**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-K**

 
| **ý****   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                               |
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| **FOR THE FISCAL YEAR ENDED DECEMBER  31, 2002**                                                                                                                                                               |
|                                                                                                                                                                                                           |
| **o****   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)  OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                                                |
|                                                                                                                                                                                                           |
| **FOR THE TRANSITION PERIOD  FROM              TO              .** |
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| **COMMISSION  FILE NUMBER: 333-26427-01**                                                                                                                                                                      |

 
| **KDSM, INC.**                                                         |
|------------------------------------------------------------------------|
| (Exact name of  Registrant as specified in its charter)                |
|                                                                   |
| **Maryland**                                                           |   | **52-1975792** |
| (State of  incorporation)                                              |   | (I.R.S. Employer  Identification No.) |
|                                                                   |   |   |
| **10706 Beaver Dam Road**                                              |
| **Hunt Valley, 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)                |
|                                                                   |
| **Delaware**                                                           |   | **52-2026076** |
| (State of  incorporation)                                              |   | (I.R.S. Employer  Identification No.) |
|                                                                   |   |   |
| **10706 Beaver Dam Road**                                              |
| **Hunt Valley, 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  whetherthe registrant (1) has filed all reports required to be filed  by Section  13 or 15 (d) of the  Securities Exchange  Act of 1934 during thepreceding 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 ýNo o

 

Indicate  by  check mark if disclosure of delinquent files pursuant to Item 405 of  Regulation S-K  is  not contained in this report, and will not be contained, to thebest  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. ý

 

Indicate by check mark whether the registrant is an accelerated filer(as defined in Rule 126-2 of the Act). Yes o No ý

 

As of March 14, 2003, 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 liquidationvalue of 11.625% high yield trust offered preferred  securities  of Sinclair Capital,  a subsidiary trust ofKDSM, 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-lookingstatements  on  our  current  expectations  and projections about future events. These forward-lookingstatements are subject to risks, uncertainties and assumptions about us,including, among other things:

 

•                   the impact ofwar,

•                   the impact ofchanges in national and regional economies,

•                   volatility ofprogramming costs,

•                   the popularityof our programming,

•                   theeffectiveness of new sales people,

•                   our ability toattract and maintain our local and national advertising,

•                   pricing anddemand fluctuations in local and national advertising,

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

•                   our ability tomaintain our affiliation agreement with the network,

•                   the activitiesof our competitors, and

•                   theeffects of governmental regulation of broadcasting or changes in thoseregulations and court actions interpreting those regulations.

 

Other matters set forth in this report, including the risk factors setforth in Item 7 to this report, and/or in the documents incorporated byreference may also cause actual results in the future to differ materially fromthose described in the forward-looking statements.  We undertake no obligation to update or revise anyforward-looking statements, whether as a result of new information, futureevents or otherwise.  In light of theserisks, uncertainties and assumptions, the forward-looking events discussed inthis report might not occur.

 

**ITEM 1. BUSINESS**

** **

KDSM, Inc. (KDSM) is an indirect wholly owned  subsidiary of Sinclair Broadcast  Group, Inc.  (“Sinclair”),  which, together with its wholly-owned subsidiary, KDSM Licensee,LLC, owns all of the  assets  related to the  operation  of television station KDSM.

 

KDSM,  Channel 17, is located inDes Moines, the state capital of Iowa. The Des Moines market is currently  served by five commercial  television stations, all of which are network affiliated.  The WB affiliate isthe most recent addition, beginning on-air operations in January of 2001.  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 forthcertain market  revenue,  size and audience share information for theDes Moines designated market area:

 
|                          |   | **Year Ended  December 31,** |   |
|-------------------------------|--------|------------------------------|--------|
|                          |   | **2002**                     |   | **2001** |   | **2000** |   |
|                          |   |                         |   | **(dollars  in thousands)** |   |   |   |
|                          |   |                         |   |   |   |   |   |
| Market revenue                |   | $                            | 50,606 |   | $ | 41,527 |   | $ | 48,497 |   |
| Annual market  revenue growth |   | 21.9                         | %      | (14.4 | )% | 8.4 | % |
| Station rank  within market   |   | 4                            |   | 4 |   | 4 |   |
| Television homes              |   | 401,000                      |   | 405,000 |   | 394,000 |   |
| KDSM audience  share          |   | 4                            | %      | 5.5 | % | 6.3 | % |
|                               |        |                              |        |  |  |  |  |  |  |  |

 

KDSM had station broadcast revenues of $7.4 million and broadcast cashflow of $1.9 million in 2002.

 

The  principal  office of  KDSM is  located at  10706  Beaver Dam  Road, Hunt Valley, MD 21030and its telephone number is 410-568-1500.

 

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**SINCLAIR CAPITAL**

** **

Sinclair  Capital is aspecial  purpose  statutory business  trust created underDelaware law pursuant to a trust agreement  executed by KDSM asdepositor for the trust,  First Union  National Bank of Maryland as property  trustee (the property  trustee), and First Union Bank of Delaware as Delaware  trustee  (theDelaware  trustee),  and the filing of a certificate  of trust with the Delaware Secretary ofState.

 

The property trustee acts as sole trustee under the trust agreement forthe purposes of compliance  with theTrust  Indenture  Act. The trust exists for the exclusivepurposes of:

 

•                   issuing  the preferred  securities   and the  common   securities, representing  undivided beneficial  interests  in the assets  of the trust,

•                   purchasing theKDSM senior  debentures  with the proceeds from sale of the preferredsecurities and the common securities and

•                   engaging  in only those  other  activities necessary  or  incidental thereto.

 

All of the common securities of Sinclair Capital are owned by KDSM andKDSM has agreed in the KDSM senior debenture  indenture to maintainsuch  ownership.  KDSM acquired common securities having anaggregate  liquidation amount equal to3% of the total capital of the trust. The trust has a term expiring in 2015,but may terminate  earlier as providedin the trust agreement.  The trust’sbusiness affairs will be conducted by the property trustee,  the Delaware trustee and theadministrative  trustee. The holder ofthe common securities,  or the holdersof at least a  majority  in the aggregate  liquidation  value of then  outstanding preferred securities if an event of default hasoccurred and is continuing, will be entitled to appoint, remove or replace thetrustees of the trust.

 

The  duties and  obligations of the  trustees  are governed  by the trustagreement.  David D. Smith and David B.Amy,  each an officer of Sinclair,  were appointed  as  administrative  trustees of the  trust  (in such capacity,  the administrativetrustees) pursuant to the terms of the trust agreement. Under the trust  agreement, the  administrative  trustees have certain  duties and powers including, but not limitedto, the delivery of certain notices to the holders of the preferred  securities, the appointment of the preferred securities  paying agent and thepreferred  securities  registrar, the registering of transfers of the preferred  securities and the common securities and preparing and filing on behalf of the trust all UnitedStates  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 notlimited to, holding legal title to the KDSM senior debentures on behalf of thetrust, the collection of payments in respect of the KDSM senior debentures,  maintenance of the payment account, thesending of default notices with respect to the preferred  securities and the  distribution of the assets of the trust in the event of awinding-up of the trust.

 

**TELEVISION BROADCASTING**

** **

***Operating Strategy***

** **

Our television operating strategy includes the following key elements:

 

**Attracting Viewership**

** **

We seek to  target ourprogramming offerings to attract viewership, particularly in the 18 to 49year-old age  bracket.

 

*PopularProgramming*.  Webelieve that an important factor in attracting viewership is our networkaffiliation with FOX. The affiliation enables us to attract viewers by virtueof the quality first-run original programming provided by this network and thenetwork’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 byus for broadcast are “The Simpsons,” “Seinfeld,” “Spin City,” “Drew Carey,”“Frasier,”  “Third Rock,” “EntertainmentTonight,” “Extra,” and “Dharma & Greg”. Our programming strategy also includes counter programming whichconsists of broadcasting programs that are alternatives to the types of programsbeing shown concurrently on competing stations.

 

*LocalNews*.  We believe thatthe production and broadcasting of local news is an important link to thecommunity and an aid to the station’s efforts to expand its viewership.  In addition, local news programming canprovide access to advertising sources targeted specifically to local newsviewers.  In March 2001, we commenced a35-minute prime-time local newscast, airing seven days a week from 9:00 pm to9:35 pm (CST) which is being produced by KGAN-TV, a wholly-owned Sinclairtelevision station in Cedar Rapids, Iowa. This is central Iowa’s only prime-time local newscast.

 

*PopularSporting Events*.  Weattempt to capture a portion of advertising dollars designated to sportsprogramming.  Affiliates of FOX aresubject to prohibitions against preemptions of network programming.  We have been able to acquire the localtelevision broadcast rights for certain sporting events, including Major LeagueBaseball, NASCAR, NFL football, Big Ten football, and Iowa and Big Tenbasketball, and Iowa High School Basketball.

 

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**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 ofpartnership with those advertisers.  We develop suchrelationships by training our sales force to offer new marketing ideas andcampaigns to advertisers.  Thesecampaigns often involve the sponsorship by advertisers of local promotionalevents that capitalize on the station’s local identity and programmingfranchises.  For example, KDSM conductsyearly the “FOX 17 Sweepstakes.”  Thisevent is a marketing promotion that involves sending direct mail pieces to150,000 homes.

 

**Control of Operating and ProgrammingCosts**

** **

By employing a disciplined approach to managing programming acquisitionand other costs, Sinclair has been able to achieve operating margins thatSinclair believes are among the highest in the television broadcastindustry.  Sinclair believes that theirnational reach of approximately 24% of the country provides a strong positionto negotiate with programming providers and, as a result, the opportunity topurchase high quality programming at more favorable prices.  Moreover, Sinclair emphasizes control ofprogramming and operating costs through program-specific profit analysis,detailed budgeting, tight control over staffing levels and detailed long-term planningmodels.

 

**Attract and Retain High QualityManagement**

** **

We believe that much of our success is due to our ability to attractand retain highly skilled and motivated managers, both at the corporate andlocal station levels.  A significantportion of the compensation available to group general managers, sales managersand other station managers is based on their exceeding certain operating  results. We also provide some of our corporate and station managers with deferredcompensation plans offering options to acquire class A common stock.

 

**Community Involvement**

 

We actively participate in various community activities and offer manycommunity services.  Our activitiesinclude broadcasting programming of local interest and sponsorship of communityand charitable events.  We alsoencourage our station employees to become active members of their communitiesand to promote involvement in community and charitable affairs. We believe thatactive community involvement by our station provides increased exposure in ourDMA and ultimately increases viewership and advertising support.

 

**Programming and Affiliations**

** **

Sinclair continually reviews our existing programming inventory andseeks to purchase the most profitable and cost-effective syndicated programsavailable for each time period.  Indeveloping its selection of syndicated programming, Sinclair balances the costof available syndicated programs with their potential to increase advertisingrevenue and the risk of their reduced popularity during the term of the programcontract. Sinclair seeks to purchase only those programs with contractualperiods that permit programming flexibility and which complement a station’soverall programming strategy and counter-programming strategy.  Programs that can perform successfully inmore than one time period are more attractive due to the long lead time andmulti-year commitments inherent in program purchasing.

 

Sinclair recently secured a long-term affiliation agreement with theFOX network with a term that will run through June 30, 2005.

 

As a FOX affiliate, KDSM has limited ability to preempt FOX programmingexcept where it has existing programming conflicts or where KDSM preempts toserve a public purpose.  FOX producesand distributes programming in exchange for KDSM’s commitment to air theprogramming at specified times and for commercial announcement time during theprogramming.

 

**FEDERALREGULATION OF TELEVISION BROADCASTING**

 

The ownership, operation and sale of television stations are subject tothe jurisdiction of the FCC, which acts under authority granted by theCommunications Act of 1934, as amended (“Communications Act”). Among otherthings, the FCC assigns frequency bands for broadcasting; determines theparticular frequencies, locations and operating power of stations; issues,renews, revokes and modifies station licenses; regulates equipment used bystations; adopts and implements regulations and policies that directly orindirectly affect the ownership, operation and employment practices ofstations; and has the power to impose penalties for violations of its rules orthe Communications Act.

 

The following is a brief summary of certain provisions of theCommunications Act, the Telecommunications Act of 1996 (“the 1996 Act”) andspecific FCC regulations and policies. Reference should be made to the CommunicationsAct, the 1996 Act, FCC rules and the public notices and rulings of the FCC forfurther information concerning the nature and extent of federal regulation ofbroadcast stations.

 

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**LicenseGrant and Renewal**

 

Television stations operate pursuant to broadcasting licenses that aregranted by the FCC for maximum terms of eight years and are subject to renewalupon application to the FCC. During certain periods when renewal applicationsare pending, petitions to deny license renewals can be filed by interestedparties, including members of the public. The FCC will generally grant arenewal application if it finds:

 

•                   thatthe station has served the public interest, convenience and necessity;

•                   that there havebeen no serious violations by the licensee of the Communications Act or therules and regulations of the FCC; and

•                   that there havebeen no other violations by the licensee of the Communications Act or the rulesand regulations of the FCC that, when taken together, would constitute apattern of misconduct.

 

KDSM’s FCC license will expire on February 1, 2006.  Although renewal of a license is granted inthe vast majority of cases even when petitions to deny are filed, there can beno assurance that the license of a station will be renewed.

 

**OwnershipMatters**

 

*General.*The Communications Act prohibits the assignment of abroadcast license or the transfer of control of a broadcast licensee withoutthe prior approval of the FCC. In determining whether to permit the assignmentor transfer of control of, or the grant or renewal of, a broadcast license, theFCC considers a number of factors pertaining to the licensee, includingcompliance 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’slimitations on alien ownership.

 

To obtain the FCC’s prior consent to assign a broadcast license ortransfer control of a broadcast licensee, appropriate applications must befiled with the FCC. If the application involves a “substantial change” inownership or control, the application must be placed on public notice for aperiod of approximately 30 days during which petitions to deny the applicationmay be filed by interested parties, including members of the public. If theapplication does not involve a “substantial change” in ownership or control, itis a “pro forma” application. The “pro forma” application is not subject topetitions to deny or a mandatory waiting period, but is nevertheless subject tohaving informal objections filed against it. If the FCC grants an assignment ortransfer application, interested parties have approximately 30 days from publicnotice of the grant to seek reconsideration or review of the grant. Generally,parties that do not file initial petitions to deny or informal objectionsagainst the application face difficulty in seeking reconsideration or review ofthe grant. The FCC normally has approximately an additional 10 days to setaside such grant on its own motion. When passing on an assignment or transferapplication, the FCC is prohibited from considering whether the public interestmight be served by an assignment or transfer to any party other than theassignee 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’sstock (or 20% or more of such stock in the case of insurance companies,investment companies and bank trust departments that are passive investors) aregenerally attributable. In August 1999, the FCC revised its attribution andmultiple ownership rules, and adopted the equity-debt-plus rule that causescertain creditors or investors to be attributable owners of a station. Underthis rule, a major programming supplier (any programming supplier that providesmore than 15% of the station’s weekly programming hours) or same-market mediaentity will be an attributable owner of a station if the supplier orsame-market media entity holds debt or equity, or both, in the station that isgreater than 33% of the value of the station’s total debt plus equity. Forpurposes of this rule, equity includes all stock, whether voting or non-voting,and equity held by insulated limited partners in partnerships. Debt includesall 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 than20% of the capital stock is owned of record or voted by non-U.S. citizens ortheir 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****Actalso authorizes the FCC, if the FCC determines that it would be in the publicinterest, to prohibit the issuance of a broadcast license to, or the holding ofa broadcast license by, any corporation directly or indirectly controlled byany other corporation of which more than 25% of the capital stock is owned ofrecord or voted by aliens. The FCC has issued interpretations of existing lawunder which these restrictions in modified form apply to other forms ofbusiness organizations, including partnerships.

 

As a result of these provisions, the licenses granted to KDSM Licensee,LLC by the FCC could be revoked if, among other restrictions imposed by theFCC, more than 25% of Sinclair’s stock were directly or indirectly owned orvoted by aliens. Sinclair and its subsidiaries are domestic corporations, andthe members of the Smith family

 

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(who together hold over 90% of the common voting rights of Sinclair)are all United States citizens. The amended and restated articles ofincorporation of Sinclair (the amended certificate) contain limitations onalien ownership and control that are substantially similar to those containedin the Communications Act. Pursuant to the amended certificate, Sinclair hasthe right to repurchase alien-owned shares at their fair market value tothe extent necessary, in the judgment of its board of directors, to comply withthe alien ownership restrictions.

 

*Radio/TelevisionCross-Ownership Rule.*The FCC’s radio/television cross-ownershiprule (the “one to a market” rule) generally permits a party to own acombination of up to two television stations and six radio stations dependingon the number of independent media voices in the market.

 

*Broadcast/DailyNewspaper Cross-Ownership Rule.*The FCC’s rules prohibit thecommon ownership of a radio or television broadcast station and a dailynewspaper in the same market.

 

*DualNetwork Rule. *Thefour major television networks, ABC, CBS, NBC and FOX, are prohibited, absent awaiver, from merging with each other. In May 2001, the FCC amended its dual network rule to permit the fourmajor television networks to own, operate, maintain or control the UPN and/orThe WB television network.

 

*NationalOwnership Rule.  *Noindividual or entity may have an attributable interest in television stationsreaching more than 35% of the national television viewing audience. In February2002, the U.S. Court of Appeals for the D.C. Circuit remanded to the FCC itsdecision not to alter this rule.  Underthis rule, which currently remains in effect pending the FCC’s review thereofas mandated by the court, where an individual or entity has an attributableinterest in more than one television station in a market, the percentage of thenational television viewing audience encompassed within that market is onlycounted once. Since, historically, VHF stations have shared a larger portion ofthe market than UHF stations, only half of the households in the market area ofany UHF station are included when calculating whether an entity or individualowns television stations reaching more than 35% of the national televisionviewing audience (commonly referred to as the “UHF discount”). All but eight ofthe stations owned and operated by us, or to which we provide programmingservices, are UHF. We reach approximately 24% of U.S. television households or14% taking into account the FCC’s UHF discount.  KDSM is a UHF station.

 

*LocalTelevision (Duopoly)Rule.*A party may own two televisionstations in adjoining markets, even if there is Grade B overlap between the twostations’ signals, and generally may own two stations in the same market:

 

•                   ifthere is no Grade B overlap between the stations; or

•                   if the marketcontaining both the stations contains at least eight separately-ownedfull-power television stations (the “eight voices test”) and not morethan 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 asecond station in the market if the station to be acquired is economicallydistressed or unbuilt and there is no party who does not own a local televisionstation who would purchase the station for a reasonable price.  In April 2002, the D.C. Circuit held thatthe eight voices test of duopoly rules was arbitrary and capricious andremanded the rules to the FCC for further consideration.

 

In September 2002, the FCC commenced a broad-based rulemakingproceeding to review all of its broadcast multiple ownership rules.  The FCC has publicly stated that it intendsto conclude this proceeding in the spring of 2003.

 

*AntitrustRegulation.*The Department of Justice (“DOJ”) and the Federal****TradeCommission have increased their scrutiny of the television industry since theadoption of the 1996 Act, and have reviewed matters related to theconcentration of ownership within markets (including LMAs) even when theownership or LMA in question is permitted****under the laws administered by the FCC orby FCC rules and regulations. The DOJ takes the position that an LMA enteredinto in anticipation of a station’s acquisition with the proposed buyer of thestation constitutes a change in beneficial ownership of the station which, ifsubject to filing under the Hart-Scott-Rodino Anti Trust Improvements Act(“HSR”) Act, cannot be implemented until the waiting period required by thatstatute has ended or been terminated.

 

Expansion of our broadcast operations on both a local and nationallevel will continue to be subject to the FCC’s ownership rules and any changesthe FCC or Congress may adopt. Concomitantly, any further relaxation of theFCC’s ownership rules may increase the level of competition in the market inwhich our station is located, more specifically to the extent that any of ourcompetitors may have greater resources and thereby be in a superior position totake advantage of such changes.

