** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-K**

 

**ANNUAL REPORT PURSUANT TO SECTION13 OR 15(D)**

**OF THE SECURITIES EXCHANGE ACT OF1934**

 
| **For the fiscal year ended December  31, 2001** |   | **Commission File Number:333-26427-01** |
|--------------------------------------------------|--------|-----------------------------------------|

** **

**KDSM, INC.**

(Exact name of Registrantas 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 Registrantas 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 whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15 (d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theRegistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ý No o

 

Indicate by check mark if disclosure of delinquent files pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K.  ý

 

As of March 20, 2002, 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 SinclairCapital, a subsidiary trust of KDSM, Inc., are issued and outstanding.

 

 

 

**PART I**

** **

**FORWARD-LOOKING STATEMENTS**

 

This report includes or incorporates forward-lookingstatements.  We have based theseforward-looking statements on our current expectations and projections aboutfuture events.  These forward-lookingstatements are subject to risks, uncertainties and assumptions about us,including, among other things:

 

•       theimpact of changes in national and regional economies,

 

•       thecontinuing impact of the terrorist attacks of September 11, 2001,

 

•       pricingfluctuations in local and national advertising,

 

•       theactivities of our competitors,

 

•       popularityof our programming and

 

•       change inthe make up of the population where our station is located,

 

•       theeffects of governmental regulation of broadcasting.

 

Other matters set forth in this report, including therisk factors set forth in Item 7 to this report, or in the documentsincorporated by reference may also cause actual results in the future to differmaterially from those described in the forward-looking statements.  We undertake no obligation to update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise.  In light ofthese risks, uncertainties and assumptions, the forward-looking eventsdiscussed in this report might not occur.

 

**ITEM 1. BUSINESS**

** **

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

 

KDSM, Channel 17, is located in Des Moines, the statecapital of Iowa.  The Des Moines marketis currently served by five commercial television stations, all of which arenetwork affiliated. KDSM, the FOX affiliate, is pursuing a counter-programmingstrategy against the other network affiliates designed to attract additionalaudience share in demographic groups not served by programming on competingstations.

 

The following table sets forth certain market revenue,size and audience share information for the Des Moines designated market area:

 
|                          |   | **Year Ended  December 31,** |   |
|-------------------------------|--------|------------------------------|--------|
|                          |   | **2001**                     |   | **2000** |   | **1999** | ** ** |
|                          |   | **(dollars  in thousands)**  |   |
| Market revenue                |   | $                            | 40,756 |   | $ | 48,497 |   | $ | 44,739 |   |
| Annual market  revenue growth |   | (16.0                        | )%     | 8.4 | % | 0.1 | % |
| Station rank  within market   |   | 3                            |   | 3 |   | 3 |   |
| Television homes              |   | 405,000                      |   | 394,000 |   | 393,000 |   |
| KDSM audience  share          |   | 5.5                          | %      | 6.3 | % | 6.0 | % |
|                               |        |                              |        |  |  |  |  |  |  |  |  |  |  |

 

KDSM had station broadcast revenues of $7.8 millionand broadcast cash flow of $2.1 million in 2001.

 

The principal office of KDSM is located at 10706Beaver Dam Road, Hunt Valley, MD 21030 and its telephone number is410-568-1500.

 

**SINCLAIR CAPITAL**

** **

Sinclair Capital is a special purpose statutorybusiness trust created under Delaware law pursuant to a trust agreementexecuted by KDSM as depositor for the trust, First Union National Bank ofMaryland as property trustee (the property trustee), and First Union Bank ofDelaware as Delaware trustee (the Delaware trustee), and the filing of acertificate of trust with the Delaware Secretary of State.

 

The property trustee acts as sole trustee under thetrust agreement for the purposes of compliance with the Trust IndentureAct.  The trust exists for the exclusivepurposes of:

 

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

 

•       purchasing the KDSM senior debentures with the proceeds fromsale of the preferred securities and the common securities and

 

•       engaging in only those other activities necessary orincidental thereto.

 

All of the common securities of Sinclair Capital areowned by KDSM and KDSM has agreed in the KDSM senior debenture indenture tomaintain such ownership.  KDSM acquiredcommon securities having an aggregate liquidation amount equal to 3% of thetotal capital of the trust.  The trusthas a term expiring in 2015, but may terminate earlier as provided in the trustagreement.  The trust’s business affairswill be conducted by the property trustee, the Delaware trustee and theadministrative trustee.  The holder ofthe common securities, or the holders of at least a majority in the aggregateliquidation value of then outstanding preferred securities if an event ofdefault has occurred and is continuing, will be entitled to appoint, remove orreplace the trustees of the trust.

