UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)
ý				QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
				For the quarterly period ended September 30, 2002
OR
o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
			For the transition period from                   to                  .

 

Commission File Number :  333-26427-01

 

KDSM, INC.

(Exact name of Registrant as specified in its charter)

 

 

SINCLAIR CAPITAL

(Exact name of Registrant as specified in its charter)

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed 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 ý   No o

 

As of November 4, 2002, there were 100 shares of Common Stock, $0.01 par value of KDSM, Inc., issued and outstanding and 2,000,000 shares of $200 million aggregate liquidation value of 11⁵/₈% High Yield Trust Offered Preferred Securities of Sinclair Capital, a subsidiary trust of KDSM, Inc., issued and outstanding.

 

The registrants each meet the conditions for reduced disclosure set forth in General Instruction H (1)(a) and (b) of Form 10-Q and are therefore filing this form with the reduced disclosure format.

 

 

KDSM, INC. AND SUBSIDIARIES

 

Form 10-Q

For the Quarter Ended September 30, 2002

 

Table of Contents

 

Part I.  Financial Information
	Item 1.			Consolidated Financial Statements
			Consolidated Balance Sheets as of September 30, 2002 and December 31, 2001
			Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2002 and 2001
			Consolidated Statement of Stockholder’s Equity for the Nine Months Ended September 30, 2002
			Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2002 and 2001
			Notes to Unaudited Consolidated Financial Statements
			Management’s Narrative Analysis of Results of Operations
Part II.  Other Information
	Item 4.			Controls and Procedures
	Item 6.			Exhibits and Reports on Form 8-K
		Signature

 

2

 

KDSM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

 

		September 30, 2002			December 31, 2001
		(unaudited)
ASSETS
CURRENT ASSETS:
Cash		$	44		$	8
Accounts receivable, net of allowance for doubtful accounts		1,115			1,587
Dividends receivable from Parent		1,085			1,085
Current portion of program contract costs		963			1,350
Prepaid expenses and other current assets		16			17
Deferred barter costs		67			63
Total current assets		3,290			4,110
PROPERTY AND EQUIPMENT, net		6,205			6,593
PROGRAM CONTRACT COSTS, less current portion		759			889
INVESTMENT IN PARENT PREFERRED SECURITIES		206,200			206,200
DUE FROM PARENT		30,995			27,252
OTHER ASSETS, net of accumulated amortization of $3,546 and $3,066,respectively		4,132			4,612
GOODWILL		23,178			23,178
BROADCAST LICENSE		4,022			4,022
DEFINITE-LIVED INTANGIBLE ASSETS, net of accumulated amortization of $1,040 and $917, respectively		2,096			2,219
Total Assets		$	280,877		$	279,075
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES:
Accounts payable		$	111		$	303
Accrued liabilities		349			459
Current portion of program contracts payable		1,277			1,737
Current portion of capital lease		200			195
Deferred barter revenues		70			59
Subsidiary trust minority interest expense payable		969			969
Total current liabilities		2,976			3,722
CAPITAL LEASES, less current portion		1,969			1,934
PROGRAM CONTRACTS PAYABLE, less current portion		1,814			1,865
OTHER LONG TERM LIABILITIES		77			92
Total Liabilities		6,836			7,613
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		22,892			20,313
Total Stockholder’s Equity		74,041			71,462
Total Liabilities and Stockholder’s Equity		$	280,877		$	279,075

 

The accompanying notes are an integral part of these unaudited consolidated statements.

 

3

 

KDSM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data) (Unaudited)