 

**TheSatellite Home Viewer Act (“SHVA”)**

 

In 1988, Congress enacted SHVA which enabled satellite carriers toprovide broadcast programming to those satellite subscribers who were unable toobtain broadcast network programming over-the-air. SHVA did not permitsatellite carriers to retransmit local broadcast television signals directly totheir subscribers. The Satellite Home Viewer Improvement Act of 1999 (“SHVIA”)revised SHVA to reflect changes in the satellite and broadcasting industry.This legislation allows satellite carriers to provide local television signalsby satellite within a station market, and effective January 1, 2002, requiredsatellite carriers to carry all local signals in any market where it

 

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carries any local signals.  Onor before July 1, 2001, SHVIA required all television stations to elect toexercise certain “must carry” or “retransmission consent” rights in connectionwith their carriage by satellite carriers. We have entered into agreements granting the two primary satellitecarriers retransmission consent to carry all of our stations.

 

**Must-Carry/RetransmissionConsent**

 

Pursuant to the Cable Act of 1992, television broadcasters are requiredto make triennial elections to exercise either certain “must-carry” or“retransmission consent” rights in connection with their carriage by cablesystems in each broadcaster’s local market. By electing the must-carry rights,a broadcaster demands carriage on a specified channel on cable systems withinits Designated Market Area, in general as defined by the Nielsen DMA Market andDemographic Rank Report of the prior year. These must-carry rights are notabsolute, and their exercise is dependent on variables such as:

 

•                   thenumber of activated channels on a cable system,

•                   the locationand size of a cable system, and

•                   the amount ofprogramming on a broadcast station that duplicates the programming of anotherbroadcast station carried by the cable system.

 

Therefore, under certain circumstances, a cable system may decline tocarry a given station. Alternatively, if a broadcaster chooses to exerciseretransmission consent rights, it can prohibit cable systems from carrying itssignal or grant the appropriate cable system the authority to retransmit thebroadcast signal for a fee or other consideration. In October 2002, we electedretransmission consent with respect to KDSM. Our stations continue to be carried on all pertinent cable systems, andwe do not believe that our elections have resulted in the shifting of ourstations to less desirable cable channel locations. Many of the agreements wehave negotiated for cable carriage are short term, subject to month-to-monthextensions.

 

The FCC recently determined not to apply must-carry rules to requirecable companies to carry both the analog and digital signals of localbroadcasters during the DTV transition period between 2002 and 2006 whentelevision stations will be broadcasting both signals. As a result of thisdecision by the FCC, cable customers in our broadcast markets may not receivethe station’s digital signal.

 

**SyndicatedExclusivity/Territorial Exclusivity**

 

The FCC’s syndicated exclusivity rules allow local broadcast televisionstations to demand that cable operators black out syndicated non-networkprogramming carried on “distant signals” (i.e., signals of broadcast stations,including so-called “superstations,” which serve areas substantially removedfrom the cable system’s local community). The FCC’s network non-duplicationrules allow local broadcast network television affiliates to require that cableoperators black out duplicating network programming carried on distant signals.   However, in a number of markets in which weown or program stations affiliated with a network, a station that is affiliatedwith the same network in a nearby market is carried on cable systems in ourmarket. This is not necessarily in violation of the FCC’s networknon-duplication rules. However, the carriage of two network stations on thesame cable system could result in a decline of viewership adversely affectingthe revenues of our owned or programmed stations. The FCC recently announcedthat stations need only broadcast on their digital channel during primetimehours and need only cover their community of license during the DTV transitionperiod.

 

**DigitalTelevision**

 

The FCC has taken a number of steps to implement digital television(“DTV”) broadcasting services**. **TheFCC has adopted an allotment table that provides all authorized televisionstations with a second channel on which to broadcast a DTV signal. The FCC hasattempted to provide DTV coverage areas that are comparable to stations’existing service areas. The FCC has ruled that television broadcast licenseesmay use their digital channels for a wide variety of services such ashigh-definition television, multiple standard definition televisionprogramming, audio, data, and other types of communications, subject to therequirement that each broadcaster provide at least one free video channel equalin quality to the current technical standard and further subject to therequirement that broadcasters pay a fee of 5% of gross revenues on all DTVsubscription services.

 

DTV channels are generally located in the range of channels fromchannel 2 through channel 51. The FCC required that affiliates of ABC, CBS, FOXand 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 begindigital broadcasting by November 1999. All other commercial stations wererequired to begin digital broadcasting****by May 1, 2002.

 

As of May 1, 2002, KDSM is operating their DTV facilities at low poweras permitted by the FCC pursuant to special temporary authority.

 

On May 24, 2002, the FCC issued an Order and Notice of Proposed RuleMaking which proposes a series of graduated sanctions to be imposed uponlicensees who do not meet the FCC’s DTV build-out schedule.  If the rules are adopted, the stations couldface monetary fines and possible loss of any digital construction permits thatare not in compliance with the schedule announced in the rules.  After completion of the transition period,the FCC will

 

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reclaim the non-digital channels. The FCC’s plan calls for the DTV transition period to end December 31,2006, at which time the FCC expects that television broadcasters will ceasenon-digital broadcasting and return one of their two channels to thegovernment, allowing that spectrum to be recovered for other uses. During thetransition period, each existing analog television station will be permitted tooperate a second station that will broadcast using the digital standard.

 

The FCC has been authorized by Congress to extend the 2006 deadline forreclamation of a television station’s non-digital channel if, in any givencase:

 

•                       one or moretelevision stations affiliated with ABC, CBS, NBC or FOX in a market is notbroadcasting digitally, and the FCC determines that each such station has“exercised due diligence” in attempting to convert to digital broadcasting andsatisfies the conditions for an extension of the FCC’s applicable constructiondeadlines for DTV service in that market;

 

•                       digital-to-analogconverter technology is not generally available in such market; or

 

•                       15% or moreof the television households in such market do not subscribe to a multichannelvideo service (cable, wireless cable or direct-to-home broadcast satellitetelevision) that carries at least one digital channel from each of the localstations in that market, and cannot receive digital signals using either atelevision receiver capable of receiving digital signals or a receiver equippedwith a digital-to-analog converter.

 

On January 27, 2003, the FCC initiated its second periodic review ofits rules on the conversion to digital television, releasing a notice ofproposed rulemaking.  The notice invitedcomments on the difficulties broadcasters face in building their DTV stationsand on the interpretation of the statutory language concerning the 2006deadline.

 

Congress directed the FCC to begin auctioning analog channels 60-69 in2001 even though the FCC is not to reclaim them until 2006.  The channel 60-69 auction has been delayedand is currently scheduled to be held in 2003. Congress further permitted broadcasters to bid on the non-digitalchannels in cities with populations over 400,000.  If the channels are owned by our competitors, they may exertincreased competitive pressure on our operations.  In addition, the FCC released a Report and Order on January 18,2002, reallocating the 698-746 MHz spectrum band, currently comprisingtelevision channels 52-59, to permit both wireless services and certain newbroadcast operations.  The FCC completedan auction of this spectrum on September 18, 2002.  Analog broadcasters are required to cease operation on thisspectrum by the end of 2006 unless the FCC extends the end of the digital transitionperiod.  The FCC envisions that thisband will be used for a variety of wireless and broadcast-type applicationsincluding two-way interactive services and services using COFDM technology.  We cannot predict how the development ofthis spectrum will affect Sinclair’s television operations.

 

Implementation of digital television has imposed substantial additionalcosts on television stations because of the need to replace equipment andbecause some stations will need to operate at higher utility costs. There canbe no assurance that our television stations will be able to increase revenueto offset such costs.  In addition theFCC has proposed imposing new public interest requirements on televisionlicensees in exchange for their receipt of DTV channels.

 

**Restrictionson Broadcast Advertising**

 

Advertising of cigarettes and certain other tobacco products onbroadcast stations has been banned for many years. Various states also restrictthe advertising of alcoholic beverages and certain members of Congress arecurrently contemplating legislation to place restrictions on the advertisementof such alcoholic beverage products. FCC rules also restrict the amount and type of advertising which canappear in programming broadcast primarily for an audience of children twelveyears old and younger.

 

The Communications Act and FCC rules also place restrictions on thebroadcasting of advertisements by legally qualified candidates for electiveoffice. Among other things,

 

•                   stationsmust provide “reasonable access” for the purchase of time by legally qualifiedcandidates for federal office,

•                   stations mustprovide “equal opportunities” for the purchase of equivalent amounts ofcomparable broadcast time by opposing candidates for the same elective office,and

•                   during the 45days preceding a primary or primary run-off election and during the 60 dayspreceding a general or special election, legally qualified candidates forelective office may be charged no more than the station’s “lowest unit charge”for the same class of advertisement, length of advertisement, and daypart.

 

We cannot predict the effect of legislation on our station’sadvertising revenues.   During March2002, legislation passed in Congress and was signed into law by the Presidentthat revised the laws regarding the rates charged by

 

8

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television stations to legally qualified candidates for office and therules regarding “soft money” advertising and advocacy advertising by laborunions and corporations. Immediately upon passage, a constitutional challengewas filed.

 

**Programmingand Operation**

 

*General.*The Communications Act requires broadcasters to serve the“public interest.” The FCC has relaxed or eliminated many of the moreformalized procedures it had developed in the past to promote the broadcast ofcertain types of programming responsive to the needs of a station’s communityof license. FCC licensees continue to be required, however, to presentprogramming that is responsive to the needs and interests of their communities,and to maintain certain records demonstrating such responsiveness. Complaintsfrom viewers concerning a station’s programming may be considered by the FCCwhen it evaluates renewal applications of a licensee, although such complaintsmay be filed at any time and generally may be considered by the FCC at anytime. Stations also must pay regulatory and application fees, and followvarious rules promulgated under the Communications Act that regulate, amongother things, political advertising, sponsorship identifications, obscene andindecent broadcasts, and technical operations, including limits on radiofrequency radiation.

 

*EqualEmployment Opportunities.* On November 20, 2002, the FCC adopted new rules requiring licensees tocreate equal employment opportunity outreach programs and maintain records andmake filings with the FCC evidencing such efforts.  The FCC simultaneously released a notice of proposed rulemakingseeking comments on whether and how to apply the new rules and policies topart-time positions, defined as less than 30 hours per week.

 

*Children’sTelevision Programming.*Television stations are required tobroadcast a minimum of three hours per week of “core” children’s educationalprogramming, which the FCC defines as programming that

 

•                       has thesignificant purpose of servicing the educational and informational needs ofchildren 16 yearsof age and under;

•                       isregularly scheduled, weekly and at least 30 minutes in duration; and

•                       is airedbetween the hours of 7:00 a.m. and 10:00 p.m.

 

Furthermore, “core” children’s educational programs, in order toqualify as such, are required to be identified as educational and informationalprograms over the air at the time they are broadcast, and are required to beidentified in the children’s programming reports required to be placedquarterly in stations’ public inspection files and filed quarterly with theFCC.

 

Additionally, television stations are required to identify and provideinformation concerning “core” children’s programming to publishers of programguides. The FCC is considering whether or not to require the use of the digitalbroadcast spectrum for the broadcast of additional amounts of “core” children’sprogramming.

 

*TelevisionProgram Content.*The television industry has developed aratings system that has been approved by the FCC, that is designed to provideparents with information regarding the content of the programming being aired.Furthermore, the FCC requires certain television sets to include the so-called“V-chip,” a computer chip that allows blocking of rated programming.

 

**PendingMatters**

 

The Congress and the FCC have under consideration, and in the futuremay consider and adopt, new laws, regulations and policies regarding a widevariety of matters that could affect, directly or indirectly, the operation,ownership and profitability of our broadcast station, result in the loss ofaudience share and advertising revenues for our broadcast station, and affectour ability to acquire additional broadcast stations or finance suchacquisitions. In addition to the changes and proposed changes noted above, suchmatters may include, for example, the license renewal process, spectrum usefees, political advertising rates, potential restrictions on the advertising ofcertain products (beer, wine and hard liquor, for example), and the rules andpolicies with respect to equal employment opportunity.

 

Other matters that could affect KDSM include technological innovationsand developments generally affecting competition in the mass communicationsindustry, such as direct television broadcast satellite service, Class Atelevision service, the continued establishment of wireless cable systems andlow power television stations, digital television technologies, the Internetand the advent of telephone company participation in the provision of videoprogramming service.

 

**OtherConsiderations**

 

The foregoing summary does not purport to be a complete discussion ofall provisions of the Communications Act or other congressional acts or of theregulations and policies of the FCC. For further information, reference shouldbe made to the Communications Act, the 1996 Act, other congressional acts, andregulations and public notices promulgated from time to time by the FCC. Thereare additional regulations and policies of the FCC and other federal agenciesthat govern political broadcasts, advertising, equal employment opportunity,and other matters affecting our business and operations.

 

9

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**ENVIRONMENTALREGULATION**

 

Prior to Sinclair’s ownership or operation of facilities, substances orwaste that are or might be considered hazardous under applicable environmentallaws may have been generated, used, stored or disposed of at certain of thosefacilities. In addition, environmental conditions relating to the soil andgroundwater at or under Sinclair’s facilities may be affected by the proximityof nearby properties that have generated, used, stored or disposed of hazardoussubstances. As a result, it is possible that Sinclair could become subject toenvironmental liabilities in the future in connection with these facilitiesunder applicable environmental laws and regulations. Although Sinclair believesthat they are in substantial compliance with such environmental requirements,and have not in the past been required to incur significant costs in connectiontherewith, there can be no assurance that their costs to comply with suchrequirements will not increase in the future. Sinclair presently believes that noneof their properties have any condition that is likely to have a materialadverse effect on their financial condition or results of operations.

 

**COMPETITION**

 

Sinclair television stations compete for audience share and advertisingrevenue with other television stations in their respective DMAs, as well aswith other advertising media, such as radio, newspapers, magazines, outdooradvertising, transit advertising, Internet, yellow page directories, directmail, satellite television and local cable television and wireless video. Somecompetitors are part of larger organizations with substantially greaterfinancial, technical and other resources than Sinclair has.

 

*TelevisionCompetition.*Competition in the television broadcastingindustry occurs primarily in individual DMAs. Generally, a televisionbroadcasting station in one DMA does not compete with stations in other DMAs.Sinclair television stations are located in highly competitive DMAs. Inaddition, certain of Sinclair’s DMAs are overlapped by both over-the-air andcable carriage of stations in adjacent DMAs, which tends to spread viewershipand advertising expenditures over a larger number of television stations.

 

Broadcast television stations compete for advertising revenuesprimarily with other broadcast television stations, radio stations, cablechannels and cable system operators serving the same market, as well as withnewspapers, the Internet, yellow page directories and outdoor advertisingopportunities. Traditional network programming generally achieves higherhousehold audience levels than FOX, WB and UPN programming and syndicatedprogramming aired by Sinclair’s independent stations. This can be attributed toa combination of factors, including the traditional networks’ efforts to reacha broader audience, generally better signal carriage available whenbroadcasting over VHF channels 2 through 13 versus broadcasting over UHFchannels 14 through 69 and the higher number of hours of traditional networkprogramming being broadcast weekly. However, greater amounts of advertisingtime are available for sale during FOX, UPN and WB programming and non-networksyndicated programming, and as a result Sinclair believes that theirprogramming typically achieves a share of television market advertising revenuesgreater than its share of the market’s audience.

 

Television stations compete for audience share primarily on the basisof program popularity, which has a direct effect on advertising rates. A largeamount of a station’s programming is supplied by FOX, ABC, NBC and CBS, and toa lesser extent WB and UPN. In those periods, Sinclair’s affiliated stationsare largely dependent upon the performance of the networks’ programs inattracting viewers. Non-network time periods are programmed by the stationprimarily with syndicated programs purchased for cash, cash and barter, orbarter-only, and also through self-produced news, public affairs, live localsporting events, and other entertainment programming.

 

Television advertising rates are based upon factors which include thesize of the DMA in which the station operates, a program’s popularity among theviewers that an advertiser wishes to attract, the number of advertiserscompeting for the available time, the demographic makeup of the DMA served bythe station, the availability of alternative advertising media in the DMAincluding radio, cable, newspapers and yellow page directories, theaggressiveness and knowledge of sales forces in the DMA and development ofprojects, features and programs that tie advertiser messages to programming.Sinclair believes that their sales and programming strategies allow them tocompete effectively for advertising within their DMAs.

 

Other factors that are material to a television station’s competitiveposition include signal coverage, local program acceptance, networkaffiliation, audience characteristics and assigned broadcast frequency.Historically, Sinclair’s UHF broadcast stations have suffered a competitivedisadvantage in comparison to stations with VHF broadcast frequencies. Thishistoric disadvantage has gradually declined through:

 

•                   carriageon cable systems, and in certain markets, direct broadcast satellite,

•                   improvement intelevision receivers,

•                   improvement intelevision transmitters,

•                   wider use ofall channel antennae,

•                   increasedavailability of programming, and

•                   the developmentof new networks such as FOX, WB and UPN.

 

10

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The broadcasting industry is continuously faced with technical changesand innovations, competing entertainment and communications media, changes inlabor conditions, and governmental restrictions or actions of federalregulatory bodies, including the FCC, any of which could possibly have amaterial effect on a television station’s operations and profits. For instance,the FCC has established Class A television service for qualifying low powertelevision stations. A low power television station that qualifies for Class Ahas certain rights currently accorded to full-power television stations, whichmay allow them to compete more effectively with full power stations. Sinclaircannot predict the effect of increased competition from Class A televisionstations in markets where they have full-power television stations.

 

There are sources of video service other than conventional televisionstations, the most common being cable television, which can increasecompetition for a broadcast television station by bringing into its marketdistant broadcasting signals not otherwise available to the station’s audience,serving as a distribution system for national satellite-delivered programmingand other non-broadcast programming originated on a cable system and sellingadvertising time to local advertisers. Other principal sources of competitioninclude home video exhibition and Direct Broadcast Satellite services andmultichannel multipoint distribution services (“MMDS”). DBS and cable operatorsin particular are competing more aggressively than in the past for advertisingrevenues in Sinclair’s TV stations’ markets. This competition could adverselyaffect Sinclair’s stations’ revenues and performance in the future.

 

In addition, SHVIA could also have an adverse effect on Sinclair’sbroadcast stations’ audience share and advertising revenue because it may allowsatellite carriers to provide the signal of distant stations with the samenetwork affiliation as Sinclair’s stations to more television viewers inSinclair’s markets than would have been permitted under previous law. Thelegislation also allows satellite carriers to provide local television signalsby satellite within a station market.

 

Moreover, technology advances and regulatory changes affectingprogramming delivery through fiber optic telephone lines and video compressioncould lower entry barriers for new video channels and encourage the developmentof increasingly specialized “niche” programming. Telephone companies arepermitted to provide video distribution services via radio communication, on acommon carrier basis, as “cable systems” or as “open video systems,” eachpursuant to different regulatory schemes. Sinclair is unable to predict whatother video technologies might be considered in the future, or the effect thattechnological and regulatory changes will have on the broadcast televisionindustry and on the future profitability and value of a particular broadcasttelevision station.

 

Sinclair is currently exploring whether or not television broadcastingwill be enhanced significantly by the development and increased availability ofDTV technology. This technology has the potential to permit Sinclair to provideviewers multiple channels of digital television over each of their existingstandard channels, to provide certain programming in a high definitiontelevision format and to deliver various forms of data, including data on theInternet, to PCs and handheld devices. These additional capabilities mayprovide Sinclair with additional sources of revenue as well as additionalcompetition.

 

While DTV technology is currently available in a large number ofviewing markets, a successful transition from the current analog broadcastformat to a digital format may take many years.  Sinclair cannot be assured that their efforts to take advantageof the new technology will be commercially successful.

 

Sinclair also competes for programming, which involves negotiating withnational program distributors or syndicators that sell first-run and rerunpackages of programming. Sinclair’s stations compete for exclusive access tothose programs against in-market broadcast station competitors for syndicatedproducts. Although, historically cable systems did not generally compete withlocal stations for programming, more recently national cable networks have morefrequently acquired programs that would have otherwise been offered to localtelevision stations.  Publicbroadcasting stations generally compete with commercial broadcasters forviewers but not for advertising dollars.

 

Historically, the cost of programming has increased because of anincrease in the number of new independent stations and a shortage of qualityprogramming. However, Sinclair believes that over the past five years programprices generally have stabilized or fallen on a per station basis, butaggregate programming costs have risen as they have attempted to improve thequality of their stations’ programming line-ups.

