (e) ..... -- -- (18,600) (23,250) (23,250)
Interest and other income .......................... 12 -- -- 239 671
--------- --------- ---------- --------- ---------
Income before income taxes ......................... $ 663 $ 1,808 $ 3,279 $ 3,446 $ 4,489
========= ========= ========== ========= =========
Net income ......................................... $ 663 $ 1,323 $ 1,895 $ 729 $ 8,977
========= ========= ========== ========= =========
Net income available to common shareholders ........ $ 663 $ 1,323 $ 1,895 $ 729 $ 8,977
========= ========= ========== ========= =========
OTHER DATA:
Broadcast cash flow (f) ............................ $ 2,922 $ 3,727 $ 3,661 $ 3,693 $ 3,433
Broadcast cash flow margin (g) ..................... 39.1% 45.4% 45.0% 44.2% 40.6%
Adjusted EBITDA (h) ................................ $ 2,772 $ 3,291 $ 3,378 $ 3,423 $ 3,175
Adjusted EBITDA margin (g) ......................... 37.1% 40.0% 41.5% 40.9% 37.5%
Program contract payments .......................... $ 1,217 $ 1,133 $ 1,219 $ 1,373 $ 1,438
Corporate overhead expense ......................... 150 436 283 270 258
Capital expenditures ............................... 139 190 197 235 151
Cash flows from operating activities ............... 2,813 1,647 4,060 4,210 10,428
Cash flows from investing activities ............... (121) (190) (207,973) (235) (151)
Cash flows from financing activities ............... (2,686) (1,485) 203,921 (3,979) (10,275)
BALANCE SHEET DATA:
Cash and cash equivalents .......................... $ 62 $ 3 $ 11 $ 7 $ 9
Total assets ....................................... 8,344 40,674 258,540 259,519 268,061
HYTOPS (i) ......................................... -- -- 200,000 200,000 200,000
Total equity of partnership 1995 to 1996, total
stockholders' equity 1997 to 1999 ................. 5,046 37,516 53,749 54,478 63,455
- ----------------
(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.
(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 i).
(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. We have presented broadcast cash flow data, which we
believe are comparable to the data provided by other companies in the
industry, because such data are commonly used as a measure of performance
for broadcast companies. However, broadcast cash flow does not purport to
represent cash provided by operating activities as reflected in our
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.
13
(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 our 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 our 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
Our operating revenues are derived from local and national advertisers. Our
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. We believe 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. Our efforts
to mitigate this trend include continuing our efforts to increase local revenues
and the development of innovative marketing strategies to sell traditional and
non-traditional services to national advertisers.
Our 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 our overall profitability.
Set forth below are the principal types of broadcast revenues received by
our station for the periods indicated and the percentage contribution of each
type to our total gross broadcast revenues:
BROADCAST REVENUES
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------
1997 1998 1999
----------------------- ----------------------- ------------------------
Local/regional advertising ......... $ 6,132 65.6% $ 6,618 69.2% $ 6,996 72.7%
National advertising ............... 3,146 33.7% 2,769 29.0% 2,536 26.4%
Network compensation ............... -- 0.0% 53 0.5% -- 0.0%
Political advertising .............. -- 0.0% 34 0.4% 17 0.2%
Production ......................... 66 0.7% 89 0.9% 73 0.7%
-------- ----- -------- ----- -------- -----
Broadcast revenues ................. 9,344 100.0% 9,563 100.0% 9,622 100.0%
======== ===== ======== ===== ======== =====
Less: agency commissions ........... (1,204) (1,200) (1,161)
-------- -------- --------
Broadcast revenues, net ............ 8,140 8,363 8,461
Barter revenues .................... 398 552 541
-------- -------- --------
Total revenues ..................... $ 8,538 $ 8,915 $ 9,002
======== ======== ========
Our primary types of programming and their approximate percentages of 1999
net broadcast revenues were syndicated programming (64.6%), network programming
(19.9%), sports programming (9.1%), paid programming (4.8%) and children's
programming (1.6%). Similarly, our six largest categories of advertising and
their approximate percentages of 1999 net broadcast revenues were automotive
(19%), services (16%), restaurants (12%), food (7%), retail/department stores
(6%), home products (6%), and soft drinks (6%). No other advertising category
accounted for more than 6% of our net broadcast revenues in 1999. No individual
advertiser accounted for more than 5% of the station's net broadcast revenues in
1999.