 

The duties and obligations of the trustees aregoverned by the trust agreement.  DavidD. Smith and David B. Amy, each an officer of Sinclair, were appointed asadministrative trustees of the trust (in such capacity, the administrativetrustees) pursuant to the terms of the trust agreement.  Under the trust agreement, theadministrative trustees have certain duties and powers including, but notlimited to, the delivery of certain notices to the holders of the preferredsecurities, the appointment of the preferred securities paying agent and thepreferred securities registrar, the registering of transfers of the preferredsecurities and the common securities and preparing and filing on behalf of thetrust all United States federal, state and local tax information and returnsand reports required to be filed by or in respect of the trust.  Under the trust agreement, the propertytrustee has certain duties and powers, including, but not limited to, holdinglegal title to the KDSM senior debentures on behalf of the trust, thecollection of payments in respect of the KDSM senior debentures, maintenance ofthe payment account, the sending of default notices with respect to thepreferred securities and the distribution of the assets of the trust in theevent of a winding-up of the trust.

 

**TELEVISION BROADCASTING**

** **

***Operating Strategy***

** **

Our television operating strategy includes thefollowing key elements:

 

**Attracting Viewership**

** **

We seek to attract viewership and expand our audienceshare through selective, high-quality programming.

 

*Popular Programming*.  We believe that an important factor inattracting viewership is our network affiliation with FOX.  The affiliation enables us to attractviewers by virtue of the quality first-run original programming provided bythis network and the network’s promotion of such programming.  We also seek to obtain, at attractiveprices, popular syndicated programming that is complementary to the station’snetwork affiliation.  Examples ofpopular syndicated programming obtained by us for broadcast are “The Simpsons,”“Seinfeld,” “Spin City,” “Drew Carey,” “Frasier,” “Third Rock,” “King of theHill” and “Cheers”.  Our programmingstrategy also includes counter programming which consists of broadcastingprograms that are alternatives to the types of programs being shownconcurrently on competing stations.

 

*Local News*.  We believe that the production and broadcasting of local news isan important link to the community and an aid to the station’s efforts toexpand its viewership.  In addition,local news programming can provide access to advertising sources targetedspecifically to local news viewers.  InMarch 2001, we commenced a 35-minute prime-time local newscast, airing sevendays a week from 9:00pm to 9:35pm (CST) which is being produced by KGAN-TV, awholly-owned Sinclair television station in Cedar Rapids, Iowa.  This is central Iowa’s only prime-time localnewscast.

* *

*Popular Sporting Events*.  We attempt to capture a portion ofadvertising dollars designated to sports programming.  Affiliates of FOX are subject to prohibitions against preemptionsof network programming.  We have beenable to acquire the local television broadcast rights for certain sportingevents, including Major League Baseball, NFL football, Big Ten football, andIowa and Big Ten basketball, and Iowa High School Basketball.

 

**Innovative Local Sales and Marketing**

 

We believe that we are able to attract new advertisersto our station and increase our share of existing customers’ advertisingbudgets by creating a sense of partnership with those advertisers.  We develop such relationships by trainingour sales force to offer new marketing ideas and campaigns to advertisers.  These campaigns often involve thesponsorship by advertisers of local promotional events that capitalize on thestation’s local identity and programming franchises.  For example, KDSM has a local Family Fair, which allows stationadvertisers to reinforce their on-air advertising with their targetaudience.  Through our strong local sales

 

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and marketing focus, we seek to capture an increasing share of ourrevenues from local sources, which are generally more stable than nationaladvertising.

 

**Control of Operating and ProgrammingCosts**

** **

By employing a disciplined approach to managingprogramming acquisition and other costs, Sinclair has been able to achieveoperating margins that Sinclair believes are among the highest in thetelevision broadcast industry.  Sinclairhas sought and will continue to seek to acquire quality programming for pricesat or below prices paid in the past which directly affects us.  As an owner or provider of programming orsales services to 63 stations located in 40 geographically diverse marketsreaching approximately 25% of the U.S. television households, Sinclair believesthat it is able to negotiate favorable terms for the acquisition ofprogramming.  Moreover, Sinclairemphasizes control of our programming and operating costs throughprogram-specific profit analysis, detailed budgeting, tight control overstaffing levels and detailed long-term planning models.

 

**Attract and Retain High QualityManagement**

 

We believe that much of our success is due to ourability to attract and retain highly skilled and motivated managers, both atthe corporate and local station levels. A portion of the compensation provided to general managers, salesmanagers and other station managers is based on their achieving certainoperating results.  We also provide someof our station managers with deferred compensation plans offering options toacquire class A common stock.