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2001			2002			2001
REVENUES:
Station broadcast revenues, net of agency commissions		$	1,640		$	1,745		$	5,259		$	5,712
Revenues realized from station barter arrangements		223			200			623			472
Total revenues		1,863			1,945			5,882			6,184
OPERATING EXPENSES:
Program and production		394			415			1,318			1,323
Selling, general and administrative		642			739			2,045			2,186
Expenses recognized from station barter arrangements		187			157			527			398
Amortization of program contract costs and net realizable value adjustments		378			331			1,190			1,118
Depreciation and write-off of property and equipment		234			112			514			328
Amortization of definite-lived intangible assets		41			259			123			777
Total operating expenses		1,876			2,013			5,717			6,130
Broadcast operating income (loss)		(13		)	(68		)	165			54
OTHER INCOME (EXPENSE):
Parent preferred stock dividend income		6,508			6,508			19,525			19,525
Subsidiary trust minority interest expense		(5,973		)	(5,973		)	(17,917		)	(17,917		)
Capital lease interest expense		(61		)	(20		)	(185		)	(20		)
Gain on sale of assets		32			—			32			—
Interest income		320			314			959			847
Income before allocation of consolidated federal income taxes and state income taxes		813			761			2,579			2,489
ALLOCATION OF CONSOLIDATED FEDERAL INCOME TAX BENEFIT		—			—			—			—
STATE INCOME TAX BENEFIT		—			—			—			—
NET INCOME		$	813		$	761		$	2,579		$	2,489
Net income per common share		$	8,130		$	7,610		$	25,790		$	24,890
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING – BASIC AND DILUTED		100			100			100			100

 

The accompanying notes are an integral part of these consolidated statements.

 

4

 

KDSM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDER’S EQUITY

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002

(in thousands) (Unaudited)

 

		Common Stock			Additional Paid-In Capital			Retained Earnings			Total Stockholder’s Equity
BALANCE, December 31, 2001		$	—		$	51,149		$	20,313		$	71,462
Net income		—			—			2,579			2,579
BALANCE, September 30, 2002		$	—		$	51,149		$	22,892		$	74,041

 

 

The accompanying notes are an integral part of these unaudited consolidated statements.

 

5

 

KDSM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) (Unaudited)

 

		Nine months Ended September 30,
		2002			2001
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	2,579		$	2,489
Adjustments to reconcile net income to net cash flows from operating activities-
Gain on disposal of property and equipment		(32		)	—
Depreciation of property and equipment		514			328
Amortization of definite-lived intangible assets		123			777
Amortization of deferred financing costs		480			480
Amortization of program contract costs and net realizable value adjustments		1,190			1,118
Changes in assets and liabilities, net of effects of acquisitions and dispositions-
Decrease in accounts receivable, net		472			539
Decrease (increase) in prepaid expenses and other current assets		1			(8		)
Decrease in accounts payable and accrued liabilities		(302		)	(17		)
Increase in other long term liabilities		25			29
Net effect of change in deferred barter revenues and deferred barter costs		8			36
Payments on program contracts payable		(1,185		)	(1,340		)
Net cash flows from operating activities		3,873			4,431
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES:
Acquisition of property and equipment		(674		)	(1,402		)
Proceeds from disposal of property and equipment		600
Net cash flows used in investing activities		(74		)	(1,402		)
CASH FLOWS USED IN FINANCING ACTIVITIES:
Net change in due from Parent		(3,763		)	(3,084		)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		36			(55		)
CASH AND CASH EQUIVALENTS, beginning of period		8			72
CASH AND CASH EQUIVALENTS, end of period		$	44		$	17
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Parent preferred stock dividends		$	19,525		$	19,525
Subsidiary trust minority interest payments		$	17,438		$	17,438

 

The accompanying notes are an integral part of these unaudited consolidated statements.

 

6

 

KDSM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

 

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.  KDSM is a television broadcaster serving the Des Moines, Iowa area through station KDSM on Channel 17, a Fox affiliate.  KDSM, Inc. is a wholly owned subsidiary of Sinclair Broadcast Group, Inc. (Parent).  In addition, KDSM, Inc. 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.

 

Interim Financial Statements

 

The consolidated financial statements for the nine months ended September 30, 2002 and 2001 are unaudited, but in the opinion of management, such financial statements have been presented on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments necessary for a fair presentation of the financial position and results of operations, and cash flows for these periods.

 

As permitted under the applicable rules and regulations of the Securities and Exchange Commission, these financial statements do not include all disclosures normally included with audited consolidated financial statements, and, accordingly, should be read in conjunction with the financial statements and notes thereto as of December 31, 2001 and for the year then ended.  The results of operations presented in the accompanying financial statements are not necessarily representative of operations for an entire year.

 

Recent Accounting Pronouncement

 

In June 2001, the Financial Accounting Standards Board approved Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires companies to cease amortizing goodwill and certain other intangible assets including broadcast licenses.  SFAS No. 142 also establishes a new method of testing goodwill and broadcast licenses for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value.  The adoption of SFAS No. 142 resulted in discontinuation of amortization of our goodwill and broadcast license commencing January 1, 2002; however, we are required to test goodwill and broadcast licenses for impairment under the new standard during 2002.