 

Sinclair believes they compete favorably against other televisionstations because of Sinclair’s management skill and experience, their abilityhistorically to generate revenue share greater than their audience share, theirnetwork affiliations and their local program acceptance. In addition, Sinclairbelieves that they benefit from the operation of multiple broadcast properties,affording them certain non-quantifiable economies of scale and competitiveadvantages in the purchase of programming.

 

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**EMPLOYEES**

 

As of December 31, 2002, we had approximately 46 employees.  None of the employees are represented bylabor unions under any collective bargaining agreement.  We have not experienced significant laborproblems 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 toprovide maximum signal coverage of the station’s market.  The following table generally describes ourprincipal  owned and leased realproperty in the Des Moines market:

 
| **Type of Facility and Use**   |   | **Owned or Leased**         |   | **Approximate Size (sq.feet)** |   |
|--------------------------------|--------|-----------------------------|--------|--------------------------------|--------|
|                           |   |                        |   |                           |   |
| KDSM Studio  & Office Site |   | Owned                       |   | 13,000                         |   |
| KDSM Transmitter  Land         |   | Leased (expires 11/08/2034) |   | 2,346                          |   |

 

We believe that all of our properties, both owned and leased, aregenerally in good operating condition,  subject to normalwear and tear, and are suitable and adequate for our current businessoperations.

 

**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 does notbelieve that these actions, individually or in the aggregate, will have amaterial adverse affect on our financial condition or results of operations.

 

**ITEM 4. SUBMISSION OF MATTERS TO AVOTE OF SECURITY HOLDERS**

** **

No matters were submitted to a vote of our  stockholders  during thefourth quarter of 2002.

 

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**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 December31, 2002, 2001, 2000, 1999 and 1998 have been derived from our audited  Consolidated Financial Statements.  The Consolidated Financial Statements forthe years ended December 31, 2002, 2001 and 2000 are included elsewhere in thisForm 10-K.

 

The information below should be read in conjunction with “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” andthe Consolidated Financial Statements included elsewhere in this report.

 
|                                                      |   | **Years  Ended December 31,** |    |
|-----------------------------------------------------------|--------|-------------------------------|---------|
|                                                      |   | **2002**                      |    | **2001** |   | **2000** |   | **1999** |   | **1998** |   |
|                                                      |   | **(dollars  in thousands)**   |    |
| **Statement of Operations Data:**                         |   |                          |    |   |   |   |   |   |   |   |   |
| Net broadcast  revenues (a)                               |   | $                             | 7,385   |   | $ | 7,751 |   | $ | 8,807 |   | $ | 8,461 |   | $ | 8,363 |   |
| Barter revenues                                           |   | 862                           |    | 775 |   | 731 |   | 541 |   | 552 |   |
|                                                      |   |                          |    |   |   |   |   |   |   |   |   |
| Total revenues                                            |   | 8,247                         |    | 8,526 |   | 9,538 |   | 9,002 |   | 8,915 |   |
|                                                      |   |                          |    |   |   |   |   |   |   |   |   |
| Operating costs  (b)                                      |   | 4,454                         |    | 4,586 |   | 4,241 |   | 3,997 |   | 3,742 |   |
| Expenses from  barter arrangements                        |   | 730                           |    | 629 |   | 636 |   | 392 |   | 377 |   |
| Depreciation and  amortization (c)                        |   | 2,434                         |    | 3,442 |   | 2,952 |   | 2,915 |   | 3,676 |   |
| Stock-based  compensation                                 |   | 1                             |    | 24 |   | 26 |   | 23 |   | 23 |   |
|                                                      |   |                          |    |   |   |   |   |   |   |   |   |
| Broadcast  operating income (loss)                        |   | 628                           |    | (155 | ) | 1,683 |   | 1,675 |   | 1,097 |   |
| Dividend and  interest income (d)                         |   | 26,033                        |    | 26,033 |   | 26,033 |   | 26,033 |   | 26,033 |   |
| Subsidiary trust  minority interest expense (e)           |   | (23,890                       | )       | (23,890 | ) | (23,890 | ) | (23,890 | ) | (23,923 | ) |
| Capital lease  interest expense                           |   | (248                          | )       | (81 | ) | — |   | — |   | — |   |
| Gain on sale of  broadcast assets                         |   | 32                            |    | — |   | — |   | — |   | — |   |
| Interest and  other income                                |   | 1,278                         |    | 1,095 |   | 1,179 |   | 671 |   | 239 |   |
|                                                      |   |                          |    |   |   |   |   |   |   |   |   |
| Income before  income taxes                               |   | 3,833                         |    | 3,002 |   | 5,005 |   | 4,489 |   | 3,446 |   |
|                                                      |   |                          |    |   |   |   |   |   |   |   |   |
| Cumulative adjustment for change in accounting  principle |   | (23,178                       | )       | — |   | — |   | — |   | — |   |
| Net income                                                |   | $                             | (19,345 | ) | $ | 3,002 |   | $ | 5,005 |   | $ | 8,977 |   | $ | 729 |   |
|                                                      |   |                          |    |   |   |   |   |   |   |   |   |
| Net income  available to common shareholders              |   | $                             | (19,345 | ) | $ | 3,002 |   | $ | 5,005 |   | $ | 8,977 |   | $ | 729 |   |
|                                                      |   |                          |    |   |   |   |   |   |   |   |   |
| **Other Data:**                                           |   |                          |    |   |   |   |   |   |   |   |   |
| Broadcast cash  flow (BCF) (f)                            |   | $                             | 1,876   |   | $ | 2,094 |   | $ | 3,284 |   | $ | 3,433 |   | $ | 3,693 |   |
| BCF margin (g)                                            |   | 25.4                          | %       | 27.0 | % | 37.3 | % | 40.6 | % | 44.2 | % |
| Adjusted EBITDA  (h)                                      |   | $                             | 1,607   |   | $ | 1,804 |   | $ | 2,992 |   | $ | 3,175 |   | $ | 3,423 |   |
| Adjusted EBITDA  margin (g)                               |   | 21.8                          | %       | 23.3 | % | 34.0 | % | 37.5 | % | 40.9 | % |
| Program contract  payments                                |   | $                             | 1,456   |   | $ | 1,561 |   | $ | 1,669 |   | $ | 1,438 |   | $ | 1,373 |   |
| Corporate  overhead expense                               |   | 269                           |    | 290 |   | 292 |   | 258 |   | 270 |   |
| Capital  expenditures                                     |   | 808                           |    | 1,727 |   | 955 |   | 151 |   | 235 |   |
| Cash flows from  operating activities                     |   | 5,370                         |    | 6,220 |   | 6,968 |   | 10,428 |   | 4,210 |   |
| Cash flows used  in investing activities                  |   | (208                          | )       | (1,727 | ) | (955 | ) | (151 | ) | (235 | ) |
| Cash flows used  in financing activities                  |   | (5,165                        | )       | (4,557 | ) | (5,950 | ) | (10,275 | ) | (3,979 | ) |
|                                                      |   |                          |    |   |   |   |   |   |   |   |   |
| **Balance Sheet Data:**                                   |   |                          |    |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                                |   | $                             | 5       |   | $ | 8 |   | $ | 72 |   | $ | 9 |   | $ | 7 |   |
| Total assets                                              |   | 259,371                       |    | 279,075 |   | 272,705 |   | 268,061 |   | 259,519 |   |
| HYTOPS (i)                                                |   | 200,000                       |    | 200,000 |   | 200,000 |   | 200,000 |   | 200,000 |   |
| Total  stockholders equity                                |   | 52,117                        |    | 71,462 |   | 68,460 |   | 63,455 |   | 54,478 |   |

 

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

 

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

(c)               Depreciation andamortization includes amortization of program contract costs and net realizablevalue adjustments, depreciation and amortization of property and equipment, andamortization of definite-lived intangible assets, and costs related to excesssyndicated programming.

(d)              Dividend andinterest income primarily results from dividends on the Parent PreferredSecurities.

(e)               Subsidiary trustminority interest expense represents distributions on the HYTOPS andamortization of deferred financing costs.

(f)                 “Broadcast cashflow” is defined as operating income plus corporate expenses, stock basedcompensation, contract termination costs, restructuring charges anddepreciation and amortization (including film amortization and excesssyndicated programming), less cash payments for program rights.  Cash program payments represent cashpayments made for current programs payable and do not necessarily correspond toprogram usage.  We have presentedbroadcast cash flow data, which we believe is comparable to the data providedby other companies in the industry, because such data are commonly used as ameasure of performance for broadcast companies; however, there can be noassurance that it is comparable. However, broadcast cash flow does not purport to represent cash providedby operating activities as reflected in our consolidated statements of cashflows and is not a measure of financial performance under generally acceptedaccounting principles.  In addition, BCFshould not be considered in isolation or as a substitute for measures ofperformance prepared in accordance with generally accepted accountingprinciples.  Management believes thepresentation of BCF is relevant and useful because (1) it is a measurementutilized by lenders to measure our ability to service our debt, (2) it is ameasurement utilized by industry analysts to determine a private market valueof our television stations and (3) it is a measurement industry analysts utilizewhen determining our television operating performance.

(g)              “Broadcast cash flowmargin” is defined as broadcast cash flow divided by net broadcastrevenues.  “Adjusted EBITDA margin” isdefined as Adjusted EBITDA divided by net broadcast revenues.

(h)              “Adjusted EBITDA” isdefined as broadcast cash flow less corporate expenses and is a commonly usedmeasure of performance for broadcast companies.  We have presented Adjusted EBITDA data, which we believe iscomparable to the data provided by other companies in the industry, becausesuch data are commonly used as a measure of performance for broadcastcompanies; however, there can be no assurances that it is comparable.  Adjusted EBITDA does not purport to representcash provided by operating activities as reflected in our consolidatedstatements of cash flows, is not a measure of financial performance undergenerally accepted accounting principles and should not be considered inisolation or as a substitute for measures of performance prepared in accordancewith generally accepted accounting principles. Management believes thepresentation of BCF is relevant and useful because (1) it is a measurementutilized by lenders to measure our ability to service our debt, (2) it is ameasurement utilized by industry analysts to determine a private market valueof our television stations and (3) it is a measurement industry analystsutilize when determining our television operating performance.

(i)                  HYTOPSrepresents our obligated mandatorily redeemable security of subsidiary trustholding Solely KDSM Senior Debentures representing $200 million aggregateliquation value.

 
| **ITEM 7.** | **MANAGEMENT’S  DISCUSSION AND ANALYSIS OF FINANCIAL  CONDITION AND RESULTS OF** |
|-------------|--------------------------------------------------------------------------------------------|
|        | **OPERATIONS**                                                                             |

** **

**INTRODUCTIO**N

 

Our operating revenues are derived from local and national advertisersand, to a much lesser extent, from political advertisers and television networkcompensation. Our revenues from local advertisers have continued to trendupward 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 the result of our focus onincreasing local advertising revenues as a percentage of total advertisingrevenues from an increase in the number of media  outlets  providing  national advertisers a means by which toadvertise their goods and services.  Ourefforts to mitigate the effect of increasing national media outlets includecontinuing our efforts to increase local revenues and the development ofinnovative  marketing  strategies to sell traditional andnon-traditional services to national advertisers.

 

Our primary operating expenses are syndicated  program  rights fees,  commissions  onrevenues,  employee  salaries and station  promotional costs.  Amortization anddepreciation  of costs  associated with the acquisition of the station and news gathering are alsosignificant factors in determining our overall profitability.

 

**Critical Accounting Policies andEstimates**

** **

Our discussion and analysis of our financial condition and results ofour operations are based on our consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States.  The preparation ofthese financial statements requires us to make estimates and judgments thataffect the reported amount of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities.  On an on-going basis, we evaluate ourestimates, including those related to bad debts, income taxes, program contractcosts, property and equipment, intangible assets, investments, and derivativecontracts.  We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions.

 

We have identified the policies below as critical to our businessoperations and the understanding of our results of operations.  For a detailed discussion on the applicationof these and other accounting policies, see the Notes to the ConsolidatedFinancial Statements.

 

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*Allowance for Doubtful Accounts.*  Wemaintain allowance for doubtful accounts for estimated losses resulting fromthe inability of our customers to make required payments.  If the economy and /or the financialcondition of our customers were to deteriorate, resulting in an impairment oftheir ability to make their payments, additional allowances may be required.

 

*ProgramContract Costs**.***  Wehave agreements with distributors for the rights to television programming overcontract periods which generally run from one to seven years.  Contract payments are made in installmentsover terms that are generally shorter than the contract period.  Each contract is recorded as an asset and aliability at an amount equal to its gross contractual commitment when thelicense period begins and the program is available for its first showing.  The portion of program contracts which becomepayable within one year is reflected as a current liability in the ConsolidatedBalance Sheets.

 

The rights to program materials are reflected in the ConsolidatedBalance Sheets at the lower of unamortized cost or estimated net realizablevalue.  Estimated net realizable valuesare based upon management’s expectation of future advertising revenues net ofsale commissions to be generated by the program material.  Amortization of program contract costs isgenerally computed using either a four year accelerated method or based onusage, whichever yields the greater amortization for each program.  Program contract costs, estimated bymanagement to be amortized in the succeeding year, are classified as currentassets.  Payments of program contractliabilities are typically paid on a scheduled basis and are not affected byadjustments for amortization or estimated net realizable value.******If we are unable torealize management’s estimate of future advertising revenues, additionalwritedowns to net realizable value may be required.

 

*Valuationof Goodwill, Long-Lived Assets and Intangible Assets.** ***We periodically evaluate our goodwill,long-lived assets and intangible assets for potential impairmentindicators.  Our judgments regarding theexistence of impairment indicators are based on estimated future cash flows,market conditions, operational performance of our stations and legalfactors.  Future events could cause usto conclude that impairment indicators exist and that the net book value oflong-lived assets and intangible assets is impaired.  Any resulting impairment loss could have a material adverseimpact on our financial condition and results of operations.

 

*IncomeTaxes.** ***We recognizedeferred tax assets and liabilities based on the differences between thefinancial statement carrying amounts and the tax bases of assets andliabilities.  We regularly review ourdeferred tax assets for recoverability and establish a valuation allowancebased on historical taxable income, projected future taxable income and theexpected timing of the reversals of existing temporary differences.   If we are unable to generate sufficienttaxable income, or if there is a material change in the actual effective taxrates or time period within which the underlying temporary differences becometaxable or deductible, we could be required to establish a valuation allowanceagainst all or a significant portion of our deferred tax assets resulting in asubstantial increase in our effective tax rate and a material adverse impact onour operating results.

 

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 ourtotal gross broadcast revenues:

 

**BROADCAST REVENUES**

**(dollars in thousands)**

** **
|                        |   | **Years  ended December 31,** |   |
|-----------------------------|--------|-------------------------------|--------|
|                        |   | **2002**                      |   | **2001** |   | **2000** |   |
| Local/regional  advertising |   | $                             | 7,091  |   | 84.9 | % | $ | 7,309 |   | 83.0 | % | $ | 7,531 |   | 75.4 | % |
| National  advertising       |   | 899                           |   | 10.8 | % | 1,444 |   | 16.4 | % | 2,356 |   | 23.6 | % |
| Political  advertising      |   | 250                           |   | 3.0 | % | 1 |   | 0.0 | % | 26 |   | 0.3 | % |
| Production                  |   | 108                           |   | 1.3 | % | 50 |   | 0.6 | % | 70 |   | 0.7 | % |
| Broadcast  revenues         |   | 8,348                         |   | 100.0 | % | 8,804 |   | 100.0 | % | 9,983 |   | 100.0 | % |
| Less: agency  commissions   |   | (963                          | )      |   |   | (1,053 | ) |   |   | (1,176 | ) |   |   |
| Broadcast  revenues, net    |   | 7,385                         |   |   |   | 7,751 |   |   |   | 8,807 |   |   |   |
| Barter revenues             |   | 862                           |   |   |   | 775 |   |   |   | 731 |   |   |   |
| Total revenues              |   | $                             | 8,247  |   |   |   | $ | 8,526 |   |   |   | $ | 9,538 |   |   |   |

 

Our primary types of programming and their approximate  percentages of 2002 net broadcast revenueswere syndicated programming (49.0%), sports programming  (18.3%), networkprogramming (15.1%), news programming (9.5%), paid programming  (5.8%), and children’s programming  (2.3%). Similarly,  our six largest  categories of advertising and their  approximate percentages of 2002 net time sales were automotive (24.8%), services (16.3%), restaurants (11.0%), furniture (7.6%), food (6.7%) and retail(5.9%).  No other  advertising category accounted for more than 5.5% of our net broadcast  revenues in 2002. No individual advertiseraccounted for more than 4.6% of the station’s net broadcast revenues in 2002.

 

The following  table sets forthcertain of our operating data for the years ended December 31, 2002, 2001 and2000. For definitions of items,  seefootnotes to table in “Item 6. Selected Financial Data”.

 

15

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**OPERATING DATA**

**(dollars in thousands)**

** **
|                                                                                  |   | **Years  ended December 31,** |    |
|---------------------------------------------------------------------------------------|--------|-------------------------------|---------|
|                                                                                  |   | **2002**                      |    | **2001** |   | **2000** |   |
| Net broadcast  revenues (a)                                                           |   | $                             | 7,385   |   | $ | 7,751 |   | $ | 8,807 |   |
| Barter revenues                                                                       |   | 862                           |    | 775 |   | 731 |   |
| Total revenues                                                                        |   | 8,247                         |    | 8,526 |   | 9,538 |   |
| Operating costs  (b)                                                                  |   | 4,454                         |    | 4,586 |   | 4,241 |   |
| Expenses from  barter arrangements                                                    |   | 730                           |    | 629 |   | 636 |   |
| Depreciation and  amortization (c)                                                    |   | 2,434                         |    | 3,442 |   | 2,952 |   |
| Stock-based  compensation                                                             |   | 1                             |    | 24 |   | 26 |   |
| Broadcast  operating income (loss)                                                    |   | 628                           |    | (155 | ) | 1,683 |   |
| Parent preferred  stock dividend income (d)                                           |   | 26,033                        |    | 26,033 |   | 26,033 |   |
| Subsidiary trust  minority interest expense (e)                                       |   | (23,890                       | )       | (23,890 | ) | (23,890 | ) |
| Capital lease  interest expense                                                       |   | (248                          | )       | (81 | ) | — |   |
| Gain on sale of  broadcast assets                                                     |   | 32                            |    | — |   | — |   |
| Interest and  other income                                                            |   | 1,278                         |    | 1,095 |   | 1,179 |   |
| Income before  income taxes                                                           |   | 3,833                         |    | 3,002 |   | 5,005 |   |
| Cumulative adjustment  for change in accounting principle net of related income taxes |   | (23,178                       | )       | — |   | — |   |
| Net income  (loss)                                                                    |   | $                             | (19,345 | ) | $ | 3,002 |   | $ | 5,005 |   |
| Net income  (loss) available to common shareholders                                   |   | $                             | (19,345 | ) | $ | 3,002 |   | $ | 5,005 |   |
|                                                                                  |   |                          |    |   |   |   |   |
| **BROADCAST CASH FLOW (BCF) DATA:**                                                   |   |                          |    |   |   |   |   |
| BCF (f)                                                                               |   | $                             | 1,876   |   | $ | 2,094 |   | $ | 3,284 |   |
| BCF margin (g)                                                                        |   | 25.4                          | %       | 27.0 | % | 37.3 | % |
|                                                                                  |   |                          |    |   |   |   |   |
| **OTHER DATA:**                                                                       |   |                          |    |   |   |   |   |
| Adjusted EBITDA  (h)                                                                  |   | $                             | 1,607   |   | $ | 1,804 |   | $ | 2,992 |   |
| Adjusted EBITDA  margin (g)                                                           |   | 21.8                          | %       | 23.3 | % | 34.0 | % |
| Program contract  payments                                                            |   | $                             | 1,456   |   | $ | 1,561 |   | $ | 1,669 |   |
| Corporate  overhead expense                                                           |   | 269                           |    | 290 |   | 292 |   |
| Capital  expenditures                                                                 |   | 808                           |    | 1,727 |   | 955 |   |
| Cash flows from  operating activities                                                 |   | 5,370                         |    | 6,220 |   | 6,968 |   |
| Cash flows used  in investing activities                                              |   | (208                          | )       | (1,727 | ) | (955 | ) |
| Cash flows used  in financing activities                                              |   | (5,165                        | )       | (4,557 | ) | (5,950 | ) |

 

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**RESULTS OF OPERATIONS**

** **

**Years Ended December 31, 2002 and2001**

 

Net broadcast revenues decreased to $7.4 million for the year endedDecember 31, 2002 from $7.8 million for the year ended December 31, 2001.  When comparing the year ended December 31,2002 to the year ended December 31, 2001, revenues from local advertisersdecreased approximately $218,000, or 3.0% and revenues from nationaladvertisers decreased approximately $545,000, or 37.8%.  Our decrease in local and national revenuewas offset by a decrease in agency commissions of approximately $90,000.  The decrease in advertising revenues isprimarily related to the soft advertising market across most revenuecategories, specifically the soft drink, food and telecommunications sectors,offset by an increase in the political and automotive sectors and a decrease inagency commissions.