14
The following table sets forth certain of our operating data for the years
ended December 31, 1997, 1998 and 1999. For definitions of items, see footnotes
on pages 13 and 14 of this document.
OPERATING DATA
(DOLLARS IN THOUSANDS)
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
Net broadcast revenues (b) ............................. $ 8,140 $ 8,363 $ 8,461
Barter revenues ........................................ 398 552 541
---------- --------- ---------
Total revenues ......................................... 8,538 8,915 9,002
---------- --------- ---------
Operating costs (c) .................................... 3,658 3,742 3,997
Expenses from barter arrangements ...................... 283 377 392
Depreciation and amortization (d) ...................... 3,521 4,349 3,555
Stock-based compensation ............................... 23 23 23
---------- --------- ---------
Broadcast operating income ............................. 1,053 424 1,035
Parent preferred stock dividend income ................. 20,826 26,033 26,033
Subsidiary trust minority interest expense (e) ......... (18,600) (23,250) (23,250)
Interest and other income .............................. -- 239 671
---------- --------- ---------
Income before income taxes ............................. $ 3,279 $ 3,446 $ 4,489
Net income ............................................. $ 1,895 $ 729 $ 8,977
---------- --------- ---------
Basic and diluted net income available to common
shareholders .......................................... $ 1,895 $ 729 $ 8,977
========== ========= =========
BROADCAST CASH FLOW (BCF)
DATA:
BCF (f) ............................................... $ 3,661 $ 3,693 $ 3,433
BCF margin (g) ........................................ 45.0% 44.2% 40.6%
OTHER DATA: ............................................
Adjusted EBITDA (h) ................................... $ 3,378 $ 3,423 $ 3,175
Adjusted EBITDA margin (g) ............................ 41.5% 40.9% 37.5%
Program contract payments ............................. $ 1,219 $ 1,373 $ 1,438
Corporate overhead expense ............................ 283 270 258
Capital expenditures .................................. 197 235 151
Cash flows from operating activities .................. 4,060 4,210 10,428
Cash flows from investing activities .................. (207,973) (235) (151)
Cash flows from financing activities .................. 203,921 (3,979) (10,275)
15
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999 AND 1998
Net broadcast revenues increased to $8.5 million for the year ended
December 31, 1999 from $8.4 million for the year ended December 31, 1998, or
1.2%. When comparing the year ended December 31, 1999 to the year ended December
31, 1998, revenues from local advertisers increased approximately $378,000, or
5.7% and revenues from national advertisers decreased approximately $233,000, or
8.4%. Our decrease in national advertising was mitigated by an offsetting
increase in local advertising revenue. The decrease in national revenue is a
trend that we believe 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 increased to $4.0 million for the year
ended December 31, 1999 from $3.7 million for the year ended December 31, 1998,
or 8.1%. The increase in operating costs for the year ended December 31, 1999,
as compared to the year ended December 31, 1998 primarily resulted from an
increase in promotion and programming costs.
Depreciation and amortization decreased to $3.6 million for the year ended
December 31, 1999 from $4.3 million for the year ended December 31, 1998, or
16.3%. The decrease in depreciation and amortization for the year ended December
31, 1999 as compared to the year ended December 31, 1998 was primarily due to
the write-off of deferred financing costs in May 1998.
Broadcast operating income increased to $1.0 million for the year ended
December 31, 1999 from $424,000 for the year ended December 31, 1998, or 136%.
The increase in broadcast operating income for the year ended December 31, 1999
as compared to the year ended December 31, 1998 was primarily attributable to
the decrease in depreciation and amortization combined with an increase in net
broadcast revenues as noted above.
Parent preferred stock dividend income of $26.0 million for the year ended
December 31, 1999 is related to our 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, 1999 is related to the private placement of the subsidiary
trust preferred securities (the HYTOPS). Our ability to make future subsidiary
trust minority interest payments is directly contingent upon the parent's
ability to pay dividends on parent preferred stock.
We recorded an income tax benefit of $4.5 million for the year ended
December 31, 1999 compared to an income tax provision of $2.7 million for the
year ended December 31, 1998. The change in income taxes for the year ended
December 31, 1999 as compared to the year ended December 31, 1998 is
attributable to the dividends received deduction associated with the HYTOPS. Our
effective tax rate for the year ended December 31, 1999 was (100.0%) as compared
to 78.8% for the year ended December 31, 1998. The decrease in our effective tax
rate for 1999 primarily resulted from the dividends received deduction
associated with the HYTOPS.