 

During the three months ended March 31, 2002, we tested our broadcast license for impairment in accordance with SFAS No. 142 based on the fair value of such license in its respective market. The fair value was then compared to the book value to determine whether any impairment had occurred.  As a result of this analysis, there was no impairment of our broadcast license.

 

We are currently in the process of testing goodwill for impairment under SFAS No. 142.  As a result of the first phase of this testing, we require additional testing for impairment of goodwill.  The net carrying amount of our goodwill at September 30, 2002 was $23.2 million.  We are in the process of obtaining an appraisal and will complete such testing by December 31, 2002.

 

The following table shows the gross carrying amount and accumulated amortization of intangibles, amortization expense and estimated amortization (in thousands):

 

		As of September 30, 2002						As of December 31, 2001
		Gross Carrying Amount			Accumulated Amortization			Gross Carrying Amount			Accumulated Amortization
Goodwill		$	26,938		$	3,760		$	26,938		$	3,760
Definite-lived Intangible Assets:
Network affiliation		1,683			427			1,683			376
Decaying advertiser base		1,453			613			1,453			541
		Total Carrying Amount						Total Carrying Amount
Indefinite-lived Intangible Assets:		$
Broadcast license		4,022						4,022

 

7

 

		For the Three months Ended September 30,						For the Nine months Ended September 30,
		2002			2001			2002			2001
Aggregate Amortization Expense		$	41		$	259		$	123		$	777

 

Estimated Amortization Expense:
For year ended 12/31/02		$	164
For year ended 12/31/03		164
For year ended 12/31/04		164
For year ended 12/31/05		164
For year ended 12/31/06		164

 

The following table shows the effect on net income and earnings per share, had we adopted SFAS No. 142 on January 1, 2001 (in thousands, except per share data).

 

		For the Three months Ended September 30,						For the Nine months Ended September 30,
		2002			2001			2002			2001
Reported net income		$	813		$	761		$	2,579		$	2,489
Add: goodwill amortization		—			168			—			504
Add: broadcast license amortization		—			50			—			150
Adjusted net income		$	813		$	979		$	2,579		$	3,143
Basic Earnings Per Share:
Reported net income		8,130			7,610			25,790			24,890
Goodwill amortization		—			1,680			—			5,040
Broadcast license amortization		—			500			—			1,500
Adjusted net income		$	8,130		$	9,790		$	25,790		$	31,430
Diluted Earnings Per Share:
Reported net income		8,130			7,610			25,790			24,890
Goodwill amortization		—			1,680			—			5,040
Broadcast license amortization		—			500			—			1,500
Adjusted net income		$	8,130		$	9,790		$	25,790		$	31,430

 

In June 2001, the FASB approved Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations.  SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  We do not expect the adoption of SFAS No. 143 to have a material impact on our financial statements.

 

We adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets on January 1, 2002. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, this Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. We do not expect the adoption of SFAS No. 144 to have a material impact on our financial statements.

 

In April 2002, the FASB approved SFAS No. 145, Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.  SFAS No. 145 will require us to record gains and losses on extinguishment of debt as a component of income from continuing operations rather than as an extraordinary item and to reclassify such items for all periods presented.  We will be required to adopt this provision of SFAS No. 145 on January 1, 2003.  We do not expect the other provisions of SFAS No. 145 to have a material effect on our financial statements.

 

8

 

In June 2002, the FASB approved SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  SFAS No. 146 is effective after December 31, 2002, and addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.”  The primary difference between SFAS No. 146 and EITF 94-3 concerns the timing of liability recognition and we do not expect the adoption of SFAS No. 146 to have a material impact on our financial statements.

 

Reclassifications

 

Certain reclassifications have been made to the prior year’s financial statements to conform with the current year presentation.

 

2.        CONTINGENCIES AND OTHER COMMITMENTS:

 

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 our financial position or results of operations.

 

3.        COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF TRUST:

 

In March 1997, we completed an offering of $200 million aggregate liquidation value of 11⁵/₈% High Yield Trust Offered Preferred Securities (the HYTOPS) of Sinclair Capital, a subsidiary trust of ours.  The HYTOPS 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.  We utilized the proceeds of the offering combined with other capital contributions to acquire $206.2 million of 12⁵/₈% Series C Preferred Stock (the Sinclair Preferred Securities) of Sinclair.