 

Station  operating  costs decreased to $4.5 million for the year ended  December 31, 2002 from $4.6 million for the year ended December31, 2001, or 2.2%.  The decrease inoperating  costs for the year endedDecember 31, 2002, as  compared to theyear ended  December  31, 2001 primarily  related to decreasesin sales expenses, commissions and stock based compensation offset by anincrease in promotion, news programming and music license fees.

 

Depreciation and amortization decreased to $2.4 million for the year ended December  31, 2002 from $3.4 million for the yearended  December  31, 2001. The decrease in depreciation and amortization for the year endedDecember 31, 2002 as compared to the year ended December 31, 2001 primarilyresulted from the adoption of Statement of Financial Accounting Standard (SFAS)No. 142, *Goodwilland Other Intangible Assets*, which resulted in the discontinuationof amortization of our goodwill and broadcast license, offset by an increase indepreciation of fixed assets related to our property additions.

 

Broadcast operating income for the year ended December 31, 2002 was$628,000 compared to broadcast operating loss of $155,000 for the year endedDecember 31, 2001.  The increase inbroadcast operating income for the year ended December 31, 2002 was primarilyattributable to the adoption of SFAS No. 142 which resulted in thediscontinuation of amortization of our goodwill and our broadcast license,offset by an increase in depreciation of fixed assets related to our propertyadditions.

 

Parent  preferred stock dividendincome of $26.0 million for the year ended December  31,  2002 is related toour  investment  in 12.625% series C preferred stock (theparent preferred securities) issued by Sinclair,  completed March 12, 1997. Subsidiary trust minority interest expense of $23.9 million for the year ended  December 31, 2002 is related to theplacement of the  subsidiary trustpreferred  securities (the “HYTOPS”) and$640,000 of deferred financing cost amortization.  Our ability to make future subsidiary trust  minority interest  payments is  directly contingent  upon the  parent’s ability to pay dividends on parentpreferred stock.

 

We  recorded  no income tax  provision or benefit for theyears ended December  31, 2002 andDecember  31,  2001.  The income taxesdid not change for the year ended December 31, 2002 as compared to the yearended December 31, 2001 because of the dividends received deduction associatedwith the HYTOPS and the adjustment to the valuation allowance on the state netoperating losses generated.  Oureffective tax rate for the years ended December 31, 2002 and December 31, 2001was zero.

 

Net deferred taxes remained consistent at zero as of December 31, 2002as compared to December 31, 2001. Federal income taxes are allocated to or from us by Sinclair at thestatutory  rate,  are considered payable or receivable  currently and arereflected as an adjustment to due from parent or due to parent in our balancesheet  depending  upon whether there is a tax benefit orprovision, respectively.

 

Net loss increased to $19.3 million for the year ended  December 31, 2002 from a net income of $3.0million for the year ended  December 31,2001.  The net loss for the yearended  December 31, 2002 as compared tothe net income for the year ended December 31, 2001 is primarily due to theadoption of SFAS No. 142 which required an impairment charge to goodwill.  The total impairment charge is reflected asa cumulative effect of a change in accounting principle in the amount of $23.2million.

 

Broadcast  cash flow  decreased to $1.9 million for the year endedDecember 31, 2002 from $2.1 million for the year ended  December 31, 2001,  or 9.5%.  Ourbroadcast  cash flow margin  decreased to 25.4% for the year ended  December 31, 2002 from 27.0% for the yearended December 31, 2001. The decrease in  broadcast  cash flow and  broadcast  cash flowmargin for the year ended  December  31, 2002 as  compared  to the year ended  December  31,  2001primarily  resulted  from a decrease in revenues related to thesoft advertising market,  offset by a  decrease in  operating  expenses.

 

Adjusted  EBITDA  represents broadcast cash flow lesscorporate expense.  Adjusted EBITDAdecreased to $1.6 million for the year ended December 31, 2002 from $1.8  million for the year ended  December  31, 2001,  or 11.1%.  Our adjusted  EBITDA margin  decreased to21.7% for the year ended December 31, 2002 from 23.3% for the year endedDecember 31, 2001.  The decrease inadjusted EBITDA and margins for the year ended December 31, 2002 as compared tothe year ended December 31, 2001 primarily resulted from a decrease inbroadcast cash flow, offset by a decrease in corporate expense.

 

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**Years Ended December 31, 2001 and2000**

 

Net broadcast revenues decreased to $7.8 million for the year endedDecember 31, 2001 from $8.8 million for the year ended December 31, 2000.  When comparing the year ended December 31,2001 to the year ended December 31, 2000, revenues from local advertisersdecreased approximately $217,000, or 2.9% and revenues from nationaladvertisers decreased approximately $911,000, or 38.6%.  Our decrease in local and national revenuewas offset by a decrease in agency commissions of approximately $123,000.  The decrease in advertising is primarilyrelated to the soft advertising market across most revenue categories.  In addition, the events of September 11,2001 had a direct impact on the revenues of media related businesses.  The impact of the terrorist attacks on ourCompany was estimated to be a $68,000 revenue loss for the year due topre-emptions and cancelled advertisements.

 

Station  operating  costs increased to $4.6 million for the year ended  December 31, 2001 from $4.2 million for the year ended December31, 2000, or 9.5%.  The increase inoperating  costs for the year endedDecember 31, 2001, as  compared to theyear ended  December  31, 2000 primarily  related to theCompany’s commencement of its shared news programming with KGAN-TV, a Sinclairstation in Cedar Rapids, IA, that began in early March 2001. We incurred$350,000 in 2001 related to its news programming.

 

Depreciation and amortization increased to $3.4 million for the year ended December  31, 2001 from $3.0 million for the yearended  December  31, 2000. The increase in depreciation and amortization for the year endedDecember 31, 2001 as compared to the year ended December 31, 2000 primarilyresulted from an increase in program contract additions related to ourinvestment to upgrade our programming, and the $248,000 write-off of damaged,obsolete, or abandoned property.

 

Broadcast operating loss for the year ended December 31, 2001 was$155,000 compared to broadcast operating income of $1.7 million for the yearended December 31, 2000.  The decreasein broadcast operating income for the year ended December 31, 2001 wasprimarily attributable to the soft advertising market noted above and increasedoperating expenses noted above.

 

Parent  preferred stock dividendincome of $26.0 million for the year ended December  31,  2001 is related toour  investment  in 12.625% series C preferred stock (theparent preferred securities) issued by Sinclair,  completed March 12, 1997. Subsidiary trust minority interest expense of $23.9 million for the year ended  December 31, 2001 is related to theplacement of the  subsidiary trustpreferred  securities (the “HYTOPS”) and$640,000 of deferred financing cost amortization.  Our ability to make future subsidiary trust  minority interest  payments is  directly contingent  upon the  parent’s ability to pay dividends on parentpreferred stock.

 

We  recorded  no income tax  provision or benefit for theyears ended December  31, 2001 andDecember  31,  2000.  The income taxesdid not change for the year ended December 31, 2001 as compared to the yearended December 31, 2000 because of the dividends received deduction associatedwith the HYTOPS and the adjustment to the valuation allowance on the state netoperating losses generated.  Oureffective tax rate for the years ended December 31, 2001 and December 31, 2000was zero.

 

Net deferred taxes remained consistent at zero as of December 31, 2001as compared to December 31, 2000. Federal income taxes are allocated to or from us by Sinclair at thestatutory  rate,  are considered payable or  receivable  currently and are reflected as an adjustmentto due from parent or due to parent in our balance sheet  depending upon whether there is a tax benefit or provision, respectively.

 

Net income  decreased to $3.0million for the year ended  December 31,2001 from $5.0 million for the year ended December 31, 2000.  The decreasein net income for the year ended December 31, 2001 as compared to the year ended December 31, 2000 isprimarily due to the soft advertising market, an increase in operating costsand the impact of the September 11, 2001 terrorist attacks as noted above.

 

Broadcast  cash flow  decreased to $2.1 million for the year endedDecember 31, 2001 from $3.3 million for the year ended  December 31, 2000,  or 36.4%.  Ourbroadcast  cash flow margin  decreased to 27.0% for the year ended  December 31, 2001 from 37.3% for the yearended December 31, 2000. The decrease in  broadcast  cash flow and  broadcast  cash flowmargin for the year ended  December  31, 2001 as  compared  to the year ended  December  31, 2000 primarily  resulted  from a soft advertising market,  an increase  in  operating expenses  and the impact of theSeptember 11, 2001 terrorist attacks as noted above.

 

Adjusted  EBITDA  decreased to $1.8 million for the year endedDecember 31, 2001 from $3.0 million  for the year ended  December 31,  2000,  or 40%. Our Adjusted  EBITDA margin  decreased to 23.3% for the year ended December31, 2001 from 34.0% for the year ended December 31, 2000 primarily resultingfrom the soft advertising market, and an increase in operating costs and theimpact of the September 11, 2001 terrorist attacks as noted above.

 

**RecentAccounting Pronouncements**

 

In June 2001, the Financial Accounting Standards Board (FASB), approvedStatement of Financial Accounting Standard (SFAS) No. 141, *Business Combinations*, andSFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 prospectively prohibits the poolingof interest method of accounting for business combinations

 

18

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initiated after June 30, 2001. SFAS No. 142 requires companies to cease amortizing goodwill and certainother intangible assets including broadcast licenses effective January 1,2002.  SFAS No. 142 also establishes anew method of testing goodwill and broadcast licenses for impairment on anannual basis or on an interim basis if an event occurs or circumstances changethat would reduce the fair value of a reporting unit below its carryingvalue.  The adoption of SFAS No. 142resulted in discontinuation of amortization of our goodwill and broadcastlicense effective January 1, 2002; however, we were required to test goodwilland the broadcast license for impairment under the new standard during 2002.

 

During the three months ended March 31, 2002, we tested our broadcastlicense for impairment in accordance with SFAS No. 142 based on the estimatedfair value of the license in the market. We estimated the fair value of our broadcast license using adiscontinued cash flow model.  Theestimated fair value was compared to the book value to determine whether anyimpairment had occurred.  As a result ofthis analysis, KDSM did not incur an impairment charge.

 

SFAS No. 142 requires that goodwill be tested for impairment at thereporting unit level at adoption and at least annually thereafter, utilizing atwo-step methodology. The initial step required us to determine the fair valueof our reporting unit and compare it to the carrying value, including goodwill,of such unit. If the fair value exceeded the carrying value, no impairment losswas recognized. However, if the carrying value of the reporting unit exceededits fair value, the goodwill of the unit might have been impaired. The amount,if any, of the impairment would then be measured in the second step.  The second step requires us to calculate thefair value of goodwill by allocating the fair value of the reporting unit toeach of the assets and liabilities of the reporting unit based on their fairvalues. This calculated goodwill is then compared to the book value of thegoodwill and an impairment loss is recognized to the extent that the book valueexceeds the fair value.

 

We determined that our designated marketing area was a reporting unitunder SFAS 142. In connection with adopting this standard during 2002, wecompleted step one of the test for impairment by comparing the book value ofthe reporting unit, including goodwill, to the estimated fair value of thereporting units as of January 1, 2002. We estimated the fair value of ourreporting unit using a discounted cash flow model.

 

We performed the second step of the goodwill impairment test for KDSMwhose goodwill was found to be potentially impaired as a result of the firststep. We performed the second step by allocating the estimated fair value ofthe reporting unit to each of the assets and liabilities of the reporting unitbased on their estimated fair values. We estimated the fair values of theassets and liabilities using a combination of observed prices paid for similarassets and liabilities, discounted cash flow models and appraisals.  As a result of such testing, a totalimpairment charge of $23.2 million related to goodwill is reflected as acumulative effect of a change in accounting principle on our consolidatedstatement of operations.

 

SFAS 142 requires goodwill and definite lived intangible assets to betested for impairment on an annual basis; therefore, we tested these assets forimpairment as of October 1, 2002 by comparing their book values to theirestimated fair values.  There was noimpairment charge recorded based on the results of such testing.

 

In June 2001, the FASB approved SFAS No. 143, *Accounting for Asset RetirementObligations*.  SFAS No. 143 iseffective for fiscal years beginning after June 15, 2002 and addressesfinancial accounting and reporting for obligations associated with theretirement 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 effect on our financial statements.

 

We adopted SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* on January 1, 2002.  The statement provides guidance on estimating cash flows whenperforming a recoverability test, requires that a long-lived asset (group) tobe disposed of other than by sale (e.g. abandoned), be classified as “held andused” until it is disposed of, and establishes more restrictive criteria toclassify an asset (group) as “held for sale.” We do not expect the adoption of SFAS No. 144 to have a material effecton our financial statements.

 

In April of 2002, the FASB approved SFAS No. 145, *Rescission of FASB Statements No. 4, 44and 64, Amendment of FASB Statement No. 13 and Technical Corrections*.  SFAS No. 145 will require us to record gainsand losses on extinguishment of debt as a component of income from continuingoperations rather than as an extraordinary item and to reclassify such items forall periods presented.  We adopted thisprovision of SFAS No. 145 on January 1, 2003. We do not expect the adoption of SFAS No. 145 to have a material effecton our consolidated financial statements.

 

In June 2002, the FASB approved SFAS No. 146, *Accounting for Costs Associated withExit or Disposal Activities*. SFAS No. 146 is effective after December 31, 2002, and addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies EITF issue No. 94-3, *Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity.*  The primary difference between SFAS No.

 

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146 and EITF 94-3 concerns the timing of liability recognition and wedo not expect the adoption of SFAS No.146 to have material effect on ourconsolidated financial statements.

 

In November 2002, the Emerging Issues Task Forces (EITF) reached aconsensus on Issue 02-16, *Accounting by Reseller for Cash Consideration Receivedfrom a Vendor*, (EITF 02-16). EITF 02-16 requires us to treat our deferred commission credits as areduction in selling expense when realized and not as broadcast revenue.  We adopted EITF 02-16 on December 31, 2002and the effect was not material.

 

**LIQUIDITY AND CAPITAL RESOURCES**

** **

As of December 31, 2002, we had cash balances of  approximately  $5,000 and working capital of approximately $388,000.  Ourprimary source of liquidity is cash from  operations  which management  believes  to be sufficient  to  meet operating cash  requirements.  Cash  requirements orexcess 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  $808,000 in 2002.  If we  are  required to  make  capital expenditures  to  keep up  with  emerging technologies, management believeswe will be able to fund such expenditures from cash flow and from the proceedsof  indebtedness or financing that isallowed to be incurred or obtained under our senior debenture  indenture (provided that our debt toAdjusted  EBITDA ratio is 4 to 1 orless) or from capital  contributionsfrom 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/Cyclicality**

** **

Our results usually are subject to seasonal  fluctuations,  whichresult in fourth  quarter  broadcast operating  income beinggreater  usually than first, second  and third quarter  broadcast  operating income.  This  seasonality is primarily  attributable toincreased expenditures by advertisers in anticipation of holiday seasonspending and an increase in viewership during this period. In addition, revenues from political advertising andthe Olympics are higher in even numbered years.

 

**Summary Disclosures about Contractual Obligations andCommercial Commitments**

 

The following table reflects a summary of our contractual cashobligations and other commercial commitments as of December 31, 2002:

 
|                                |   | **Payments  Due by Year**   |       |
|-------------------------------------|--------|-----------------------------|------------|
|                                |   | **2003**                    |       | **2004** |   | **2005** |   | **2006 and  thereafter** |   | **Total** |   |
|                                |   | **(amounts  in thousands)** |       |
| **Contractual Cash Obligations**    |   |                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                |   |                        |       |   |   |   |   |   |   |   |   |
| HYTOPS                              |   | 23,250                      |       | 23,250 |   | 23,250 |   | 274,594 |   | 344,344 |   |
| Maintanence and  support            |   | 176                         |       | 172 |   | 174 |   | 222 |   | 744 |   |
| Personnel  employment contracts     |   | 94                          |       | — |   | — |   | — |   | 94 |   |
| Programming  services               |   | 109                         |       | 85 |   | 15 |   | — |   | 209 |   |
| Film liability -  active            |   | 1,709                       |       | 900 |   | 575 |   | 232 |   | 3,416 |   |
| Film liability -  future (see note) |   | 26                          |       | 36 |   | — |   | 130 |   | 192 |   |
| Other operating  contracts          |   | 4                           |       | 4 |   | 4 |   | 14 |   | 26 |   |
|                                |   |                        |       |   |   |   |   |   |   |   |   |
| Total  contractual cash obligations |   | 25,368                      |       | 24,447 |   | 24,018 |   | 275,192 |   | 349,025 |   |

** **

**Note: **Future film liabilitiesreflect a license agreement for program material that is not yet available forits first showing or telecast.  Per SFASNo. 63, *FinancialReporting for Broadcasters*, an asset and a liability for the rightsacquired and obligations incurred under a license agreement are reported on thebalance sheet when the cost of each program is known or reasonablydeterminable, the program material has been accepted by the licensee inaccordance with the conditions of the license agreement and the program isavailable for its first showing or telecast.

 

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**RiskFactors**

 

We cannot identify nor can we control all circumstances that couldoccur in the future that may adversely affect our business and results ofoperations.  Some of the circumstancesthat may occur and may impair our business are described below.  If any of the following were to occur, ourbusiness could be materially adversely affected.

 

*Arthur Andersen LLP. *Arthur Andersen LLP, theCompany’s former independent public accountants that audited the Company’sfinancial statements for the fiscal years ended December 31, 2000 and 2001, wasfound guilty by a jury on June 15, 2002 of federal obstruction of justice inconnection with the government’s investigation of Enron Corp.  Arthur Andersen ceased practicing before theCommission effective August 31, 2002. It is possible that events arising out of the indictment may adverselyaffect the ability of Arthur Andersen to satisfy any claims arising from itsprovision of auditing and other services to the Company, including claims thatmay arise out of Arthur Andersen’s audit of the Company’s financialstatements.  The Commission has saidthat it will continue accepting financial statements audited or reviewed byArthur Andersen provided that the Company complies with the applicable rulesand orders issued by the Commission in March 2002 for such purpose.

 

**UnitedStates participation in a war could result in a decline in advertising revenues**.

 

Involvement in a war by the United States could cause televisionadvertisers to reduce or cancel their advertising spots. Advertising revenues maydecline as a result of uninterrupted news coverage or other economicdislocation. We cannot predict the amount of revenues that would be lost as aresult.

 

**Oursubstantial indebtedness could adversely affect our operations and our abilityto fulfill our debt and HYTOPS.**

 

We have a high level of debt and other obligations compared tostockholder’s equity.  Our obligationsinclude the following:

 

*Obligations under High Yield TrustOffered Preferred Securities (“HYTOPS”).*  Sinclair Capital, a subsidiary trust ofSinclair, has issued $200 million aggregate liquidation amount of HYTOPS.  “Aggregate liquidation amount” means theamount Sinclair Capital must pay to the holders when it redeems the HYTOPS orupon liquidation.  Sinclair Capital mustredeem the HYTOPS in 2009.  Sinclair isindirectly liable for the HYTOPS obligations because it issued $206.2 millionliquidation amount of series C preferred stock to us to support $200 millionaggregate principal amount of 11 .625% notes that we issued to Sinclair Capitalto support the HYTOPS.

 

*Program Contracts Payable andProgramming Commitments.*** **Totalcurrent and long-term program contracts payable at December 31, 2002 were $1.7million and $1.7 million, respectively. In addition, we entered into commitments to purchase futureprogramming.  Under these commitments,we were obligated on December 31, 2002 to make future payments totaling$192,000.