Deferred state tax liability decreased to zero as of December 31, 1999 from
$846,000 as of December 31, 1998. The decrease in our deferred tax liability as
of December 31, 1999 as compared to December 31, 1998 is primarily due to the
dividends received deduction associated with the HYTOPS. Federal income taxes
are allocated to or from us by Sinclair at the statutory rate, are considered
payable or receivable currently and are reflected as an adjustment to due from
parent or due to parent in our balance sheet depending upon whether there is a
tax benefit or provision, respectively.
Net income increased to $9.0 million for the year ended December 31, 1999
from $729,000 for the year ended December 31, 1998. The increase in net income
for the year ended December 31, 1999 as compared to the year ended December 31,
1998 is primarily due to the change in income taxes combined with a decrease in
depreciation and amortization and an increase in net broadcast revenues as noted
above.
Broadcast cash flow decreased to $3.4 million for the year ended December
31, 1999 from $3.7 million for the year ended December 31, 1998, or 8.1%. Our
broadcast cash flow margin decreased to 40.6% for the year ended December 31,
1999 from 44.2% for the year ended December 31, 1998. The
16
decrease in broadcast cash flow and broadcast cash flow margin for the year
ended December 31, 1999 as compared to the year ended December 31, 1998
primarily resulted from an increase in operating expenses as noted above
combined with an increase in program contract payments offset by an increase in
net broadcast revenues.
Adjusted EBITDA decreased to $3.2 million for the year ended December 31,
1999 from $3.4 million for the year ended December 31, 1998, or 5.9%. Our
Adjusted EBITDA margin decreased to 37.5% for the year ended December 31, 1999
from 40.9% for the year ended December 31, 1998. The decrease in adjusted EBITDA
and adjusted EBITDA margin for the year ended December 31, 1999 as compared to
the year ended December 31, 1998 primarily resulted from an increase in
operating expenses as noted above combined with an increase in program contract
payments offset by an increase in net broadcast revenues.
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 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%. Our decrease in national advertising was mitigated by an
offsetting increase in local advertising revenue. The decrease in national
revenue is a trend that we believe 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 our 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). Our 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. Our 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 our 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 our 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 us by Sinclair at the statutory rate, are considered payable
currently and are reflected as an adjustment to due from parent in our 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.
17
Our 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.
Our 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.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1999, we had cash balances of approximately $9,000 and
working capital of approximately $647,000. Our 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.
We do not anticipate capital expenditures in the coming year to exceed
historical capital expenditures, which were approximately $151,000 in 1999. If
we are required to make capital expenditures to keep up with emerging
technologies, management believes we will be able to fund such expenditures from
cash flow and from the proceeds of indebtedness or financing that is allowed to
be incurred or obtained under our senior debenture indenture (provided that our
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 us in an amount sufficient to cover such costs if it chose to
do so.
SEASONALITY
Our 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
Sinclair spent approximately $2.5 million over the past two years updating
hardware and software systems to ensure Year 2000 compliance. The four phases of
Sinclair's Year 2000 plan consisted of: inventory and data collection;
compliance requests; test fix and verify; final testing and new item compliance.
Each of the four phases of Sinclair's Year 2000 process have been successfully
completed and no disruptions to operations occurred as a result of Year 2000.
Although we have completed all phases of our Year 2000 compliance project
and currently believe all of our systems to be Year 2000 compliant, we cannot
assure you that any of our systems will be Year 2000 compliant in future dates.
In addition, we cannot assure you that outside systems indirectly related to our
operations are Year 2000 complaint or will be Year 2000 compliant in future
dates.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISKS
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statement and supplementary data required by this item are
filed as exhibits, are listed under Item 14(a)(1) and (2), and are incorporated
by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIAL
DISCLOSURE
None.
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below is certain information relating to our executive officers,
directors, certain key employees and persons expected to become executive
officers, directors or key employees.
NAME AGE TITLE
- ---------------------------- ----- -----------------------
David D. Smith ............. 49 President and Director
David B. Amy ............... 47 Secretary and Director
Dr. David McCarus .......... 48 Director
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 of KDSM 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 and Director of KDSM since April of
1996. In addition he has served as Executive Vice President of Sinclair
Broadcast Group, Inc. since September 1999. Prior to that time, Mr. Amy served
as Chief Financial Officer (CFO) of Sinclair since October of 1994. In
addition, he serves as Secretary of Sinclair Communications, Inc., the Sinclair
subsidiary which owns and operates the broadcasting operations. Prior to his
appointment, Mr. Amy served as the Corporate Controller of Sinclair beginning
in 1986. Mr. Amy has over sixteen years of broadcast experience, having joined
Sinclair as a business manager for WPTT-TV in Pittsburgh. Mr. Amy received an
MBA degree from the University of Pittsburgh in 1981. Mr. Amy is currently a
member of the board of directors of Acrodyne Communications, Inc.,
BeautyBuys.com, Inc., and an advisor to Allegiance Capital.