 

4.        PARENT PREFERRED SECURITIES:

 

In March 1997, we utilized the proceeds of the HYTOPS combined with other capital contributions to acquire $206.2 million of 12⁵/₈% Sinclair Preferred Securities, issued by our Parent.  The Sinclair 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.

 

5.        INCOME TAXES:

 

For the three and nine months ended September 30, 2002 and 2001, our Parent had sufficient cumulative earnings and profits from prior years to allow us to utilize all of the dividends received deduction associated with the HYTOPS.  As a result, no income tax provision was required by us for the three and nine months ended September 30, 2002 and 2001.

 

9

 

MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

 

The following information should be read in conjunction with the unaudited financial statements of KDSM, Inc. and notes thereto included in this Quarterly Report and the audited financial statements and Management’s Discussion and Analysis contained in our Form 10-K, for the fiscal year ended December 31, 2001.

 

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:

 

•             the impact of changes in national and regional economies,

•             volatility of programming costs,

•             the popularity of our programming,

•             the effectiveness of new sales people,

•             our ability to attract and maintain our local and national advertising,

•             our ability to service our outstanding debt,

•             pricing and demand fluctuations in local and national advertising,

•             changes in the makeup of the population in the area where our station is located,

•             the activities of our competitors, and

•             the effects of governmental regulation of broadcasting or changes in those regulations and court actions interpreting those regulations.

 

Other matters set forth in this report including the risk factors set forth in KDSM, Inc.’s Form 10-K filed with the Securities and Exchange Commission on April 1, 2002, 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.

 

The following table sets forth certain operating data for the three and nine months ended September 30, 2002 and 2001:

 

OPERATING DATA (dollars in thousands):

 

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2001			2002			2001
Net broadcast revenues(a)		$	1,640		$	1,745		$	5,259		$	5,712
Barter revenues		223			200			623			472
Total revenues		1,863			1,945			5,882			6,184
Operating costs(b)		1,036			1,154			3,363			3,509
Expenses from barter arrangements		187			157			527			398
Depreciation and amortization(c)		653			702			1,827			2,223
Broadcast operating income (loss)		(13		)	(68		)	165			54
Dividend and interest income(d)		6,767			6,802			20,300			20,353
Gain on sale of assets		32			—			32			—
Subsidiary trust minority interest expense(e)		(5,973		)	(5,973		)	(17,918		)	(17,918		)
Net income before income taxes		813			761			2,579			2,489
Income taxes		—			—			—			—
Net income		$	813		$	761		$	2,579		$	2,489
OTHER DATA:
Broadcast cash flow (BCF)(f)		$	472		$	504		$	1,060		$	1,195
BCF margin(g)		28.8		%	28.9		%	20.2		%	20.9		%
Adjusted EBITDA(h)		$	392		$	440		$	805		$	991
Adjusted EBITDA margin(g)		23.9		%	25.2		%	15.3		%	17.4		%
Program contract payments		$	251		$	237		$	1,185		$	1,340
Corporate management fees		80			64			255			204

 

10

 

a)                  “Net broadcast revenue” is defined as broadcast revenue net of agency commissions.

b)                 “Operating costs” include programming and production expenses, selling, general and administrative expenses and stock based compensation.

c)                  Depreciation and amortization includes amortization of program contract costs and net realizable value adjustments, depreciation and amortization of property and equipment, and amortization of definite-lived intangible assets, and costs related to excess syndicated programming.

d)                 Dividend and interest income primarily results from dividends on the Parent Preferred Securities.

e)                  Subsidiary trust minority interest expense represents distributions on the HYTOPS and amortization of deferred financing costs.

f)                    “Broadcast cash flow” is defined as broadcast operating income plus corporate expenses, stock based compensation, contract termination costs and 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.  We have presented broadcast cash flow data, which we believe is 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, there can be no assurance that it is comparable. However, broadcast cash flow does not purport to represent cash provided by operating activities as reflected in our consolidated statements of cash flows and is not a measure of financial performance under generally accepted accounting principles. In addition, BCF should not be considered in isolation or as a substitute for measures of performance prepared in accordance with generally accepted accounting principles. Management believes the presentation of BCF is relevant and useful because (1) it is a measurement utilized by lenders to measure our ability to service our debt, (2) it is a measurement utilized by industry analysts to determine a private market value of our television stations and (3) it is a measurement industry analysts utilize when determining our television operating performance.