 

*Other. *Our commitments also include operating leases,capital leases, sports programming, personnel contracts and other liabilities.The amount of these commitments may be material.

 

**Wedepend on advertising revenue, which is below historical averages as a resultof a number of conditions.**

 

Our main source of revenue is sales of advertisingtime.  Our ability to sell advertisingtime depends on:

 

•                   thehealth of the economy in the area where our station is located and in thenation as a whole;

 

•                   the popularityof our programming;

 

•                   changes in themakeup of the population in the area where our station is located;

 

•                   pricingfluctuations in local and national advertising;

 

•                   the activitiesof our competitors, including increased competition from other forms ofadvertising-based mediums, particularly network, cable television, directsatellite television, Internet and radio;

 

•                   the decreaseddemand for political advertising in non-election years; and

 

•                   other factorsthat may be beyond our control.

 

There was a dramatic decline in advertising revenue generally in2001.  KDSM’s advertising revenue stillremains below levels prior to 2001.

 

21

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Periods of declining revenues pose the following risks:

 

•                   We may not beable to fund necessary expenditures from cash flow and must rely on Sinclair'scapital contributions.  Sinclair’s lendersmay not be as willing to lend additional amounts to them for our future workingcapital needs, additional acquisitions, or other purposes.

 

•                   Our ability topay our obligations as they come due could become more difficult.

 

Any of these events could have a material adverseeffect on us.

 

**We mustpurchase television programming in advance but cannot predict if a particularshow will be popular enough to cover its cost. In addition, our business is subject to the popularity of the network weare affiliated with.**

 

One of our most significant costs is televisionprogramming. If a particular program is not popular in relation to its costs,we may not be able to sell enough advertising time to cover the costs of theprogram. Since we purchase programming content from others rather than produceit ourselves, we also have little control over the costs of programming. Weusually must purchase programming several years in advance, and may have tocommit to purchase more than one year’s worth of programming. Finally, we mayreplace programs that are doing poorly before we have recaptured anysignificant portion of the costs we incurred, or accounted fully for the costson our books for financial reporting purposes. Any of these factors couldreduce our revenues or otherwise cause our costs to escalate relative torevenues. These factors are exacerbated during a weak advertising market.Additionally, our business is subject to the popularity of the programsprovided by the networks with which we have affiliation agreements or whichprovide us programming. Our affiliation group experienced revenue declines in2002 and this trend could continue in the future.

 

**We maylose a large amount of programming if a network terminates its affiliation withus.**

 

Sinclair recently secured a long-term affiliation agreement with a termthat will run through June 30, 2005.

 

If we do not enter into affiliation agreements to replace the expiredor expiring agreements, we may no longer be able to carry programming of therelevant network. This loss of programming would require us to obtainreplacement programming, which may involve higher costs and which may not be asattractive to our target audiences.

 

**Competitionfrom other broadcasters and other sources may cause our advertising sales to godown or our costs to go up.**

 

We face intense competition in our industry andmarkets from the following:

 

*NewTechnology and the Subdivision of Markets.*New technologiesenable our competitors to tailor their programming for specific segments of theviewing public to a degree not possible before. As a result, the overall marketshare of broadcasters, including ourselves, whose approach or equipment may notpermit such a discriminating approach is under new pressures.  In addition, emerging technologies thatallow viewers to digitially record and play back television programming maydecrease viewership of commericals and, as a result, lower our advertisingrevenue.  The new technologies andapproaches include:

 

•                  cable,

 

•                  satellite-to-homedistribution,

 

•                  pay-per-view

 

•                  home video andentertainment systems, and

 

•                  personal videorecorders (PVR’s).

 

*FutureTechnology under Development.*Cable providers and directbroadcast satellite companies are developing new techniques that allow them totransmit more channels on their existing equipment. These so-called “videocompression techniques” will reduce the cost of creating channels, and may leadto the division of the television industry into ever more specialized nichemarkets. Video compression is available to us as well, but competitors whotarget programming to such sharply defined markets may gain an advantage overus for television advertising revenues. Lowering the cost of creating channelsmay also encourage new competitors to enter our markets and compete with us foradvertising revenue.

 

*In-MarketCompetition.*We also face more conventional competition fromrivals that may be larger and have greater resources than we have. Theseinclude:

 

•                  other local freeover-the-air broadcast stations, and

 

•                  other media,such as newspapers, periodicals, and cable systems.

 

22

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*Deregulation.*Changes in law have also increased competition. TheTelecommunications Act of 1996 and subsequent actions by the FCC have createdgreater flexibility and removed some limits on station ownership. Telephone,cable and some other companies are also free to provide video services incompetition with us.  In addition, theFCC has reallocated the spectrum occupied by television channels 52-59 for newservices including fixed and mobile wireless services and digital broadcastservices.  Among the potential new usesenvisioned by the FCC for this reallocated spectrum are digital broadcastservices, based on coded orthogonal frequency division multiplex (COFDM)technology, including mobile television broadcasting services.  As a result of these changes, new companiesare able to enter our markets and compete with us.

 

**Thephased introduction of digital television will increase our operating costs andmay expose us to increased competition.**

 

DTV channels are generally located in the range of channels fromchannel 2 through channel 51. The FCC required that affiliates of ABC, CBS, FOXand 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 begindigital broadcasting by November 1999. All other commercial stations wererequired to begin digital broadcasting****by May 1, 2002.  As of May 1, 2002, KDSM is operating their DTV facilities at lowpower as permitted by the FCC pursuant to special temporary authority.

 

The FCC’s plan calls for the DTV transition period to end in the yearDecember 31, 2006, at which time the FCC expects that television broadcasterswill cease non-digital broadcasting and return one of their two channels to thegovernment, allowing that spectrum to be recovered for other uses. During thetransition period, each existing analog television station will be permitted tooperate a second station that will broadcast using the digital standard.  The FCC has been authorized by Congress toextend the 2006 deadline for reclamation of a television station’s non-digitalchannel if, in any given case:

 

•                   oneor more television stations affiliated with ABC, CBS, NBC or FOX in a market isnot broadcasting digitally, and the FCC determines that each such station has“exercised due diligence” in attempting to convert to digital broadcasting andsatisfies the conditions for an extension of the FCC’s applicable constructiondeadlines for DTV service in that market;

 

•                   digital-to-analogconverter technology is not generally available in such market; or

 

•                   15% or more ofthe television households in such market do not subscribe to a multichannelvideo service (cable, wireless cable or direct-to-home broadcastsatellite television) that carries at least one digital channel from each ofthe local stations in that market, and cannot receive digital signals usingeither a television receiver capable of receiving digital signals or a receiverequipped with a digital-to-analog converter.

 

On January 27, 2003, the FCC initiated its secondperiodic review of its rules on the conversion to digital television, releasinga notice of proposed rulemaking. The notice invited comments on thedifficulties broadcasters face in building their DTV stations and on theinterpretation of the statutory language concerning the 2006 deadline.  There is considerable uncertainty about thefinal form of the FCC digital regulations. Even so, we believe that these newdevelopments may have the following effects on us:

 

*Reclamation of analog channels.*Congressdirected the FCC to begin auctioning analog channels 60-69 in 2001, even thoughthe FCC is not to reclaim them until 2006. The channel 60-69 auction wasscheduled to be held in January 2003 but has been  delayed, and no new auction date has been established.  Congress further permitted broadcasters tobid on the non-digital channels in cities with populations over 400,000.  If the channels are owned by ourcompetitors, they may exert increased competitive pressure on ouroperations.  In addition, the FCCreallocated the spectrum band, currently comprising television channels 52-59,to permit both wireless services and certain new broadcast operations.    The FCC completed an auction for part ofthis spectrum in September 2002 and has scheduled an auction for anotherportion of this spectrum in May 2003. With respect to the remaining spectrum, the FCC has not yet establishedan auction date.  Analog broadcastersare required to cease operation on this spectrum by the end of 2006 unless theFCC extends the end of the digital transition. The FCC envisions that this bandwill be used for a variety of broadcast-type applications including two-wayinteractive services and services using COFDM technology. We cannot predict howthe development of this spectrum will affect our television operations.

 

*Signal Quality Issues.*Ourtests have indicated that the digital standard mandated by the FCC, 8-levelvestigial sideband (“8-VSB”), is currently unable to provide for reliablereception of a DTV signal through a simple indoor antenna. Absent improvementsin DTV receivers, or an FCC ruling allowing us to use an alternative standard,continued reliance on the 8-VSB digital standard may not allow us to providethe same reception coverage with our digital signals as we can with our currentanalog signals. Furthermore,

 

23

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the FCC generally hasmade available much higher power allocations to digital stations that willreplace stations on existing channels 2 through 13 than digital stations thatwill replace existing channels 14 through 69. The majority of our analogfacilities operate between channels 14 through 69. This power disparity couldput us at a disadvantage to our competitors that now operate on channels 2through 13.

 

In August 2002, the FCCadopted regulations requiring new television receivers to include over-the-airDTV tuners.  In November 2002, we fileda petition for further reconsideration requesting that the FCC ensure thatthese over-the-air DTV tuners are capable of adequately receiving digitaltelevision signals.  If DTV tuners arenot able to receive digital television signals adequately, we may be forced torely on cable television or other alternative means of transmission to deliverour digital signals to all of the viewers we are able to reach with our currentanalog signals.

 

*Digital must carry*.  While the FCC ruled that cable companies arerequired to carry the signals of digital-only television stations, the agencyhas tentatively concluded, subject to additional inquiry in a pendingrulemaking proceeding, that cable companies should not be required to carryboth the analog and digital signals of stations during the transition periodwhen stations will be broadcasting in both modes.  If the FCC does not require this, cable customers in ourbroadcast markets may not receive our digital signal, which could negativelyimpact our stations.

 

*Capital and operating costs.*Wewill incur costs to replace equipment in our stations in order to providedigital television. Some of our stations will also incur increased utilitiescosts as a result of converting to digital operations. We cannot be certain wewill be able to increase revenues to offset these additional costs.

 

*Subscription fees.*TheFCC has determined to assess a fee in the amount of 5% of gross revenues ondigital television subscription services. If we are unable to pass this costthrough to our subscribers, this fee will reduce our earnings from any digitaltelevision subscription services we implement in the future.

 

*Conversion and programming costs.*We may incur additional costs to obtain programming for the additional channelsmade available by digital technology. Increased revenues from the additionalchannels may not make up for the conversion cost and additional programmingexpenses. Also, multiple channels programmed by other stations could increasecompetition in our markets.

 

Given this climate ofmarket uncertainty and regulatory change, we cannot be sure what impact theFCC’s actions might have on our plans and results in the area of digitaltelevision.

 

**Federalregulation of the broadcasting industry limits our operating flexibility.**

 

The FCC regulates our business, just as it does all other companies inthe broadcasting industry. We must ask the FCC’s approval whenever we need anew license, seek to renew, or assign, or modify a license, purchase a newstation, or transfer the control of one of our subsidiaries that holds alicense.

 

Federal legislation and FCC rules have changed significantly in recentyears and can be expected to continue to change. These changes may limit ourability to conduct our business in ways that we believe would be advantageousand may thereby affect our operating results.

 

24

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**ITEM 7A. QUANTITATIVE AND QUALITATIVEDISCUSSION ABOUT MARKET RISKS**

** **

We believe that we do not have any material exposure to market riskassociated with activities in derivative financial instruments, other financialinstruments, and derivative commodity instruments.

 

**ITEM 8. FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

** **

Our financial statement and supplementary data required by this itemare filed as exhibits, are listed under Item 15(a)(1) and (2), and areincorporated by reference.

 

**ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING FINANCIALDISCLOSURE**

** **

On May 17, 2002, the Company dismissed its independent auditors, ArthurAndersen LLP (“Arthur Andersen”), and engaged Ernst & Young LLP to serve asits new independent auditors for fiscal year 2002.  The Company filed a current report on Form 8-K with the SEC onMay 17, 2002, the same date that the change in auditors became effective.

 

Arthur Andersen’s reports on the Company’s consolidated financialstatements for each of the fiscal years ended December 31, 2001 and December31, 2000, as included elsewhere herein, did not contain an adverse opinion ordisclaimer of opinion, nor were they qualified or modified as to uncertainty,audit scope or accounting principles.

 

During the fiscal years ended December 31, 2001 and 2000 and theinterim period between December 31, 2001 and May 17, 2002, there were nodisagreements between the Company and Arthur Andersen on any matter ofaccounting principles or practices, financial statement disclosure or auditingscope or procedures which, if not resolved to Arthur Andersen’s satisfaction,would have caused them to make reference to the subject matter of thedisagreement in connection with their report for such years; and there were noreportable events as defined in Item 301(a)(1)(v) of Regulation S-K.

 

25

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**PART III**

 

**ITEM 10. DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

** **

Set forth below is certain information relating to our executiveofficers, directors,  certain  key employees  and persons  expected to become  executive officers,directors or key employees.

 
| **Name**           |   | **Age** |   | **Title**              |   |
|--------------------|--------|---------|--------|------------------------|--------|
|               |   |    |   |                   |   |
| David D. Smith     |   | 52      |   | President and Director |   |
| David B. Amy       |   | 50      |   | Secretary and Director |   |
| Dr. David  McCarus |   | 51      |   | 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.

 

In 1978, David D. Smith founded Comark Communications, Inc., a companyengaged in the manufacture of high power transmitters for UHF televisionstations, and was an officer and director of Comark until 1986.  He also was a principal in other televisionstations prior to serving as a General Manager of WCWB from 1984 until 1986.  In 1986, David was instrumental in theformation of Sinclair Broadcast Group, Inc. He has served as President and Chief Executive Officer since 1988 and asChairman of the Board of Sinclair Broadcast Group, Inc. since September1990.  David Smith is currently a memberof the Board of Directors of Sinclair Ventures, Inc., Acrodyne Communications,Inc., G1440, Inc., Summa Holdings, Ltd., KDSM, Inc., and Safe Waterways inMaryland.

 

David B. Amy has served as Executive Vice President and Chief FinancialOfficer (“CFO”) since March 2001. Prior to that, he served as Executive VicePresident since September 1999 and as Vice President and CFO from September1998 to September 1999. Prior to that, he served as CFO since 1994. Inaddition, he serves as Secretary of SCI, the Sinclair subsidiary that owns andoperates the broadcasting operations. Mr. Amy has over 19 years of broadcastexperience, having joined Sinclair as a Business Manager for WCWB-TV inPittsburgh.  Mr. Amy received his MBAdegree from the University of Pittsburgh in 1981.  Mr. Amy is currently a member of the board of directors ofAcrodyne Communications, Inc., G1440, Inc., and KDSM, Inc., and an advisor toAllegiance Capital, L.P.

 

Dr. David C. McCarus has served  as Director of KDSM sinceFebruary 9, 1999.  Dr.  McCarus is a Board Certified Obstetricianand Gynecologist and has been in private  practice  in Timonium, Maryland since  1983. Dr. McCarus has served on numerouscommittees at both Greater Baltimore Medical Center and St. Joseph Medical Centerand is also a member of multiple specialty medical societies.  He currently serves as a member on theMedical Mutual Liability Insurance Claims Committee and is Head of the Divisionof Gynecology for the Towson Surgical Center, located in Maryland.  Dr. McCarus received his medical degree fromWest  Virginia  University  School  of Medicine in 1978 and completed hisspecialty training in Obstetrics and Gynecology at Greater Baltimore MedicalCenter in 1983.  He currently speaksnationally on the subject of Postmenopausal Women’s Health, Osteoporosisprevention and treatment and Hormone Replacement Therapy.

 

26

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**ITEM 11.EXECUTIVE COMPENSATION**

 

The following table sets forth certain information regarding the annualand long-term compensation by Sinclair for  services  rendered in all  capacities during the year ended December 31, 2002 by the President and the other officers of KDSM whoreceived  total annual  salary and bonus of $100,000 or more in 2002(the named executive officers):

 

**SUMMARYCOMPENSATION TABLE**

**AnnualCompensation**

** **
| **Name and  Principle Position** |     |   |       |      |          | **Long-Term  Compensation  Securities Underlying  Options Granted** |       | **All Other  Compensation (b)** |       |
|----------------------------------|----------|--------|------------|-----------|---------------|---------------------------------------------------------------------|------------|---------------------------------|------------|
|                             |     |   |
|                             |     |   |
|                             |     |   |
| **Annual  Compensation**         |
|                             | **Year** |   | **Salary** |      | **Bonus (a)** |                                                                |       |                            |
|                             |     |   |       |      |          |                                                                | ** ** |                            | ** ** |   | ** ** |
| David D. Smith President         |     | 2002   |       | $         | 1,000,000     |                                                                | —     |                            | —     |   | 7,063 |   |
|                             |     | 2001   |       | 1,000,000 |          | —                                                              |       | —                          |       | 4,713 |   |
|                             |     | 2000   |       | 1,000,000 |          | —                                                              |       |                            | 150,000    |   | 6,659 |   |
|                             |     |   |       |      |          |                                                                |       |                            |       |   |   |
| David B. Amy Secretary           |     | 2002   |       | $         | 300,000       |                                                                | $          | 100,000                         |       | — |   | 9,753 |   |
|                             |     | 2001   |       | 300,000   |          | —                                                              |       | —                          |       | 4,713 |   |
|                             |     | 2000   |       | 300,000   |          | —                                                              |       |                            | 100,000    |   | 6,659 |   |
|                                  |          |        |            |           |               |                                                                     |            |                                 |            |  |  |  |  |  |

 

----

(a)            The bonuses reportedin this column represent amounts awarded and paid during the fiscal years notedbut relate to the fiscal year immediately prior to the year noted.

 

(b)           All other compensationconsists of income deemed received for personal use of Sinclair-leasedautomobiles, our 401(k) contribution, life insurance and long-term disabilitycoverage.

 

**Stock Options**

 

The following table shows the number of stock options granted during2002 and the 2002 year-end value of the stock options held by the named  executive officers:

 
|           |   | **Number of  Securities  Underlying Options  Granted to  Employees in** |   | **Exercise  Price per** |   | **Market  Price on  Date of** |   | **Expiration** |   | **Potential  Realizable Value At  Assumed Annual Rates Of Stock  Price Appreciation for Option Term** |   |
|----------------|--------|-------------------------------------------------------------------------|--------|-------------------------|--------|-------------------------------|--------|----------------|--------|-------------------------------------------------------------------------------------------------------|--------|
| **Name**       |   | **Fiscal  Year**                                                        |   | **Share**               |   | **Grant**                     |   | **Date**       |   | **0%**                                                                                                |   | **5%** |   | **10%** |   |
| David D. Smith |   | —                                                                  |   | —                  |   |                          |   |           |   | —                                                                                                |   | — |   | — |   |
| David B. Amy   |   | 10,000                                                                  |   | 11.63                   |   | 11.63                         |   | 2/28/12        |   | —                                                                                                |   | 73,140 |   | 185,352 |   |

 

**AggregatedOption Exercises in Last Fiscal Year and December 31, 2002 Option Values**

 

The following table shows information regarding options exercisedduring 2002 and the number of securities underlying, and the value of the “inthe money” options outstanding on December 31, 2002:

 
| **Name**       |   | **Shares  Acquired  On Exercise** |   | **Value  Realized** |   | **Number of  Securities Underlying  Unexercised Options  at December 31, 2002** |   | **Value of  Unexercised  “In-the-Money” Options  at December 31, 2002 (a)** |   |
|----------------|--------|-----------------------------------|--------|---------------------|--------|---------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------|--------|
|           |   |                              |   |                |   | **Excercisable**                                                                |   | **Unexercisable**                                                                     |   | **Exercisable** |   | **Unexercisable** |   |
| David D. Smith |   | —                            |   | —              |   | 112,500                                                                         |   | 37,500                                                                                |   | $ | 267,750 |   | $ | 89,250 |   |
| David B. Amy   |   | —                            |   | —              |   | 215,000                                                                         |   | 105,000                                                                               |   | 209,550 |   | 14,100 |   |
|                |        |                                   |        |                     |        |                                                                                 |        |                                                                                       |        |  |  |  |  |  |  |

 

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(a)            An  “In-the-Money” option is an option for whichthe option price of the underlying stock is less than the market price atDecember  31, 2002,  and all of the value shown reflects stockprice appreciation since the granting of the option.