Dr. David C. McCarus has served as Director of KDSM 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 US Healthcare 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.
19
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual and
long-term compensation by Sinclair for services rendered in all capacities
during the year ended December 31, 1999 by the President and the other officers
of KDSM who received total annual salary and bonus of $100,000 or more in 1999
(Named Executive Officers):
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
NAME AND ------------------------------------ SECURITIES UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS (A) OPTIONS GRANTED (#) COMPENSATION (B)
- -------------------- ------ ------------- ----------- ----------------------- -----------------
David D. Smith
President ......... 1999 $1,072,500 $603,115 -- $ 6,409
1998 1,290,000 502,526 -- 6,515
1997 1,354,490 98,224 -- 6,306
David B. Amy
Secretary ......... 1999 300,000 75,000 10,945
1998 200,000 75,000 135,000 11,136
1997 189,000 50,000 25,000 10,140
(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 KDSM-leased automobiles, our 401 (k) contribution, life insurance and
long-term disability coverage.
STOCK OPTIONS
The following table shows the number of stock options exercised during 1999
and the 1999 year-end value of the stock options held by the named executive
officers:
POTENTIAL REALIZABLE
VALUE
NUMBER OF AT ASSUMED ANNUAL RATES
SECURITIES OF STOCK PRICE
UNDERLYING APPRECIATION
OPTIONS GRANTED TO FOR OPTION TERM (A)
EMPLOYEES IN EXERCISE EXPIRATION ------------------------
NAME FISCAL YEAR PRICE PER SHARE DATE 0% 5% 10%
- ------------------------ ------------------- ----------------- ----------- - - --
David D. Smith ......... -- -- -- -- -- -- --
David B. Amy ........... -- -- -- -- -- -- --
- ----------
Aggregated Option Exercises in Last Fiscal Year and December 31, 1999 Option
Values
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS "IN-THE-MONEY" OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
SHARES ACQUIRED VALUE ----------------------------- ----------------------------
NAME ON EXERCISE REALIZED(A) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------------- ------------ ------------- --------------- ------------- --------------
David D. Smith ......... -- -- -- -- -- --
David B. Amy ........... -- -- 65,000 135,000 $25,545 --
(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, 1999, 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 Sinclair, 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, 2000, David Smith receives a base salary of approximately $1,000,000.
20
In September 1998, Sinclair entered into an amended employment agreement
with David B. Amy, then Vice President and Chief Financial Officer of Sinclair
and Secretary of KDSM. 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 month's base salary in effect at the time of the
termination times the number of the 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. In September 1999, Mr. Amy was promoted
to Executive Vice President, Sinclair Broadcast Group, Inc.
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
KDSM. Each of David D. Smith and David B. Amy, both of whom are executive
officers and directors of KDSM, is a director and/or executive officer of
Sinclair.
During 1999, none of the named executive officers participated in any
deliberations of our 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 24, 2000, by holders having
beneficial ownership of more than five percent of KDSM, Inc. common stock.
COMMON STOCK
--------------------------------------
NAME OF BENEFICIAL OWNER NUMBER OF SHARES PERCENT OF CLASS
- --------------------------------------- ------------------ -----------------
Sinclair Communications, Inc. ......... 100 100%
10706 Beaver Dam Road
Cockeysville, MD 21030
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) Index to Financial Statements
The financial statements required by this item are submitted in a separate
section beginning on page F-1 of this report.
PAGE
-----
Index to Financial Statements ................................................... F-1
Report of Independent Public Accountants ........................................ F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 .................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1998, and 1999 ................................................................ F-4
Consolidated Statements of Changes in Stockholder's Equity for the Years Ended
December 31, 1997, 1998, and 1999 ............................................. F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1998, and 1999 ................................................................ F-6
Notes to Consolidated Financial Statements ...................................... F-7
(a) (2) Index to Financial Statements Schedules
The financial statements schedules required by this item are submitted on
pages S-1 through S-3 of this report.