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.  We have presented Adjusted EBITDA data, which we believe is comparable to the data provided by other companies in the industry, because such data are commonly used as a measure of performance for brodacast companies; however, there can be no assurances that it is comparable.  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.  Management believes the presentation of BCF is relevant and useful because (1) it is a measurement utilized by lenders to measure our ability to service our debt, (2) it is a measurement utilized by industry analysts to determine a private market value of our television stations and (3) it is a measurement industry analysts utilize when determining our television operating performance.

 

Results of Operations

 

Nine months Ended September 30, 2002 and 2001

 

Net broadcast revenues decreased to $5.3 million for the nine months ended September 30, 2002 from $5.7 million for the nine months ended September 30, 2001, or 7.0%.  The decrease in net broadcast revenues for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 resulted from a decrease in national revenues of $431,000 and local revenues of $238,000 which was primarily related to the soft advertising market across most revenue categories, specifically the soft drink, food and telecommunications sectors, offset by an increase in the political and automotive sectors and a decrease in agency commissions.

 

Operating costs decreased to $3.4 million for the nine months ended September 30, 2002 from $3.5 million for the nine months ended September 30, 2001, or 2.9%. The decrease in operating costs for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 related to a decrease in sales expenses, commissions, promotion and production expenses, offset by an increase primarily related to our commencement of our shared news programming with KGAN-TV, a Sinclair station in Cedar Rapids, IA, that began in early March 2001, and an increase in music license fees.

 

Depreciation and amortization decreased to $1.8 million for the nine months ended September 30, 2002 from $2.2 million for the nine months ended September 30, 2001.  The decrease in depreciation and amortization for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 primarily resulted from the adoption of Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and Other Intangible Assets, which resulted in the discontinuation of amortization of our goodwill and broadcast license, offset by an increase in depreciation of fixed assets related to our property additions and an increase in program contract additions.

 

Broadcast operating income for the nine months ended September 30, 2002 was $164,000 compared to broadcast operating income of $54,000 for the nine months ended September 30, 2001.  The increase in broadcast operating income for the nine months ended September 30, 2002 was primarily attributable to the adoption of SFAS No. 142 which resulted in the discontinuation of amortization of our goodwill and our broadcast license, offset by an increase in depreciation of fixed assets related to our property additions and an increase in program contract additions.

 

No income tax provision was recorded for the nine months ended September 30, 2002 and 2001 because of our ability to use all of the dividends received deduction associated with the HYTOPS.  Our effective tax rate for the nine months ended September 30, 2002 and 2001 was zero.

 

Net income increased to $2.6 million for the nine months ended September 30, 2002 from $2.5 million for the nine months ended September 30, 2001.  The increase in net income for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 primarily resulted from an increase in interest income and a decrease in operating expenses and a decrease in amortization due to the adoption of SFAS No. 142 which resulted in the discontinuation of amortization of our goodwill and broadcast license, offset by an increase in depreciation and a decrease in revenues related to the soft advertising market.

 

Broadcast cash flow decreased to $1,060,000 for the nine months ended September 30, 2002 from $1,195,000 for the nine months ended September 30, 2001, or 11.3%.  The decrease in broadcast cash flow for the nine months

 

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ended September 30, 2002 as compared to the nine months ended September 30, 2001 primarily resulted from a decrease in revenues related to the soft advertising market, offset by decreased operating expenses.  Our broadcast cash flow margin decreased to 20.2% for the nine months ended September 30, 2002 from 20.9% for the nine months ended September 30, 2001.

 

Adjusted EBITDA decreased to $805,000 for the nine months ended September 30, 2002 from $991,000 for the nine months ended September 30, 2001, or 18.8%.  The decrease in adjusted EBITDA for the nine months ended September 30, 2002 as compared to the nine months ended September 30, 2001 resulted from the circumstances affecting the broadcast cash flow as noted above and an increase in corporate management fees of $51,000.  For reasons noted above, our adjusted EBITDA margin decreased to 15.3% for the nine months ended September 30, 2002 from 17.4% for the nine months ended September 30, 2001.