 

**Employment Agreements**

** **

Sinclair does not have an employment agreement with Mr. Smith and doesnot currently anticipate entering into an agreement.  The compensation committee has set David Smith’s base salary for2003 at $1,000,000.

 

27

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In September 1998, Sinclair entered into an amended employmentagreement with David B. Amy, Executive Vice President and Chief Financial  Officer of Sinclair and Secretary ofKDSM.  The agreement does not have anyspecified termination date, and Sinclair has the right to terminate theemployment of Mr. Amy at any time, with or without cause. The severance  payment due upon termination  without cause is equal to one month’s basesalary in effect at the time of the termination times the number of the yearsof continuous  employment by Sinclair orits  predecessor.  Mr. Amy receives a base salary of $300,000and may receive an annual bonus based on performance.  The agreement also contains non-competition and confidentialityrestrictions on Mr. Amy.

 

**Compensation Committee Interlocks andInsider Participation**

** **

Other than as follows, no named executive officer is a director of acorporation that has a director or executive officer who is also a director ofKDSM.  Each of David D. Smith and DavidB. Amy, both of whom are executive officers and directors of KDSM, is adirector and/or executive officer of Sinclair.

 

During 2002, none of the named executive officers participated in anydeliberations of our board of directors or the compensation committee relatingto compensation of the named executive officers.

 

**ITEM12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

** **

The following table sets forth certain information regarding thebeneficial ownership of KDSM, Inc. common stock as of March 14, 2003,  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         |   |                  |   |   |   |
| Hunt Valley,  MD  21030   |   |                  |   |   |   |

 

**ITEM 13. CERTAIN RELATIONSHIPS ANDRELATED TRANSACTIONS**

** **

None.

 

**PART IV**

 

**ITEM14.  CONTROLS AND PROCEDURES**

 

Within 90 days prior to the date of this report, we carried out anevaluation, under the supervision and with the participation of our Company’smanagement, including our Principal Executive Officer and Principal Financialand Accounting Officer, of the effectiveness of the design and operation of ourdisclosure controls and procedures pursuant to Exchange Act Rule 13a-15.  Based on that evaluation, our PrincipalExecutive Officer and Principal Financial and Accounting Officer concluded thatour disclosure controls and procedures are effective in timely alerting them tomaterial information required to be included in our periodic SEC reports.  It should be noted that the design of anysystem of controls is based in part upon certain assumptions about thelikelihood of future events, and there can be no assurance that any design willsucceed in achieving its stated goals under all potential future conditions,regardless of how remote.

 

In addition, we have reviewed our internal controls and have seen nosignificant changes in our internal controls or in other factors that couldsignificantly affect the disclosure controls, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 

28

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**PART IV**

** **

**ITEM15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ONFORM 8-K**

 

(a) (1) Financial Statements

 

The followingfinancial statements required by this item are submitted in a separate sectionbeginning on page F-1 of this report.

 
| Index to Financial  Statements                                                                                                                           |
|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                     |
| Reports of  Independent Public Accountants                                                                                                               |
|                                                                                                                                                     |
| Consolidated Balance  Sheets as of December 31, 2002 and 2001                                                                                            |
|                                                                                                                                                     |
| Consolidated  Statements of Operations for the Years Ended December 31, 2002,  2001 and 2000                                                             |
|                                                                                                                                                     |
| Consolidated  Statements of Stockholder’s Equity for the Years Ended December 31,  2002, 2001 and 2000                                              |
|                                                                                                                                                     |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2002,  2001 and 2000                                                             |
|                                                                                                                                                     |
| Notes to  Consolidated Financial Statements                                                                                                              |
|                                                                                                                                                     |
| (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.                                        |
|                                                                                                                                                     |
| Index to  Schedules                                                                                                                                      |
|                                                                                                                                                     |
| Schedule II—Valuation  and Qualifying Account                                                                                                       |
|                                                                                                                                                     |
| 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 15(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, 2002.                        |
|                                                                                                                                                     |
| (c)    Exhibits                                                                                                                                |

 

29

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The following exhibits are filed with this report:

 

**EXHIBIT INDEX**

 
| **Exhibit  No.** |   | **Description**                                                                                                                                                                                |
|------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|             |   |                                                                                                                                                                                           |
| 3.1              |   | Amended and Restated Trust Agreement, dated as of  March 12, 1997 among KDSM, Inc., First Union National Bank of Maryland, First  Union Bank of Delaware, David D. Smith, and David B. Amy (1) |
|             |   |                                                                                                                                                                                           |
| 3.2              |   | Articles of Incorporation of KDSM, Inc., as of April  22, 1996 (1)                                                                                                                             |
|             |   |                                                                                                                                                                                           |
| 3.3              |   | By-Laws of KDSM, Inc. (1)                                                                                                                                                                      |
|             |   |                                                                                                                                                                                           |
| 4.1              |   | Indenture, dated as of March 12, 1997 among KDSM,  Inc., Sinclair Broadcast Group, Inc., and its First Union National Bank of  Maryland. (1)                                                   |
|             |   |                                                                                                                                                                                           |
| 4.2              |   | Pledge and Security Agreement dated as of March 12,  1997 between KDSM, Inc. and First Union National Bank of Maryland (1)                                                                     |
|             |   |                                                                                                                                                                                           |
| 4.3              |   | Form of 11.625% High Yield Trust Offered Preferred  Securities of Sinclair Capital (1)                                                                                                         |
|             |   |                                                                                                                                                                                           |
| 4.4              |   | Form of 11.625% Senior Debentures due 2009 of KDSM,  Inc. (included in Exhibit 4.1) (1)                                                                                                        |
|             |   |                                                                                                                                                                                           |
| 4.5              |   | Form of Parent Guarantee Agreement between Sinclair  Broadcast Group, Inc. and First Union National Bank of Maryland (1)                                                                       |
|             |   |                                                                                                                                                                                           |
| 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 Principal Executive Officer.                         |
|             |   |                                                                                                                                                                                           |
| 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 Principal Financial and Accounting Officer.          |

 

----

(1)            Incorporatedby reference from the Company’s Registration Statement on Form S-4, No.333-26427.

 

(d) Financial Statements Schedules

 

     The financial statementsschedules required by this Item are listed under Item 15(a) (2)

 

30

----

 

**SIGNATURES**

 

Pursuant to the requirements  of the Section 13or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly causedthis report on Form 10-K to be signed on its behalf by the  undersigned,  thereunto duly  authorizedon this 21st day of March 2003.

 
|   | 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 signatureappears below under the heading “Signature” constitutes and appoints David B.Amy as his or her true and lawful attorney-in-fact, each acting alone, withfull power of substitution and resubstitution, for him or her and in his or hername, place and stead in any and all capacities to sign any or all amendmentsto this 10-K and to file the same, with all exhibits thereto, and otherdocuments in connection therewith, with the SEC, granting unto saidattorney-in-fact full power and authority to do and perform each and every actand thing requisite and necessary  to bedone in and about the premises, as fully for all intents and purposes as he orshe might or could do in person, hereby ratifying and confirming all that saidattorney-in-fact,  or theirsubstitutes,  each acting alone, may lawfullydo or cause to be done by virtue hereof.

 

Pursuant to the  requirements ofthe Securities  Exchange Act of 1934,this report  has  been signed  below  by the following  persons  on behalf  of the registrant and inthe capacities and on the dates indicated.

 
| **Signature**         |   | **Title**                                                                                                                                                                  |   | **Date**       |
|-----------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------|
|                  |   |                                                                                                                                                                       |   |           |
| /s/ David D. Smith    |   | Director and President, KDSM, Inc.                                                                                                                                         |   | March 21, 2003 |
| David D. Smith        |   |      (principal executive officer)  Administrative Trustee, Sinclair Capital    (principal executive officer)                                |   |           |
|                  |   |                                                                                                                                                                       |   |           |
| /s/ David B. Amy      |   | Director and Secretary, KDSM Inc.                                                                                                                                          |   | March 21, 2003 |
| David B. Amy          |   |     (principal financial and accounting  officer)  Administrative Trustee, Sinclair Capital    (principal financial and  accounting officer) |   |           |
|                  |   |                                                                                                                                                                       |   |           |
| /s/ Dr. David McCarus |   | Director                                                                                                                                                                   |   | March 21, 2003 |
| Dr. David McCarus     |   | KDSM, Inc.                                                                                                                                                                 |   |           |

 

31

----

 

I, David D. Smith, certify that:

 

1.                 I have reviewedthis annual report on Form 10-K of KDSM, Inc.;

 

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

 

3.                 Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                 The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

A)  designed such disclosure controls andprocedures to ensure that material information relating to the registrant,including its consolidated subsidiaries, is made known to us by others withinthose entities, particularly during the period in which this annual report isbeing prepared;

 

B)  evaluated the effectiveness of theregistrant’s disclosure controls and procedures as of a date within 90 daysprior to the filing date of this annual report (the Evaluation Date); and

 

C)  presented in this annual report ourconclusions about the effectiveness of the disclosure controls and proceduresbased on our evaluation as of the Evaluation Date;

 

5.                 The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

A)                                   allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

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

 

6.                                        Theregistrant’s other certifying officers and I have indicated in this annualreport whether there were significant changes in internal controls or in otherfactors that could significantly affect internal controls subsequent to thedate of our most recent evaluation, including any corrective actions withregard to significant deficiencies and material weakness.

 
| Date:  | March 21, 2003 |   |       |
|--------|----------------|--------|------------|
|   |           |   |       |
|   |           |   |       | /s/ David D. Smith |
|   |           |   | Signature: | David D. Smith,  Director and President, KDSM, Inc.  (principal executive officer) |

 

32

----

 

I, David B. Amy, certify that:

 

1.                 I have reviewedthis annual report on Form 10-K of KDSM, Inc.;

 

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

 

3.                 Based on myknowledge, the financial statements, and other financial information includedin this annual report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this annual report;

 

4.                 The registrant’sother certifying officers and I are responsible for establishing andmaintaining disclosure controls and procedures (as defined in Exchange ActRules 13a-14 and 15d-14) for the registrant and have:

 

A)           designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisannual report is being prepared;

 

B)             evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this annual report (theEvaluation Date); and

 

C)             presented in thisannual report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5.                 The registrant’sother certifying officers and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee ofregistrant’s board of directors (or persons performing the equivalentfunctions):

 

A)           all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

B)             any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6.                 The registrant’sother certifying officers and I have indicated in this annual report whetherthere were significant changes in internal controls or in other factors thatcould significantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weakness.

 
| Date:  | March 21, 2003 |   |       |                                                                                           |
|--------|----------------|--------|------------|------------------------------------------------------------------------------------------------|
|   |           |   |       |                                                                                           |
|   |           |   |       | /s/ David B. Amy                                                                               |
|   |           |   | Signature: | David B. Amy,  Director and Secretary, KDSM Inc.  (principal financial and accounting officer) |

 

33

----

 

### **KDSM, INC. AND SUBSIDIARIES**

#### **INDEX TO FINANCIAL STATEMENTS**

# ** **

| **KDSM, INC. AND SUBSIDIARIES**                                                                             |   |
|-------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                        |   |
| Reports of  Independent Public Accountants                                                                  |   |
| Consolidated Balance Sheets  as of December 31, 2002 and 2001                                               |   |
| Consolidated  Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000                 |   |
| Consolidated  Statements of Stockholder’s Equity for the Years Ended December 31, 2002,  2001 and 2000 |   |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000                 |   |
| Notes to  Consolidated Financial Statements                                                                 |   |

 

F-1

----

 

**REPORTOF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To Sinclair Broadcast Group, Inc.:

 

We have audited the accompanying consolidated balance sheet of KDSM,Inc. (a Maryland corporation and a wholly-owned subsidiary of SinclairBroadcast Group, Inc.) and Subsidiaries (“the Company”) as of December 31,2002, and the related statements of operations, stockholder’s equity, and cashflows for the year ended.  Our auditalso included the financial statement schedule for the year ended December 31,2002 listed in the Index at Item 15(a) (2). These financial statements and schedule are the responsibility of theCompany’s management.  Ourresponsibility is to express an opinion on these financial statements andschedule based on our audit.  Thefinancial statements and schedule of KDSM, Inc. and Subsidiaries as of December31, 2001 and 2000, and for the years then ended were audited by other auditorswho have ceased operations and whose report dated March 8, 2002 expressed anunqualified opinion on those statements prior to the disclosures related to theadoption of Statement of Financial Accounting Standards No. 142 (SFAS No. 142),"Goodwill and Other Intangible Assets," discussed in Notes 1 and 3.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States.  Thosestandards require that we plan and perform the audit to obtain reasonable assuranceabout whether the financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that our auditprovides a reasonable basis for our opinion.

 

In our opinion, the 2002 financial statements referred to above presentfairly, in all material respects, the consolidated financial position of KDSM,Inc. and Subsidiaries as of December 31, 2002, and the results of theiroperations and their cash flows for the year then ended in conformity withaccounting principles generally accepted in the United States.  Also, in our opinion, the related financialstatement schedule for the year ended December 31, 2002, when considered inrelation to the basic financial statements taken as a whole, presents fairly inall respects the information set forth therein.

 

As discussed in note 1 to the notes to the financial statements, duringthe year ended December 31, 2002, the Company changed the manner in which itaccounts for goodwill and other intangible assets upon adoption of SFAS No. 142on January 1, 2002.

 

As discussed above, the financial statements of KDSM, Inc. andSubsidiaries as of December 31, 2001 and 2000, and for the years then endedwere audited by other auditors who have ceased operations.  As discussed in Note 1, these financialstatements have been revised to include the transitional disclosures requiredby SFAS No. 142, which was adopted by the Company as of January 1, 2002.  Our audit procedures with respect to thedisclosures in Notes 1 and 3 with respect to 2001 and 2000 included (a)agreeing the previously reported net income and income from continuingoperations to the previously issued financial statements and the adjustments toreported net income and income from continuing operations representing amortizationexpense recognized in those periods related to goodwill and intangible assetsthat are no longer being amortized, as well as accumulated amortization forgoodwill, broadcast licenses and amortized intangibles to the Company’sunderlying records obtained from management, and (b) testing the mathematicalaccuracy of the reconciliation of adjusted net income and income fromcontinuing operations to reported net income and income from continuingoperations.  In our opinion, thedisclosures for 2001 and 2000 in Notes 1 and 3 are appropriate.  However, we were not engaged to audit,review, or apply any procedures to the 2001 and 2000 financial statements ofthe Company other than with respect to such disclosures and, accordingly, we donot express an opinion or any other form of assurance on the 2001 and 2000financial statements taken as a whole.

 
|                 | /s/ ERNST & YOUNG  LLP |
|----------------------|----------------------------|
| Baltimore, Maryland, |
| March 14, 2003       |

 

F-2

----

 

# **REPORT OF INDEPENDENT** PUBLIC ACCOUNTANTS

 

 

## **To theStockholders of**

Sinclair Broadcast Group, Inc.:

 

We have audited the accompanying consolidated balancesheets of KDSM, Inc. (a Maryland corporation and a wholly-owned subsidiary ofSinclair Broadcast Group, Inc.) and Subsidiaries (“the Company”) as of December31,  2001 and 2000,  and the related  consolidated  statements of  operations,stockholder’s  equity and cash  flows for each of the three years in theperiod ended December 31, 2001. These financial  statements are the responsibility  of theCompany’s  management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance  with auditing  standards  generally accepted in the UnitedStates.  Those standards require that weplan and perform the audit to obtain reasonable  assurance about whether the financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements.  An audit also includes  assessing the accounting  principles used and  significantestimates  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 toabove present fairly, in all material respects, the financial  position of KDSM, Inc. and Subsidiaries asof December 31, 2001 and 2000, and the results of their operations  and their cash flows for each of the threeyears in the period ended December 31, 2001, in conformity with accounting  principles generally accepted in the United States.

 
|                 | ARTHUR  ANDERSEN LLP |
|----------------------|----------------------|
| Baltimore, Maryland, |
| March 8, 2002        |

 

 

**Thisreport is a copy of a previously issued Arthur Andersen LLP report and thereport has not been reissued by Arthur Andersen LLP, nor has Arthur AndersenLLP provided a consent to the inclusion of its report in this Form 10-K.**

 

F-3

----

 

**KDSM, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands, except for share and per share information)**

** **
|                                                                                                            |   | **As of  December 31,** |    |
|-----------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                            |   | **2002**                |    | **2001** |   |
| **ASSETS**                                                                                                      |   |                    |    |   |   |
| CURRENT ASSETS:                                                                                                 |   |                    |    |   |   |
| Cash                                                                                                            |   | $                       | 5       |   | $ | 8 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $58 and  $46, respectively                 |   | 1,421                   |    | 1,587 |   |
| Dividends  receivable from parent                                                                               |   | 1,085                   |    | 1,085 |   |
| Current portion  of program contract costs                                                                      |   | 1,250                   |    | 1,350 |   |
| Prepaid expenses  and other current assets                                                                      |   | 65                      |    | 17 |   |
| Deferred barter  costs                                                                                          |   | 56                      |    | 63 |   |
| Total current  assets                                                                                           |   | 3,882                   |    | 4,110 |   |
| PROPERTY AND  EQUIPMENT, net                                                                                    |   | 6,143                   |    | 6,593 |   |
| PROGRAM CONTRACT  COSTS, less current portion                                                                   |   | 699                     |    | 889 |   |
| INVESTMENT IN  PARENT PREFERRED SECURITIES                                                                      |   | 206,200                 |    | 206,200 |   |
| DUE FROM PARENT                                                                                                 |   | 32,398                  |    | 27,252 |   |
| OTHER ASSETS,  net of accumulated amortization of $3,706 and $3,066, respectively                               |   | 3,972                   |    | 4,612 |   |
| GOODWILL                                                                                                        |   | —                  |    | 23,178 |   |
| BROADCAST  LICENSE                                                                                              |   | 4,022                   |    | 4,022 |   |
| DEFINITE-LIVED  INTANGIBLE ASSETS, net                                                                          |   | 2,055                   |    | 2,219 |   |
| Total Assets                                                                                                    |   | $                       | 259,371 |   | $ | 279,075 |   |
|                                                                                                            |   |                    |    |   |   |
| **LIABILITIES  AND STOCKHOLDER’S EQUITY**                                                                  |   |                    |    |   |   |
| CURRENT  LIABILITIES:                                                                                           |   |                    |    |   |   |
| Accounts payable                                                                                                |   | $                       | 177     |   | $ | 303 |   |
| Accrued  liabilities                                                                                            |   | 382                     |    | 459 |   |
| Current portion  of program contracts payable                                                                   |   | 1,709                   |    | 1,737 |   |
| Current portion  of capital lease                                                                               |   | 202                     |    | 195 |   |
| Deferred barter  revenues                                                                                       |   | 55                      |    | 59 |   |
| Subsidiary trust  minority interest expense payable                                                             |   | 969                     |    | 969 |   |
| Total current  liabilities                                                                                      |   | 3,494                   |    | 3,722 |   |
| CAPITAL LEASES                                                                                                  |   | 1,980                   |    | 1,934 |   |
| PROGRAM  CONTRACTS PAYABLE                                                                                      |   | 1,707                   |    | 1,865 |   |
| OTHER LONG TERM  LIABILITIES                                                                                    |   | 73                      |    | 92 |   |
| Total  Liabilities                                                                                              |   | 7,254                   |    | 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                                                                                              |   | 968                     |    | 20,313 |   |
| Total  Stockholder’s Equity                                                                                |   | 52,117                  |    | 71,462 |   |
| Total  Liabilities and Stockholder’s Equity                                                                |   | $                       | 259,371 |   | $ | 279,075 |   |

#### ** **

#### **The accompanying notes are anintegral part of these consolidated statements.**

 

F-4

----

 