PAGE
-----
Index to Schedules .............................................................. S-1
Report of Independent Public Accountants ........................................ S-2
Schedule II -- Valuation and Qualifying Accounts ................................ S-3
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
The exhibit index in Item 14(c) is incorporated by reference in this
report.
(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, 1999.
22
(c) Exhibits
The following exhibits are filed with this report:
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- -------- -------------------------------------------------------------------------------------------
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
3.1 David B. Amy (1)
3.2 Articles of Incorporation of KDSM, Inc., as of April 22, 1996 (1)
3.3 By-Laws of KDSM, Inc. (1)
Indenture, dated as of March 12, 1997 among KDSM, Inc., Sinclair Broadcast Group, Inc. and
4.1 First Union National Bank of Maryland (1)
Pledge and Security Agreement dated as of March 12, 1997 between KDSM, Inc. and First
4.2 Union National Bank of Maryland (1)
4.3 Form of 11 5/8 % High Yield Trust Offered Preferred Securities of Sinclair Capital (1)
4.4 Form of 11 5/8% Senior Debentures due 2009 of KDSM, Inc. (included in Exhibit 4.1) (1)
Form of Parent Guarantee Agreement between Sinclair Broadcast Group,Inc. and First
4.5 Union National Bank of Maryland (1)
27 Financial Data Schedule of KDSM, Inc.
- ----------
(1) Incorporated by reference from the Company's Registration Statement on Form
S-4, No. 333-26427.
(d) Financial Statements Schedules
The financial statement schedules required by this Item are listed under
Item 14 (a) (2).
23
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 to
be signed on its behalf by the undersigned, thereunto duly authorized on this
30th day of March 2000.
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
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below under the heading "Signature" constitutes and appoints David B. Amy as his
or her true and lawful attorneys-in-fact each acting alone, with full power of
substitution and resubstitution, for him or her and in his or her name, place
and stead in any and all capacities to sign any or all amendments to this 10-K
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the SEC, granting unto said attorneys-in-fact full
power and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully for all intents and
purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact, or their substitutes, each acting
alone, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- --------------------------- ---------------------------------------------- ---------------
/s/ David D. Smith Director and President March 30, 2000
- ------------------------- (principal executive officer)
David D. Smith KDSM, Inc.
Administrative Trustee
(principal executive officer)
Sinclair Capital
/s/ David B. Amy Director and Secretary March 30, 2000
- ------------------------- (principal financial and accounting officer)
David B. Amy KDSM, Inc.
Administrative Trustee
(principal financial and accounting officers)
Sinclair Capital
/s/ Dr. David McCarus
- ------------------------- Director March 30, 2000
Dr. David McCarus KDSM, Inc.
KDSM, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
KDSM, INC. AND SUBSIDIARIES
Report of Independent Public Accountants .......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 ...................... F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997, 1998,
and 1999 ........................................................................ F-4
Consolidated Statements of Changes in Stockholder's Equity for the Years Ended
December 31, 1997, 1998, and 1999 ............................................... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1998,
and 1999 ........................................................................ F-6
Notes to Consolidated Financial Statements ........................................ F-7
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc.:
We have audited the accompanying consolidated balance sheets of KDSM, Inc.
(a Maryland corporation) and subsidiaries (the Company) as of December 31, 1998
and 1999, and the related consolidated statements of operations, stockholder's
equity and cash flows for the years ended December 31, 1997, 1998, and 1999.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1998 and 1999, and the results of its operations and its cash
flows for the years ended December 31, 1997, 1998, and 1999, in conformity with
accounting principles generally accepted in the United States.