 

**Community Involvement**

 

We actively participate in various communityactivities and offer many community services. Our activities include broadcasting programming of local interest andsponsorship of community and charitable events.  We also encourage our station employees to become active membersof their communities and to promote involvement in community and charitableaffairs.  We believe that activecommunity involvement by our station provides increased exposure in our DMA andultimately increases viewership and advertising support.

 

**Programming and Affiliations**

 

Sinclair continually reviews our existing programminginventory and seeks to purchase the most profitable and cost-effectivesyndicated programs available for each time period.  In developing its selection of syndicated programming, Sinclairbalances the cost of available syndicated programs with their potential toincrease advertising revenue and the risk of their reduced popularity duringthe term of the program contract. Sinclair seeks to purchase only those programs with contractual periodsthat permit programming flexibility and which complement a station’s overallprogramming 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.

 

On August 21, 1996, Sinclair entered into an agreementwith FOX (“the FOX agreement”) which, among other things, provides that theaffiliation agreement between FOX and KDSM would be amended to have a newfive-year term commencing on the date of the FOX agreement and ending on August21, 2001.  FOX had, but did notexercise, an option to extend the affiliation agreement for an additionalfive-year term.  Sinclair is currentlyin discussion with FOX to secure a long term affiliation agreement for KDSM,and expects such discussions to be successful. KDSM continues to carry FOX programming notwithstanding the fact thatthis affiliation agreement has expired. 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 televisionstations are subject to the jurisdiction of the FCC, which acts under authoritygranted by the Communications Act of 1934, as amended (“CommunicationsAct”).  Among other things, the FCCassigns frequency bands for broadcasting; determines the particularfrequencies, locations and operating power of stations; issues, renews, revokesand modifies station licenses; regulates equipment used by stations; adopts andimplements regulations and policies that directly or indirectly affect theownership, operation and employment practices of stations; and has the power toimpose penalties for violations of its rules or the Communications Act.

 

The following is a brief summary of certain provisionsof the Communications Act, the Telecommunications Act of 1996 (“the 1996 Act”)and specific FCC regulations and policies. Reference should be made to the Communications Act, the 1996 Act, FCCrules and the public notices and rulings of the FCC for further informationconcerning the nature and extent of federal regulation of broadcast stations.

 

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**License Grant and Renewal**

 

Television stations operate pursuant to broadcastinglicenses that are granted by the FCC for maximum terms of eight years and aresubject to renewal upon application to the FCC.  During certain periods when renewal applications are pending,petitions to deny license renewals can be filed by interested parties,including members of the public.  TheFCC will generally grant a renewal application if it finds:

 

•       that the station has served the public interest, convenienceand necessity;

•       that there have been no serious violations by the licensee ofthe Communications Act or the rules and regulations of the FCC; and

•       that there have been no other violations by the licensee ofthe Communications Act or the rules and regulations of the FCC that, when takentogether, would constitute a pattern of misconduct.

 

KDSM’s FCC license will expire on February 1,2006.  Although renewal of a license isgranted in the vast majority of cases even when petitions to deny are filed,there can be no assurance that the license of a station will be renewed.

 

**OwnershipMatters**

 

*General. *TheCommunications Act prohibits the assignment of a broadcast license or thetransfer of control of a broadcast licensee without the prior approval of theFCC.  In determining whether to permitthe assignment or transfer of control of, or the grant or renewal of, abroadcast license, the FCC considers a number of factors pertaining to thelicensee, including compliance with various rules limiting common ownership ofmedia properties, the “character” of the licensee and those persons holding“attributable” interests in that licensee, and compliance with the CommunicationsAct’s limitations on alien ownership.

 

To obtain the FCC’s prior consent to assign abroadcast license or transfer control of a broadcast licensee, appropriateapplications must be filed with the FCC. If the application involves a “substantial change” in ownership orcontrol, the application must be placed on public notice for a period ofapproximately 30 days during which petitions to deny the application may befiled by interested parties, including members of the public.  If the application does not involve a“substantial change” in ownership or control, it is a “pro forma”application.  The “pro forma”application is not subject to petitions to deny or a mandatory waiting period,but is nevertheless subject to having informal objections filed againstit.  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 initialpetitions to deny or informal objections against the application facedifficulty in seeking reconsideration or review of the grant.  The FCC normally has approximately anadditional 10 days to set aside such grant on its own motion.  When passing on an assignment or transfer application,the FCC is prohibited from considering whether the public interest might beserved by an assignment or transfer to any party other than the assignee ortransferee specified in the application.