**KDSM,INC. AND SUBSIDIARIES**

#### **CONSOLIDATED STATEMENTSOF OPERATIONSFOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

#### **(inthousands, except per share and share information)**

 
|                                                                                                  |   | **2002** |     | **2001** |   | **2000** |   |
|-------------------------------------------------------------------------------------------------------|--------|----------|----------|----------|--------|----------|--------|
| **REVENUES:**                                                                                         |   |     |     |     |   |     |   |
| Station  broadcast revenues, net of agency commissions of  $963, $1,053 and $1,176, respectively |   | $        | 7,385    |     | $      | 7,751    |   | $ | 8,807 |   |
| Revenues  realized from station barter arrangements                                                   |   | 862      |     | 775      |   | 731      |   |
| Total revenues                                                                                        |   | 8,247    |     | 8,526    |   | 9,538    |   |
|                                                                                                  |   |     |     |     |   |     |   |
| **OPERATING EXPENSES:**                                                                               |   |     |     |     |   |     |   |
| Program and  production                                                                               |   | 1,753    |     | 1,734    |   | 1,465    |   |
| Selling, general  and administrative                                                                  |   | 2,702    |     | 2,876    |   | 2,802    |   |
| Expenses  realized from station barter arrangements                                                   |   | 730      |     | 629      |   | 636      |   |
| Amortization of  program contract costs and net realizable value adjustments                          |   | 1,560    |     | 1,788    |   | 1,483    |   |
| Depreciation and  write-off of property and equipment                                                 |   | 710      |     | 618      |   | 419      |   |
| Amortization of  definite-lived intangible assets and other assets                                    |   | 164      |     | 1,036    |   | 1,050    |   |
| Total operating  expenses                                                                             |   | 7,619    |     | 8,681    |   | 7,855    |   |
| Broadcast  operating income (loss)                                                                    |   | 628      |     | (155     | )      | 1,683    |   |
|                                                                                                  |   |     |     |     |   |     |   |
| **OTHER INCOME (EXPENSE):**                                                                           |   |     |     |     |   |     |   |
| Parent preferred  stock dividend income                                                               |   | 26,033   |     | 26,033   |   | 26,033   |   |
| Subsidiary trust  minority interest expense                                                           |   | (23,890  | )        | (23,890  | )      | (23,890  | )      |
| Capital lease  interest expense                                                                       |   | (248     | )        | (81      | )      | —   |   |
| Interest income                                                                                       |   | 1,278    |     | 1,095    |   | 1,179    |   |
| Net gain on sale  of broadcast assets                                                                 |   | 32       |     | —   |   | —   |   |
| Income before  income taxes                                                                           |   | 3,833    |     | 3,002    |   | 5,005    |   |
| ALLOCATION OF  CONSOLIDATED FEDERAL                                                                   |   | —   |     | —   |   | —   |   |
| STATE INCOME TAX  BENEFIT                                                                             |   | —   |     | —   |   | —   |   |
| Income from  continuing operations                                                                    |   | 3,833    |     | 3,002    |   | 5,005    |   |
| CUMULATIVE  EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE                                                  |   | (23,178  | )        | —   |   | —   |   |
| NET (LOSS)  INCOME AVAILABLE TO COMMON SHAREHOLDERS                                                   |   | $        | (19,345  | )        | $      | 3,002    |   | $ | 5,005 |   |
| NET (LOSS)  INCOME PER COMMON SHARE                                                                   |   | $        | (193,450 | )        | $      | 30,020   |   | $ | 50,050 |   |
|                                                                                                  |   |     |     |     |   |     |   |
| WEIGHTED AVERAGE  COMMON SHARES OUTSTANDING – BASIC AND DILUTED                                  |   | 100      |     | 100      |   | 100      |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

F-5

----

 

**KDSM, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDER’S EQUITY**

**FOR THE YEARS ENDED DECEMBER 31,2002, 2001, 2000 AND 1999**

**(inthousands)**

 
|                        |   | **Common  Stock** |   | **Additional  Paid-In  Capital** |   | **Retained  Earnings** |   | **Total  Stockholder’s  Equity** |   |
|-----------------------------|--------|-------------------|--------|----------------------------------|--------|------------------------|--------|---------------------------------------|--------|
| BALANCE, December 31, 1999  |   | $                 | — |                             | $      | 51,149                 |   | $                                     | 12,306 |   | $ | 63,455 |   |
| Net income                  |   | —            |   | —                           |   | 5,005                  |   | 5,005                                 |   |
| BALANCE,  December 31, 2000 |   | —            |   | 51,149                           |   | 17,311                 |   | 68,460                                |   |
| Net income                  |   | —            |   | —                           |   | 3,002                  |   | 3,002                                 |   |
| BALANCE,  December 31, 2001 |   | —            |   | 51,149                           |   | 20,313                 |   | 71,462                                |   |
| Net loss                    |   | —            |   | —                           |   | (19,345                | )      | (19,345                               | )      |
| BALANCE,  December 31, 2002 |   | $                 | — |                             | $      | 51,149                 |   | $                                     | 968    |   | $ | 52,117 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

F-6

----

 

**KDSM,INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000**

**(in thousands)**

** **
|                                                                                          |   | **2002** |    | **2001** |   | **2000** |   |
|-----------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
| **CASH FLOWS FROM OPERATING  ACTIVITIES:**                                                    |   |     |    |     |   |     |   |
| Net (loss)  income                                                                            |   | $        | (19,345 | )        | $      | 3,002    |   | $ | 5,005 |   |
| Adjustments to  reconcile net (loss) income to net cash flows from operating activities– |   |     |    |     |   |     |   |
| Depreciation of  property and equipment                                                       |   | 710      |    | 618      |   | 419      |   |
| Gain on disposal  of property and equipment                                                   |   | (32      | )       | —   |   | —   |   |
| Amortization of definite-lived intangible assets and other assets                             |   | 164      |    | 1,036    |   | 1,050    |   |
| Amortization of  deferred financing costs                                                     |   | 640      |    | 640      |   | 640      |   |
| Amortization of  program contract costs and net realizable value adjustments                  |   | 1,560    |    | 1,788    |   | 1,483    |   |
| Cumulative  effect of change in accounting principle                                          |   | 23,178   |    | —   |   | —   |   |
| Net effect of  change in deferred barter revenues and deferred barter costs                   |   | 3        |    | (24      | )      | (4       | )      |
| Changes in  assets and liabilities, net of effects of acquisitions and dispositions–     |   |     |    |     |   |     |   |
| Decrease in  accounts receivable, net                                                         |   | 166      |    | 292      |   | 22       |   |
| Increase in  prepaid expenses and other current assets                                        |   | (48      | )       | (3       | )      | (6       | )      |
| (Decrease)  increase in accounts payable and accrued liabilities                              |   | (203     | )       | 323      |   | 28       |   |
| Increase in  other long term liabilities                                                      |   | 33       |    | 109      |   | —   |   |
| Payments on  program contracts payable                                                        |   | (1,456   | )       | (1,561   | )      | (1,669   | )      |
| Net cash flows  from operating activities                                                     |   | 5,370    |    | 6,220    |   | 6,968    |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                    |   |     |    |     |   |     |   |
| Acquisition of  property and equipment                                                        |   | (808     | )       | (1,727   | )      | (955     | )      |
| Proceeds from  disposal of property and equipment                                             |   | 600      |    | —   |   | —   |   |
| Net cash flows  used in investing activities                                                  |   | (208     | )       | (1,727   | )      | (955     | )      |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                    |   |     |    |     |   |     |   |
| Net change in  due from Parent                                                                |   | (5,165   | )       | (4,557   | )      | (5,950   | )      |
| NET (DECREASE)  INCREASE IN CASH                                                              |   | (3       | )       | (64      | )      | 63       |   |
| CASH, beginning  of period                                                                    |   | 8        |    | 72       |   | 9        |   |
| CASH, end  of  period                                                                    |   | $        | 5       |     | $      | 8        |   | $ | 72 |   |
|                                                                                          |   |     |    |     |   |     |   |
| **SUPPLEMENTAL SCHEDULE OF INVESTING  AND FINANCING ACTIVITIES:**                             |   |     |    |     |   |     |   |
| Subsidiary trust  minority interest payments                                                  |   | $        | 23,250  |     | $      | 23,250   |   | $ | 23,250 |   |
| Parent preferred  stock dividend income                                                       |   | $        | 26,033  |     | $      | 26,033   |   | $ | 26,033 |   |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

F-7

----

 

**KDSM,INC. AND SUBSIDIARIES**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**FOR THEYEARS ENDED DECEMBER 31, 2002, 2001, AND 2000**

** **

**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 arecollectively referred to hereafter as “we”, “the Company”, or “KDSM”.  The company is a wholly owned subsidiary ofSinclair Broadcast Group, Inc. The Company is a television broadcaster servingthe Des Moines, Iowa area through station KDSM on Channel 17.  KDSM owns all the issued and outstandingcommon stock of KDSM Licensee, Inc. and all of the common trust interests ofSinclair Capital.  All intercompanyamounts are eliminated in consolidation.

** **

**Use ofEstimates**

 

The preparation of financial statements in accordance with accountingprinciples generally accepted in the United States requires management to makeestimates and assumptions that affect the reported amounts of assets,liabilities, revenues and expenses in the financial statements and in thedisclosures of contingent assets and liabilities.  Actual results could differ from those estimates.

 

**NewAccounting Pronouncements**

 

In June 2001, the Financial Accounting Standards Board (FASB), approvedStatement of Financial Accounting Standard (SFAS) No. 141, *Business Combinations*, andSFAS No. 142, *Goodwill and Other Intangible Assets*.  SFAS No. 141 prospectively prohibits thepooling of interest method of accounting for business combinations initiatedafter June 30, 2001.  SFAS No. 142requires companies to cease amortizing goodwill and certain other intangibleassets including broadcast licenses. Effective January 1, 2002,  SFASNo. 142 also establishes a new method of testing goodwill and broadcastlicenses for impairment on an annual basis or on an interim basis if an eventoccurs or circumstances change that would reduce the fair value of a reportingunit below its carrying value.  Theadoption of SFAS No. 142 resulted in discontinuation of amortization of ourgoodwill and broadcast license effective January 1, 2002; however, we wererequired to test goodwill and the broadcast license for impairment under thenew standard during 2002.

 

During the three months ended March 31, 2002, we tested our broadcastlicense for impairment in accordance with SFAS No. 142 based on the estimatedfair value of the license in the market.  We estimated the fair value of our broadcast license using adiscontinued cash flow model.  Theestimated fair value was compared to the book value to determine whether any impairmenthad occurred.  As a result of thisanalysis we concluded that the license was not impaired.

 

SFAS No. 142 requires that goodwill be tested for impairment at thereporting unit level at adoption and at least annually thereafter, utilizing atwo-step methodology. The initial step required us to determine the fair valueof our reporting unit and compare it to the carrying value, including goodwill,of such unit. If the fair value exceeded the carrying value, no impairment losswas recognized. However, if the carrying value of the reporting unit exceededits fair value, the goodwill of the unit might have been impaired. The amount,if any, of the impairment would then be measured in the second step.  The second step requires us to calculate thefair value of goodwill by allocating the fair value of the reporting unit toeach of the assets and liabilities of the reporting unit based on their fairvalues. This calculated goodwill is then compared to the book value of thegoodwill and an impairment loss is recognized to the extent that the book valueexceeds the fair value.

 

We determined that our designated marketing area was a reporting unitunder SFAS 142. In connection with adopting this standard during 2002, wecompleted step one of the test for impairment by comparing the book value ofthe reporting unit, including goodwill, to the estimated fair value of thereporting units as of January 1, 2002. We estimated the fair value of ourreporting unit using a discounted cash flow model.

 

We performed the second step of the goodwill impairment test for KDSMwhose goodwill was found to be potentially impaired as a result of the firststep. We performed the second step by allocating the estimated fair value ofthe reporting unit to each of the assets and liabilities of the reporting unitbased on

 

F-8

----

 

their estimated fair values. We estimated the fair values of the assetsand liabilities using a combination of observed prices paid for similar assetsand liabilities, discounted cash flow models and appraisals.  As a result of such testing, a totalimpairment charge of $23.2 million related to goodwill is reflected as acumulative effect of a change in accounting principle on our consolidatedstatement of operations.  The taxbenefit associated with this impairment is offset by a provision for anincrease in the valuation allowance on net operating losses.

 

SFAS 142 requires goodwill and definite lived intangible assets to betested for impairment on an annual basis; therefore, we tested these assets forimpairment as of October 1, 2002 by comparing their book values to theirestimated fair values.  There was noimpairment charge recorded based on the results of such testing.

 

The following table shows the effect on net income (loss) available tothe common stockholder had we adopted SFAS No. 142 on January 1, 2000 (inthousands.)

 
|                                                     |   | **For the  Twelve Months ended December 31,** |    |
|----------------------------------------------------------|--------|-----------------------------------------------|---------|
|                                                     |   | **2002**                                      |    | **2001** |   | **2000** | ** ** |
| Reported (loss)  income available to common stockholders |   | $                                             | (19,345 | ) | $ | 3,002 |   | $ | 5,005 |   |
| Add:  goodwill amortization                         |   | —                                        |    | 673 |   | 673 |   |
| Add:  broadcast license amortization                |   | —                                        |    | 199 |   | 199 |   |
| Adjusted net  (loss) earnings                            |   | $                                             | (19,345 | ) | $ | 3,874 |   | $ | 5,877 |   |

 

The following table shows the effect on income (loss) from continuingoperations had we adopted SFAS 142 on January 1, 2000 (in thousands.)

 
|                                            |   | **For the  Twelve Months ended December 31,** |   |
|-------------------------------------------------|--------|-----------------------------------------------|--------|
|                                            |   | **2002**                                      |   | **2001** |   | **2000** | ** ** |
| Reported net  income from continuing operations |   | $                                             | 3,833  |   | $ | 3,002 |   | $ | 5,005 |   |
| Add:  goodwill amortization                |   | —                                        |   | 673 |   | 673 |   |
| Add:  broadcast license amortization       |   | —                                        |   | 199 |   | 199 |   |
| Adjusted income  from continuing operations     |   | $                                             | 3,833  |   | $ | 3,874 |   | $ | 5,877 |   |

 

In June 2001, the FASB approved SFAS No. 143, *Accounting for Asset RetirementObligations*.  SFAS No. 143 iseffective for fiscal years beginning after June 15, 2002 and addressesfinancial accounting and reporting for obligations associated with theretirement of tangible long-lived assets and the associated asset retirementcosts.  We do not expect the adoption ofSFAS No. 143 to have a material effect on our financial statements.

 

We adopted SFAS No. 144, *Accounting for the Impairment or Disposal ofLong-Lived Assets* on January 1, 2002.  The statement provides guidance on estimating cash flows whenperforming a recoverability test, requires that a long-lived asset (group) tobe disposed of other than by sale (e.g. abandoned), be classified as “held andused” until it is disposed of, and establishes more restrictive criteria toclassify an asset (group) as “held for sale.” We do not expect the adoption of SFAS No. 144 to have a material effecton our financial statements.

 

In April of 2002, the FASB approved SFAS No. 145, *Rescission of FASB Statements No. 4, 44and 64, Amendment of FASB Statement No. 13 and Technical Corrections*.  SFAS No. 145 will require us to record gainsand losses on extinguishment of debt as a component of income from continuingoperations rather than as an extraordinary item.  We adopted this provision of SFAS No. 145 on January 1,2003.  We do not expect the otherprovisions of SFAS No. 145 to have a material effect on our consolidatedfinancial statements.

 

F-9

----

 

In June 2002, the FASB approved SFAS No. 146, *Accounting for Costs Associated withExit or Disposal Activities*. SFAS No. 146 is effective after December 31, 2002, and addressesfinancial accounting and reporting for costs associated with exit or disposalactivities and nullifies EITF issue No. 94-3, *Liability Recognition for CertainEmployee Termination Benefits and Other Costs to Exit an Activity.*  The primary difference between SFAS No. 146and EITF 94-3 concerns the timing of liability recognition and we do not expectthe adoption of SFAS No. 146 to have material effect on our consolidatedfinancial statements.

 

In November 2002, the Emerging Issues Task Forces (EITF) reached aconsensus on Issue 02-16, *Accounting by Reseller for Cash ConsiderationReceived from a Vendor*, (EITF 02-16).  EITF 02-16 requires us to treat our deferred commission creditsas a reduction in selling expense when realized and not as broadcast revenue.  We adopted EITF 02-16 on December 31, 2002,and the effect was not material.

 

**Accounts Receivable**

 

Management regularly reviews accounts receivable and determines anappropriate estimate for the allowance for doubtful accounts based upon theimpact of economic conditions on the merchant’s ability to pay, past collectionexperience and such other factors which, in management’s judgment, deservecurrent recognition.  In turn, aprovision is charged against earnings in order to maintain the allowance level.

 

**Programming**

 

The Company has agreements with distributors for the rights totelevision programming over contract periods which generally run from one toseven years.  Contract payments are madein installments over terms that are generally shorter than the contractperiod.  Each contract is recorded as anasset and a liability at an amount equal to its gross contractual commitmentwhen the license period begins and the program is available for its firstshowing.  The portion of programcontracts which become payable within one year is reflected as a currentliability in the accompanying Consolidated Balance Sheets.

 

The rights to program materials are reflected in the accompanyingConsolidated Balance Sheets at the lower of unamortized cost or estimated netrealizable value.  Estimated netrealizable values are based upon management’s expectation of future advertisingrevenues net of sales commissions to be generated by the program material.  Amortization of program contract costs isgenerally computed using either a four year accelerated method or based onusage, whichever method yields the greater amortization for each program.  Program contract costs, estimated bymanagement to be amortized in the succeeding year, are classified as currentassets.  Payments of program contractliabilities are typically paid on a scheduled basis and are not affected byadjustments for amortization or estimated net realizable value.

 

**Barter Arrangements**

 

Certain program contracts provide for the exchange of advertising airtimein lieu of cash payments for the rights to such programming.  These contracts are recorded as the programsare aired at the estimated fair value of the advertising airtime given inexchange for the program rights. Network programming is excluded from these calculations.

 

The Company broadcasts certain customers’ advertising in exchange forequipment, merchandise and services. The estimated fair value of the equipment, merchandise or servicesreceived is recorded as deferred barter costs and the corresponding obligationto broadcast advertising is recorded as deferred barter revenues.  The deferred barter costs are expensed orcapitalized as they are used, consumed or received.  Deferred barter revenues are recognized as the relatedadvertising is aired.

 

F-10

----

 

**OtherAssets**

# ** **

# **Other  assets primarily consist of costs related tothe issuance of the 11.625% High Yield Trust Offered Preferred Securities (the“HYTOPS” or the “Trust Preferred Securities”) of Sinclair Capital, a subsidiarytrust of the Company in March of 1997. These costs are being amortized on a straight line basis over a 12 yearperiod which represents the date they are mandatorily redeemable.**

 

# **Accrued Liabilities**

 

Accrued  liabilities  consisted of the  following as of December 31, 2002 and 2001 (in thousands):

 
|         |   | **2002** |   | **2001** |   |
|--------------|--------|----------|--------|----------|--------|
| Compensation |   | $        | 210    |     | $      | 228 |   |
| Other        |   | 172      |   | 231      |   |
|         |   | $        | 382    |     | $      | 459 |   |

# ** **

# **Revenues**

 

Advertising revenues, net of agency and national representatives’commissions, are recognized in the period during which time spots areaired.  Total revenues include cash andbarter advertising revenues, net of agency and national representatives’commissions.

# ** **

# **Reclassifications**

 

Certain reclassifications have been made to the prior years’ financialstatements to conform with the current year presentation.

 

F-11

----

 

**2.****              PROPERTYAND EQUIPMENT:**

 

Property and equipment are stated at cost,  less  accumulated depreciation.  Depreciation iscomputed under the  straight-line methodover the  following estimated usefullives:

 
| 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 31,2002 and 2001 (in thousands):

 
|                                  |   | **2002** |   | **2001** | ** ** |
|---------------------------------------|--------|----------|--------|----------|------------|
| Buildings and  improvements           |   | $        | 944    |     | $          | 860 |   |
| Station  equipment                    |   | 6,688    |   | 5,298    |       |
| Office furniture  and equipment       |   | 372      |   | 362      |       |
| Leasehold  improvements               |   | 32       |   | 34       |       |
| Automotive  equipment                 |   | 231      |   | 210      |       |
| Construction in  progress             |   | 92       |   | 1,941    |       |
|                                  |   | 8,359    |   | 8,705    |       |
| Less –  Accumulated depreciation |   | (2,216   | )      | (2,112   | )          |
|                                  |   | $        | 6,143  |     | $          | 6,593 |   |

 

During 2002 and 2001, the Company wrote-off $175,000 and $251,000respectively, of fixed assets which represent the net book value of damaged,obsolete, or abandoned property.