ARTHUR ANDERSEN, LLP
Baltimore, Maryland,
February 24, 2000
F-2
KDSM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
AS OF DECEMBER 31,
-----------------------
1998 1999
---------- ----------
ASSETS
CURRENT ASSETS:
Cash. ................................................................ $ 7 $ 9
Accounts receivable, net of allowance for doubtful accounts of $33
and $19, respectively............................................... 2,107 1,901
Dividends receivable from parent ..................................... 1,085 1,085
Current portion of program contract costs ............................ 910 961
Prepaid expenses and other current assets ............................ 25 9
Deferred barter costs ................................................ 28 29
-------- --------
Total current assets .............................................. 4,162 3,994
PROPERTY AND EQUIPMENT, net ........................................... 3,062 2,813
PROGRAM CONTRACT COSTS, less current portion .......................... 534 890
INVESTMENT IN PARENT PREFERRED SECURITIES ............................. 206,200 206,200
DUE FROM PARENT ....................................................... 6,652 16,927
OTHER ASSETS, net of accumulated amortization of $1,889 and
$1,786, respectively.................................................. 6,532 5,892
ACQUIRED INTANGIBLE BROADCASTING ASSETS, net of
accumulated amortization of $2,501 and $3,533, respectively........... 32,377 31,345
-------- --------
Total Assets ...................................................... $259,519 $268,061
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 17 $ 58
Accrued liabilities .................................................. 386 353
Current portion of program contracts payable ......................... 1,920 1,915
Deferred barter revenues ............................................. 102 52
Subsidiary trust minority interest expense payable ................... 969 969
-------- --------
Total current liabilities ......................................... 3,394 3,347
PROGRAM CONTRACTS PAYABLE ............................................. 801 1,259
DEFERRED STATE TAXES .................................................. 846 -
-------- --------
Total liabilities ................................................. 5,041 4,606
-------- --------
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 .................................................... 3,329 12,306
-------- --------
Total stockholder's equity ........................................ 54,478 63,455
-------- --------
Total Liabilities and Stockholder's Equity ........................ $259,519 $268,061
======== ========
The accompanying notes are an integral part of these consolidated statements.
F-3
KDSM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1998 1999
------------ ------------ ------------
REVENUES:
Station broadcast revenues, net of agency commissions of $1,204,
$1,200 and $1,161, respectively.................................. $ 8,140 $ 8,363 $ 8,461
Revenues realized from station barter arrangements ................ 398 552 541
--------- --------- ---------
Total revenues ................................................. 8,538 8,915 9,002
--------- --------- ---------
OPERATING EXPENSES:
Program and production ............................................ 1,199 1,153 1,393
Selling, general and administrative ............................... 2,482 2,612 2,627
Expenses realized from station barter arrangements ................ 283 377 392
Amortization of program contract costs and net realizable value
adjustments ..................................................... 1,579 1,710 1,483
Depreciation of property and equipment ............................ 354 381 400
Amortization of acquired intangible broadcasting assets and other
assets .......................................................... 1,588 2,258 1,672
--------- --------- ---------
Total operating expenses ....................................... 7,485 8,491 7,967
--------- --------- ---------
Broadcast operating income ..................................... 1,053 424 1,035
--------- --------- ---------
OTHER INCOME (EXPENSE):
Parent preferred stock dividend income ............................ 20,826 26,033 26,033
Subsidiary trust minority interest expense ........................ (18,600) (23,250) (23,250)
Interest income ................................................... - 239 671
--------- --------- ---------
Income before allocation of consolidated federal income taxes
and state income taxes ....................................... 3,279 3,446 4,489
ALLOCATION OF CONSOLIDATED FEDERAL INCOME TAX
PROVISION (BENEFIT) ............................................... 1,123 2,205 (3,642)
STATE INCOME TAX PROVISION (BENEFIT) ............................... 261 512 (846)
--------- --------- ---------
NET INCOME ......................................................... $ 1,895 $ 729 $ 8,977
========= ========= =========
Basic and diluted net income per common share ...................... $ 18,950 $ 7,290 $ 89,770
========= ========= =========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING ......................... 100 100 100
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-4
KDSM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS)
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDER'S
COMPANY STOCK CAPITAL EARNINGS EQUITY
- --------------------------------------- -------- ------------ ---------- --------------
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
Net income ........................... -- -- 8,977 8,977
--- ------- ------- -------
BALANCE, December 31, 1999 ............ $-- $51,149 $12,306 $63,455
=== ======= ======= =======
The accompanying notes are an integral part of these consolidated statements.