 

Seasonality/Cyclicality

 

Our results are subject to seasonal fluctuations, which usually cause fourth quarter operating income to be greater than first, second and third quarter 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 and the Olympics are higher in even numbered years.

 

Recent Accounting Pronouncement

 

In June 2001, the Financial Accounting Standards Board approved SFAS No. 142. SFAS No. 142 requires companies to cease amortizing goodwill and certain other intangible assets including broadcast licenses.  SFAS No. 142 also establishes a new method of testing goodwill and broadcast licenses for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value.  The adoption of SFAS No. 142 resulted in discontinuation of amortization of our goodwill and broadcast license commencing January 1, 2002; however, we are required to test goodwill and broadcast licenses for impairment under the new standard during 2002.

 

During the three months ended March 31, 2002, we tested our broadcast license for impairment in accordance with SFAS No. 142 based on the fair value of such license in its respective market. The fair value was then compared to the book value to determine whether any impairment had occurred.  As a result of this analysis, there was no impairment of our broadcast license.

 

We are currently in the process of testing goodwill for impairment under SFAS No. 142.  As a result of the first phase of this testing, we require additional testing for impairment of goodwill.  The net carrying amount of our goodwill at September 30, 2002 was $23.2 million.  We are in the process of obtaining an appraisal and will complete such testing by December 31, 2002.

 

In June 2001, the FASB approved Statement of Financial Accounting Standard No. 143, Accounting for Asset Retirement Obligations.  SFAS No. 143 is effective for fiscal years beginning after June 15, 2002 and addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  We do not expect the adoption of SFAS No. 143 to have a material impact on our financial statements.

 

We adopted SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets on January 1, 2002. SFAS No. 144 addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of. This Statement supersedes FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. However, this Statement retains the fundamental provisions of Statement 121 for (a) recognition and measurement of the impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. We do not expect the adoption of SFAS No. 144 to have a material impact on our financial statements.

 

In April 2002, the FASB approved SFAS No. 145, Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.  SFAS No. 145 will require us to record gains and losses on extinguishment of debt as a component of income from continuing operations rather than as an extraordinary item and to reclassify such items for all periods presented.  We will be required to adopt this provision of SFAS No. 145 on January 1, 2003.  We do not expect the other provisions of SFAS No. 145 to have a material effect on our financial statements.

 

In June 2002, the FASB approved SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities.  SFAS 146 is effective after December 31, 2002, and addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity.”  The primary difference between SFAS 146 and EITF 94-3 concerns the timing of liability recognition and we do not expect the adoption of SFAS 146 to have a material impact on our financial statements.

 

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PART II

 

ITEM 4.   CONTROLS AND PROCEDURES

 

Within 90 days prior to the date of this report, we carried out an evaluation, under the supervision and with the participation of our company's management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.

 

In addition, we have reviewed our annual controls and have seen no significant changes in our internal controls or in other factors that could significantly affect the disclosure controls, including any corrective actions with regard to significant deficiencies and material weaknesses.

 

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

(a)	Exhibits
	99.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002, executed by the CEO.
	99.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley act of 2002, executed by the CFO.
(b)	Reports on Form 8-K
	None.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized on the 14th day of November 2002.

 

 

	KDSM, INC.
	by:	/s/  David B. Amy
		David B. Amy
		Director and Secretary
		Principal Accounting Officer

 

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I, David B. Amy, certify that:

 

1.     I have reviewed this quarterly report on Form 10-Q of KDSM, Inc. (registrant);

 

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

A)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

B)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and

 

C)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the date of the Evaluation Date;

 

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

A)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

B)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls, subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies in material weakness.

 

 

Date:	November 14, 2002
			/s/ David B. Amy
			Signature:	David  B. Amy
				Principal Financial and Accounting Officer

 

 

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I, David D. Smith, certify that:

 

1.     I have reviewed this quarterly report on Form 10-Q of KDSM, Inc. (registrant);

 

2.     Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

 

3.     Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

 

4.     The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

A)   designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

B)    evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the Evaluation Date); and

 

C)    presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the date of the Evaluation Date;

 

5.     The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

 

A)   all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

 

B)    any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

 

6.     The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls, subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies in material weakness.

 

 

Date:	November 14, 2002
			/s/ David D. Smith
			Signature:	David D. Smith
				Principal Executive Officer

 

 

 

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