 

**3.****              GOODWILLAND OTHER INTANGIBLE ASSETS:**

 

Intangible assets and other assets subject to amortization, are beingamortized on a straight-line basis over periods of 15 to 25 years.  These amounts result from the  acquisition of the broadcast assets ofKDSM-TV by Sinclair Broadcast Group, Inc. (“Sinclair”) from River CityBroadcasting L.P. (“RCB”).

 

As a result of implementing SFAS No. 142, goodwill was consideredcompletely impaired and a charge of $23.2 million related to goodwill isreflected as a cumulative effect of a change in accounting principle on ourconsolidated statement of operations. In addition, we are no longer amortizing our broadcast license.  The following table shows the gross carryingamount and accumulated amortization of intangibles and estimated amortization(in thousands):

 
|                           |   | **For the  year ended  December 31, 2002** |   | **For the  year ended  December 31, 2001** |   |
|--------------------------------|--------|--------------------------------------------|--------|--------------------------------------------|--------|
|                           |   | **Amortization  Period**                   |   | **Gross  Carrying  Amount**                |   | **Accumulated  Amortization** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   |
| Amortized intangible  assets:  |   |                                       |   |                                       |   |   |   |   |   |   |   |
| Network affiliation            |   | 25 years                                   |   | $                                          | 1,682  |   | $ | (443 | ) | $ | 1,682 |   | $ | (375 | ) |
| Decaying advertiser base       |   | 15 years                                   |   | 1,452                                      |   | (636 | ) | 1,452 |   | (540 | ) |
| Total                          |   |                                       |   | $                                          | 3,134  |   | $ | (1,079 | ) | $ | 3,134 |   | $ | (915 | ) |
|                           |   |                                       |   |                                       |   |   |   |   |   |   |   |
| Unamortized intangible assets: |   |                                       |   |                                       |   |   |   |   |   |   |   |
| Broadcast licenses             |   |                                       |   | $                                          | 4,966  |   | $ | (944 | ) | $ | 4,966 |   | $ | (944 | ) |
| Goodwill                       |   |                                       |   | —                                     |   | — |   | 26,938 |   | (3,760 | ) |
| Total                          |   |                                       |   | $                                          | 4,966  |   | $ | (944 | ) | $ | 31,904 |   | $ | (4,704 | ) |

 

F-12

----

 

The amortization expense of the definite-lived intangible assets forthe years ended December 31, 2002 and 2001 was $164,000 for each year.  The following table shows the estimatedamortization expense of the definite-lived intangible assets for the next fiveyears.

 
| For  the year ended December 31, 2003 | $ | 164,151 |   |
|---------------------------------------|---|---------|--------|
| For the year  ended December 31, 2004 | $ | 164,151 |   |
| For the year  ended December 31, 2005 | $ | 164,151 |   |
| For the year  ended December 31, 2006 | $ | 164,151 |   |
| For  the year ended December 31, 2007 | $ | 164,151 |   |

 

**4.****              PROGRAMCONTRACTS PAYABLE:**

 

Future payments required under program contracts payable as of December31, 2002 were as follows (in thousands):

 
| 2003                                            |   | $      | 1,709  |   |
|-------------------------------------------------|--------|--------|--------|--------|
| 2004                                            |   | 900    |   |
| 2005                                            |   | 575    |   |
| 2006                                            |   | 215    |   |
| 2007                                            |   | 17     |   |
|                                            |   | 3,416  |   |
| Less: current  portion                          |   | (1,709 | )      |
| Long-term  portion of program contracts payable |   | $      | 1,707  |   |

 

Included in the current portion amounts are payments due in arrears of$542,000. In addition, the Company has entered into non-cancelable commitmentsfor future program rights aggregating $192,000 as of December 31, 2002.

 

The Company performs a net realizable value calculation for each of itsnon-cancelable commitments in accordance with SFAS No. 63, “Financial Reportingby Broadcasters.”  The Company utilizessales information to estimate the future revenue of each commitment andmeasures that amount against the amount of the commitment.  If the estimated future revenue is less thanthe amount of the commitment, a write down to the value of the asset isconsidered.

 

The Company has  estimated thefair value of its program  contract  payables and non-cancelable  commitments at  approximately  $3.2million and $168,000, respectively,  atDecember 31, 2002, and $3.3 million and $606,000, respectively,  as of December 31, 2001, based on futurecash flows discounted at the Company’s current borrowing rate.

** **

**5.****              RELATEDPARTY TRANSACTIONS:**

 

The financial statements of KDSM are included in the consolidatedfinancial statements of Sinclair Broadcast Group, Inc. (“Sinclair”).  Sinclair corporate expenses are allocated toKDSM and each of the Sinclair subsidiaries to cover the salaries and expensesof senior management, and other support functions.  Total management fees and expenses, including allocated corporateexpenses, for the years ended December 31, 2002, 2001 and 2000 wereapproximately $269,000, $290,000 and $292,000, respectively.  Certain of these costs have been allocatedto KDSM based upon a ratio of KDSM’s net revenue to total consolidated Sinclairnet revenues.  Management believes thatthe allocation method is reasonable and that these amounts approximate thecharges which would have been incurred had KDSM been on a stand-alonebasis.  Sinclair also provides andreceives short-term cash advances to and from KDSM through a central cashmanagement system.  No interest ischarged or received for these advances. The total amount due from Sinclair was approximately $32.4 million and$27.3 million as of December 31, 2002 and 2001, respectively.

 

F-13

----

 

**6.****              INCOMETAXES:**

 

Sinclair files a consolidated federal income tax return and separate state tax returns for each of itssubsidiaries.  It is Sinclair’s policyto charge KDSM for its federal income tax provision through intercompanycharges, and KDSM is directly responsible for its current state taxliabilities.  The accompanying financialstatements have been prepared in accordance with the separate return method ofSFAS No. 109, whereby the allocation of federal tax provision/(benefit) dueto/from the Parent is based on what the subsidiary’s current and deferredfederal tax provision/(benefit) would have been had the subsidiary filed afederal income tax return outside its consolidated group. KDSM is required toreimburse Sinclair only when it experiences a federal tax provision and the benefit allocated to KDSM from the Parentrelated to dividends on the Parent Preferred Stock is limited to KDSM’s cumulativefederal tax provision.  The federalincome tax provision is recorded as an intercompany charge and included as areduction of the due from Parent amount in the accompanying consolidatedbalance sheets as a current obligation. Accordingly, KDSM has no federal deferred income taxes.  Since KDSM is directly responsible for itsstate taxes, all deferred tax assets or liabilities are related to state incometaxes.  The Company had no alternativeminimum tax credit carryforwards as of December 31, 2002 and 2001.

 

The allocation of consolidated income taxes consists of the followingfor the years ended December 31, 2002, 2001 and 2000 (in thousands): 

 
|      |   | **2002** |   | **2001** |   | **2000** |   |
|-----------|--------|----------|--------|----------|--------|----------|--------|
| Current:  |   |     |   |     |   |     |   |
| Federal   |   | $        | — |     | $      | —   |   | $ | — |   |
| State     |   | —   |   | —   |   | —   |   |
|      |   |     |   |     |   |     |   |
| Deferred: |   |     |   |     |   |     |   |
| Federal   |   | —   |   | —   |   | —   |   |
| State     |   | —   |   | —   |   | —   |   |
|      |   | $        | — |     | $      | —   |   | $ | — |   |

 

The  following is a  reconciliation  of federal  income taxesat the  applicable statutory rate to therecorded provision:

 
|                                                            |   | **2002** |   | **2001** |   | **2000** |   |
|-----------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Statutory  federal income taxes                                 |   | 34.0     | %      | 34.0     | %      | 34.0     | %      |
| Adjustments-                                                    |   |     |   |     |   |     |   |
| State income  taxes                                             |   | 7.9      |   | 7.9      |   | 7.9      |   |
| Non-deductible  expense items                                   |   | 1.2      |   | 1.2      |   | 1.0      |   |
| Tax benefit  related to dividends on Parent Preferred stock (a) |   | (43.1    | )      | (43.1    | )      | (42.9    | )      |
|                                                            |   |     |   |     |   |     |   |
| Provision for  income taxes                                     |   | 0.0      | %      | 0.0      | %      | 0.0      | %      |

_______________

(a)      In March 1997, the Company issued the HYTOPS securities. Inconnection with this  transaction,  Sinclair Broadcast  Group,  Inc. (the “Parent”) issued $206.2 million ofSeries C Preferred Stock (the “Parent Preferred  Stock”) to KDSM, Inc.,a wholly owned subsidiary.  ParentPreferred Stock dividends paid to KDSM, Inc. are considered  taxableincome for Federal tax purposes. The Parent Preferred Stock dividends paid toKDSM are reflected as other income for KDSM’s book purposes, but are excludedas an expense from Sinclair Broadcast Group, Inc’s consolidated operations asthe amounts eliminate in consolidation. Also for Federal tax purposes, KDSM, Inc. is allowed a tax deduction fordividends  received on the ParentPreferred  Stock in an amount  equal to Parent  Preferred  Stock  dividends received  in each  taxable  year limited to the extent  thatthe  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,  KDSM will reduce itstax basis in the Parent Preferred  Stock  which gives  rise to a  deferred tax  liability  (to be recognized upon redemption).  During the year ended  December 31,  2000,  the Parent generated a significant amount of  “earnings and profits” though the sale of a significant amount ofassets at a gain. KDSM therefore avoided a reduction in basis of its ParentPreferred Stock.  In the years endedDecember 31, 2002 and 2001, the Parent had sufficient cumulative “earnings andprofits” and KDSM avoided a reduction of basis in its Parent Preferred Stock.

 

F-14

----

 

The following table summarizes the state tax effectsof the significant types of temporary differences between financial reportingbasis and tax basis as of the years ended December 31, 2002 and 2001 (inthousands):

 
|                                    |   | **2002** |    | **2001** |   |
|-----------------------------------------|--------|----------|---------|----------|--------|
| Deferred Tax  Assets                    |   |     |    |     |   |
| Net operating  losses                   |   | $        | 10,799  |     | $      | 8,857 |   |
| Fixed assets and  intangibles           |   | 1,033    |    | (639     | )      |
| Other                                   |   | 10       |    | 10       |   |
|                                    |   | 11,842   |    | 8,228    |   |
| Valuation  allowance                    |   | (8,338   | )       | (4,766   | )      |
|                                    |   | $        | 3,504   |     | $      | 3,462 |   |
|                                    |   |     |    |     |   |
| Deferred Tax  Liabilities               |   |     |    |     |   |
| Preferred stock  deferred tax liability |   |     |    |     |   |
| [see (a) above]                         |   | (3,462   | )       | (3,462   | )      |
| Other                                   |   | (42      | )  | —   |   |
|                                    |   | $        | (3,504  | )        | $      | (3,462 | ) |

 

The Company establishes valuation allowances inaccordance with the provisions of SFAS No. 109, *Accounting for Income Taxes.*TheCompany continually reviews the adequacy of the valuation allowance and isrecognizing these benefits only as reassessment indicates that it is morelikely than not that the benefits will be realized.

 

The deferred state tax assets and liabilitiesrepresent the state tax benefits related to the temporary differences listedabove.  The estimated blended federaland state statutory rate was 41.9% for the years ended December 31, 2002 and2001.

** **

**7.****              EMPLOYEEBENEFITS:**

 

KDSM participates in Sinclair’s retirement savings plan under Section401(k) of the Internal Revenue Code.  Thisplan covers substantially all employees of the Company who meet minimum age orservice requirements and allows participants to defer a portion of their annualcompensation on a pre-tax basis. Contributions from the Company are made on anannual basis in an amount equal to 50% of the participating employeecontributions, to the extent such contributions do not exceed 4% of theemployees’ eligible compensation during the year.

** **

**8.****              COMMITMENTS AND CONTINGENCIES:**

 

# **Litigation**

 

The Company is involved in certain litigation matters arising in thenormal course of business.  In theopinion of management, these matters are not significant and will not have amaterial adverse effect on the Company’s financial position.

 

F-15

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# **Capital and Operating Leases**

 

The company leases certain equipment under non-cancelable operatingleases.  In addition, in 2001, theCompany entered into a 25 year capital lease for a digital tower.  The capital lease was recorded at $2.1million, which is the present value of the future minimum lease payments.  Future minimum payments under the lease areas follows (in thousands):

 
| **Year ending December 31, 2002**               |   | **Capital  lease** |   | **Operating  lease** |   |
|-------------------------------------------------|--------|--------------------|--------|----------------------|--------|
| 2003                                            |   | $                  | 202    |                 | $      | 2 |   |
| 2004                                            |   | 210                |   | 2                    |   |
| 2005                                            |   | 219                |   | 2                    |   |
| 2006                                            |   | 228                |   | —               |   |
| 2007                                            |   | 237                |   | —               |   |
| Thereafter                                      |   | 6,642              |   | —               |   |
| Total future  minimum lease payments            |   | 7,738              |   | $                    | 6      |   |
| Less - interest                                 |   | (5,556             | )      |                 |   |
| Less current  portion                           |   | (202               | )      |                 |   |
| Present value of  future capital lease payments |   | $                  | 1,980  |                 |   |   |

 

**AffiliationAgreement**

 

Sinclair recently secured a long-term affiliationagreement with the FOX network with a term that will run through June 30, 2005.

 

Upon the termination of the above affiliationagreement, the Company would be required to establish a new affiliation withanother network or operate as an independent. At such time, the remaining value of the network affiliation asset maybe impaired and the Company would be required to write down the value of theasset.

 

F-16

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**9.****              COMPANYOBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTHOLDING SOLELY KDSM SENIOR DEBENTURES:**

 

In March 1997, the Company completed a private placement of $200million aggregate liquidation value of HYTOPS. The Trust Preferred Securities were issued March 12, 1997, mature March15, 2009, are mandatorily redeemable at maturity and provide for quarterlydistributions 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 SecuritiesAct of 1933, as amended) and a limited number of institutional “accreditedinvestors” and the offering was exempt from registration under the SecuritiesAct of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) of theSecurities Act and Rule 144A thereunder. The Company utilized the proceeds of the private placement combined withother capital contributions to acquire $206.2 million of 12.625% Series CPreferred Stock (the “Parent Preferred Securities”) of Sinclair.

# ** **

# **Pursuantto a Registration Rights Agreement entered into in connection with the privateplacement of the Trust Preferred Securities, Sinclair Capital offered holdersof the Trust Preferred Securities the right to exchange the Trust PreferredSecurities with new Trust Preferred Securities having the same terms as theexisting securities, except that the exchange of the new Trust PreferredSecurities for the existing Trust Preferred Securities has been registered underthe Securities Act.  On May 2, 1997, theCompany filed a registration statement on Form S-4 with the Securities andExchange Commission for the purpose of registering the new Trust PreferredSecurities to be offered in exchange for the aforementioned existing TrustPreferred Securities issued by the Company in March 1997 (the “ExchangeOffer”).  The Company’s Exchange Offerwas closed and became effective on August 11, 1997, at which time all of theexisting Trust Preferred Securities were exchanged for new Trust PreferredSecurities.**

** **

**10.****       PARENTPREFERRED SECURITIES:**

 

In March 1997, the Company utilized the proceeds of the Trust PreferredSecurities combined with other capital contributions to acquire $206.2 millionof 12.625% Parent Preferred Securities issued by Sinclair.  The Parent Preferred Securities were issuedMarch 12, 1997, mature March 15, 2009, are mandatorily redeemable at maturity,and provide for quarterly distributions to be paid in arrears beginning June15, 1997.

 

Pursuant to a Registration Rights Agreement entered into in connectionwith the private placement of the Trust Preferred Securities, Sinclair wasobligated to exchange the existing Parent Preferred Securities  (the “Old Parent Preferred”) with New ParentPreferred Securities (the “New Parent Preferred”) registered under theSecurities Act.  The terms of the NewParent Preferred are identical in all material respects to those of the OldParent Preferred.  A registrationstatement was filed on May 2, 1997 with respect to registering the New ParentPreferred, and was declared effective on July 14, 1997 and the exchange hasbeen completed.

 

The Company intends to hold the New Parent Preferred securities untilmaturity.  In accordance withmanagement’s intentions, these investments are carried at cost.  Any permanent impairment to the investmentwill result in a write-off of the investment at the time of the impairment.

 

F-17

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**11.****       QUARTERLYFINANCIAL INFORMATION (UNAUDITED, in thousands):**

** **
|                                                |   | **For the  Quarter Ended** |   |
|-----------------------------------------------------|--------|----------------------------|--------|
|                                                |   | **March 31,  2002**        |   | **March 31,  2002** |   | **June 30,  2002** |   | **September  30,  2002** |   | **December  31,  2002** |   |
|                                                |   | **(As  reported)**         |   | **(As restated)(1)(2)** |   | **(2)** |   | **(2)** |   |   |   |
| Total revenues                                      |   | $                          | 1,933  |   | $ | 1,929 |   | $ | 2,083 |   | $ | 1,860 |   | $ | 2,375 |   |
| Operating income  (loss)                            |   | 89                         |   | 89 |   | 87 |   | (13 | ) | 465 |   |
| Income from  continuing operations                  |   | 883                        |   | 883 |   | 882 |   | 813 |   | 1,255 |   |
| Loss from change  in accounting principle           |   | —                     |   | (23,178 | ) | — |   | — |   | — |   |
| Net (loss)  income available to common shareholders |   | 883                        |   | (22,295 | ) | 882 |   | 813 |   | 1,255 |   |
| Net income  (loss) per common share                 |   | 8,830                      |   | (222,950 | ) | 8,820 |   | 8,130 |   | 12,550 |   |
|                                                     |        |                            |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

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**(1)****         Theresults previously reported in the Company’s Form 10-Q for the quarter endedMarch 31, 2002 have been restated to reflect the cumulative effect of adoptionof SFAS No. 142 as discussed in Note 1.**

 

**(2)****         Theresults previously reported in the Company’s Form 10-Q for the quarters endedMarch 31, 2002, June 30, 2002 and September 30, 2002 have been restated toreflect the adoption of EITF 02-16 as discussed in Note 1.**

** **
|                              |   | **For the  Quarter Ended** |   |
|-----------------------------------|--------|----------------------------|--------|
|                              |   | **March 31,  2001**        |   | **June 30,  2001** |   | **September  30,  2001** |   | **December  31,  2001** |   |
| Total revenues                    |   | $                          | 2,157  |   | $ | 2,083 |   | $ | 1,942 |   | $ | 2,344 |   |
| Operating income                  |   | (26                        | )      | 148 |   | (68 | ) | (209 | ) |
| Income from continuing operations |   | 765                        |   | 963 |   | 761 |   | 513 |   |
| Net income per common share       |   | 7,650                      |   | 9,630 |   | 7,610 |   | 5,130 |   |
|                                   |        |                            |        |  |  |  |  |  |  |  |  |  |  |

 

F-18

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**KDSM,INC. AND SUBSIDIARIES**

 

**INDEX TO SCHEDULES**

 
| Schedule  II – Valuation and Qualifying Accounts |   |   | ** ** |
|-------------------------------------------------------|--------|--------|------------|

 

All  schedules except thoselisted above are omitted as not applicable or not required or the requiredinformation is included in the consolidated financial statements or in the notes thereto.

 

S-1

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**SCHEDULEII**

** **

**KDSM, INC. AND SUBSIDIARIESVALUATION AND QUALIFYING ACCOUNTSFOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002(in thousands)**

** **
| **Description**                 |   | **Balance at  Beginning of Period** |   | **Charged  to Costs and  Expenses** |   | **Deductions** |   | **Balance  at End of  Period** |   |
|---------------------------------|--------|-------------------------------------|--------|-------------------------------------|--------|----------------|--------|--------------------------------|--------|
| **2000**                        |   |                                |   |                                |   |           |   |                           |   |
| Allowance for doubtful accounts |   | 19                                  |   | 51                                  |   | 49             |   | 21                             |   |
| **2001**                        |   |                                |   |                                |   |           |   |                           |   |
| Allowance for doubtful accounts |   | 21                                  |   | 56                                  |   | 31             |   | 46                             |   |
| **2002**                        |   |                                |   |                                |   |           |   |                           |   |
| Allowance for doubtful accounts |   | 46                                  |   | 29                                  |   | 17             |   | 58                             |   |

 

S-2

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