F-5
KDSM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(IN THOUSANDS)
1997 1998 1999
------------- ------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .............................................................. $ 1,895 $ 729 $ 8,977
Adjustments to reconcile net income to net cash flows from
operating activities--
Depreciation of property and equipment ................................ 354 381 400
Amortization of acquired intangible broadcasting assets and
other assets ......................................................... 1,588 2,258 1,672
Amortization of program contract costs and net realizable value
adjustments .......................................................... 1,579 1,710 1,483
Increase (decrease) in deferred state taxes ........................... 261 512 (846)
Net effect of change in deferred barter revenues and deferred
barter costs ......................................................... 39 (35) (51)
Changes in assets and liabilities, net of effects of acquisitions and
dispositions--
(Increase) decrease in accounts receivable, net ....................... (98) 43 206
Increase in dividend receivable from parent ........................... (1,085) -- --
Decrease in prepaid expenses and other current assets ................. 53 8 17
(Decrease) increase in accounts payable and accrued liabilities. (276) (23) 8
Increase in subsidiary trust minority interest expense payable ........ 969 -- --
Payments on program contracts payable ................................... (1,219) (1,373) (1,438)
---------- -------- ---------
Net cash flows from operating activities ................................ 4,060 4,210 10,428
---------- -------- ---------
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 ................................... (197) (235) (151)
---------- -------- ---------
Net cash flows from investing activities ................................ (207,973) (235) (151)
---------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in due from parent ........................................... (2,611) (3,979) (10,275)
Contributions of capital ................................................ 13,776 -- --
Net proceeds from subsidiary trust securities offering .................. 192,756 -- --
---------- -------- ---------
Net cash flows from financing activities ................................ 203,921 (3,979) (10,275)
---------- -------- ---------
NET INCREASE (DECREASE) IN CASH .......................................... 8 (4) 2
CASH, beginning of period ................................................ 3 11 7
---------- --------- ---------
CASH, end of period ...................................................... $ 11 $ 7 $ 9
========== ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Contribution of capital - building ...................................... $ 562 $ -- $ --
========== ========= =========
Subsidiary trust minority interest payments ............................. $ 17,631 $23,250 $ 23,250
========== ========= =========
Parent preferred stock dividend income .................................. $ 19,742 $26,033 $ 26,033
========== ========= =========
The accompanying notes are an integral part of these consolidated statements.
F-6
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999
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. Sinclair Broadcast Group, Inc. (Sinclair) purchased
the non-license assets of KDSM-TV from River City Broadcasting, L.P. (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, 1998 and 1999 consolidated balance sheets and
related consolidated statements of operations and cash flows for the years ended
December 31, 1997, 1998, and 1999 are presented on a new basis of accounting.
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.
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.
F-7
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
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, 1998 and 1999, consist of the
following (in thousands):
AMORTIZATION
PERIOD 1998 1999
------------- ---------- ----------
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 ......... (2,501) (3,533)
-------- --------
$ 32,377 $ 31,345
======== ========
ACCRUED LIABILITIES
Accrued liabilities consist of the following as of December 31, 1998 and 1999
(in thousands):
1998 1999
------ -------
Compensation ............... $206 $211
Other ...................... 180 142
---- ----
$386 $353
==== ====
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.
F-8
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
2. PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost, less accumulated depreciation.
Depreciation is computed under the straight-line method over the following
estimated useful lives:
Buildings and improvements ............. 10--35 years
Station equipment ...................... 5--10 years
Office furniture and equipment ......... 5--10 years
Leasehold improvements ................. 10--31 years
Automotive equipment ................... 3-- 5 years
Property and equipment consisted of the following as of December 31, 1998 and
1999 (in thousands):
1998 1999
---------- -----------
Buildings and improvements ...................... $ 800 $ 800
Station equipment ............................... 2,843 2,926
Office furniture and equipment .................. 285 328
Leasehold improvements .......................... 34 34
Automotive equipment ............................ 26 51
------ --------
3,988 4,139
Less - Accumulated depreciation and amortization. (926) (1,326)
------ --------
$3,062 $ 2,813
====== ========
3. PROGRAM CONTRACTS PAYABLE:
Future payments required under program contracts payable as of December 31,
1999, are as follows (in thousands):
2000 .......................................... $ 1,915
2001 .......................................... 777
2002 .......................................... 394
2003 .......................................... 76
2004 .......................................... 12
--------
3,174
Less - Current portion ........................ (1,915)
--------
Long-term portion of program contracts payable. $ 1,259
========
Included in the current portion amounts are payments due in arrears of $416,000.
In addition, the Company has entered into noncancelable commitments for future
program rights aggregating $2.1 million as of December 31, 1999.
The Company has estimated the fair value of its program contract payables and
noncancelable commitments at approximately $2.4 million and $2.0, respectively,
as of December 31, 1998, and $2.8 million and $1.7 million, respectively, at
December 31, 1999, based on future cash flows discounted at the Company's
current borrowing rate.
4. RELATED PARTY TRANSACTIONS:
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
F-9
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
expenses, including allocated corporate expenses, for the years ended December
31, 1997, 1998, and 1999, were approximately $283,000, $270,000, and $258,000,
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. No interest is
charged or received for these advances. The total amount due from Sinclair was
approximately $6.7 million and $16.9 million as of December 31, 1998 and 1999.
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 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 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:
Sinclair files a consolidated federal tax return, and separate state tax returns
for each of its subsidiaries. It is Sinclair's policy to charge KDSM for its
federal income tax provision through intercompany charges, and KDSM is directly
responsible for its current state tax liabilities. The accompanying financial
statements have been prepared in accordance with the separate return method of
FASB 109, whereby the allocation of federal tax provision due to the Parent is
based on what the subsidiary's current and deferred federal tax provision would
have been had the subsidiary filed a federal income tax return outside its
consolidated group. Given that KDSM is required to reimburse Sinclair for its
federal tax provision, the federal income tax provision is recorded as an
intercompany charge and included as a reduction of the due from Parent amount in
the accompanying consolidated balance sheets as a current obligation.
Accordingly, KDSM has no federal deferred income taxes. Since KDSM is directly
responsible for its state taxes, all deferred tax assets or liabilities are
related to state income taxes. The Company had no alternative minimum tax credit
carryforwards as of December 31, 1998 and 1999.
The allocation of consolidated income taxes consists of the following for the
years ended December 31, 1998 and 1999 (in thousands):
1998 1999
--------- ------------
Current
Federal ..................................... $2,205 $ (3,642)
State ....................................... -- --
------ --------
2,205 (3,642)
------ --------
Deferred
Federal ..................................... -- --
State ....................................... 512 (846)
------ --------
$2,717 $ (4,488)
====== ========
F-10
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
The following is a reconciliation of federal income taxes at the applicable
statutory rate to the recorded provision:
1998 1999
---------- -------------
Statutory federal income taxes ................. 35.0% 35.0%
Adjustments-
State income taxes ............................ 7.9 7.9
Non-deductible expense items .................. 0.2 1.0
Tax liability (benefit) related to dividends on
Parent Preferred Stock (a) .................. 35.6 (130.0)
Other ......................................... 0.1 ( 13.9)
----- ------
Provision for income taxes ..................... 78.8% (100.0)%
===== ======
- ----------
(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 equal 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. During the year ended December 31, 1999, the Parent earned
sufficient earnings and profits such that there was no adjustment to basis
of the Parent's Series C Preferred Stock.
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, 1998 and 1999 (in thousands):
1998 1999
----------- -----------
Net operating losses ........................ $ 2,572 $ 3,865
Film amortization ........................... 42 34
Fixed asset depreciation .................... (89) (93)
Intangible amortization ..................... (241) (361)
Parent preferred stock deferred tax liability
[see (a) above] ............................ (3,152) (3,462)
Other ....................................... 22 17
-------- --------
$ (846) $ --
======== ========
The deferred state tax assets and liabilities represent 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, 1998 and
1999.
6. EMPLOYEE BENEFITS:
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.
F-11
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
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 years ended December
31, 1997, 1998, and 1999, was approximately $25,000, $31,000, and $23,000
respectively. Future minimum lease payments under noncancellable operating
leases are approximately (in thousands):
2000 ....................................... $ 12
2001 ....................................... 11
2002 ....................................... 10
2003 ....................................... 10
2004 ....................................... 10
2005 and thereafter ........................ 312
----
$365
====
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 $1.6 million and
entered into an LMA with RCB as described in Note 4. None of the current assets
of KDSM were acquired. The acquisition was accounted for under the purchase
method of accounting whereby the purchase price was allocated to property and
equipment, acquired intangible broadcasting assets, other intangible assets and
purchase options of $2.8 million, $3.1 million, $27.5 million and $3.4 million,
respectively.
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
F-12
KDSM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998 AND 1999 - (CONTINUED)
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
$1.6 million.
F-13
KDSM, INC. AND SUBSIDIARIES
INDEX TO SCHEDULES
Report of Independent Public Accountants ................................. S - 2
Schedule II - Valuation and Qualifying Accounts .......................... S - 3
All schedules except those listed above are omitted as not applicable or not
required or the required information is included in the consolidated financial
statements or in the notes thereto.
S-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Sinclair Broadcast Group, Inc.:
We have audited in accordance with auditing standards generally accepted in the
United States, 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 February 24,
2000. 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.
ARTHUR ANDERSEN, LLP
Baltimore, Maryland,
February 24, 2000
S-2
SCHEDULE II
KDSM, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(IN THOUSANDS)
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------------------ ------------ ------------ ------------ ----------
1997
Allowance for doubtful accounts ......... $39 $39 $48 $30
1998
Allowance for doubtful accounts ......... 30 13 10 33
1999
Allowance for doubtful accounts ......... 33 25 39 19
S-3