 

The FCC generally applies its ownership limits to “attributable”interests held by an individual, corporation, partnership or otherassociation.  In the case ofcorporations holding, or through subsidiaries controlling, broadcast licenses,the interests of officers, directors and those who, directly or indirectly,have the right to vote 5% or more of the corporation’s stock (or 20% or more ofsuch stock in the case of insurance companies, investment companies and banktrust departments that are passive investors) are generally attributable.  In August 1999, the FCC revised itsattribution and multiple ownership rules, and adopted the equity-debt-plus rulethat causes certain creditors or investors to be attributable owners of astation.  Under this rule, a major programmingsupplier (any programming supplier that provides more than 15% of the station’sweekly programming hours) or same-market media entity will be an attributableowner of a station if the supplier or same-market media entity holds debt orequity, or both, in the station that is greater than 33% of the value of thestation’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 includes all liabilities whetherlong-term or short-term.

 

The Communications Act prohibits the issuance ofbroadcast licenses to, or the holding of a broadcast license by, anycorporation of which more than 20% of the capital stock is owned of record orvoted by non-U.S.  citizens or theirrepresentatives or by a foreign government or a representative thereof, or byany 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 hasissued interpretations of existing law under which these restrictions inmodified form apply to other forms of business organizations, includingpartnerships.

 

As a result of these provisions, the licenses grantedto KDSM Licensee, LLC by the FCC could be revoked if, among other restrictionsimposed by the FCC, more than 25% of Sinclair’s stock were directly orindirectly owned or voted by aliens. Sinclair and its subsidiaries are domestic corporations, and the membersof the Smith family (who together hold over 90% of the common voting rights ofSinclair) are all United States citizens. The amended and restated articles of incorporation of Sinclair (theamended certificate) contain limitations on alien ownership and control thatare substantially similar to those contained in the Communications Act.  Pursuant to the amended certificate,Sinclair has the right to repurchase alien-owned shares at their fair marketvalue to the extent necessary, in the judgment of its board of directors, tocomply with the alien ownership restrictions.

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*Radio/Television Cross-Ownership Rule. *The FCC’s radio/televisioncross-ownership rule (the “one to a market” rule) generally permits a party toown a combination of up to two television stations and six radio stationsdepending on the number of independent media voices in the market.

 

*Local Television/Cable Cross-Ownership Rule. *On February 19, 2002, theU.S. Court of Appeals for the D.C. Circuit vacated the FCC rules prohibitingthe common ownership of a television station and a cable system that serve thesame local market.

* *

*Broadcast/Daily Newspaper Cross-Ownership Rule. *The FCC’s rules prohibitthe common ownership of a radio or television broadcast station and a dailynewspaper in the same market.  OnSeptember 20, 2001, the FCC released an Order and Notice of Proposed RuleMaking in which it seeks comments on whether the broadcast/daily newspapercross-ownership rule should be retained, modified or eliminated.

 

*Dual Network Rule. *InMay 2001, the FCC amended its dual network rule to permit the four majortelevision networks — ABC, CBS, NBC and FOX to own, operate, maintain orcontrol the UPN and/or WB television network. The four major networks are still prohibited, absent a waiver, frommerging with each other.

 

*Antitrust Regulation. *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 DOJtakes the position that an LMA entered into in anticipation of a station’sacquisition with the proposed buyer of the station constitutes a change inbeneficial ownership of the station which, if subject to filing under the HSRAct, cannot be implemented until the waiting period required by that statutehas ended or been terminated.

 

Expansion of our broadcast operations on both a localand national level will continue to be subject to the FCC’s ownership rules andany changes the FCC or Congress may adopt. Concomitantly, any further relaxation of the FCC’s ownership rules mayincrease the level of competition in the market in which our station islocated, more specifically to the extent that any of our competitors may havegreater resources and thereby be in a superior position to take advantage ofsuch changes.

* *

*National Ownership Rule. *The U.S. Court of Appeals for the D.C. Circuitrecently remanded to the FCC its decision not to alter the rule that noindividual or entity may have an attributable interest in television stationsreaching more than 35% of the national television viewing audience.  Under this rule, which currently remains ineffect pending the FCC’s review thereof as mandated by the court, where anindividual or entity has****an attributable interest in more than onetelevision station in a Designated Market Area (“DMA”), the percentage of thenational television viewing audience encompassed within that DMA is onlycounted once.  Historically, VHFstations have shared a larger portion of the market than UHF stations.  Therefore, only half of the households inthe market area of any UHF station are included when calculating whether anentity or individual owns television stations reaching more than 35% of thenational television viewing audience. KDSM is a UHF station.

* *

*Duopoly Rule. *Underthe FCC’s 1999 local television ownership rules, a party may own two televisionstations in adjoining DMA, even if there is Grade B overlap between the twostations’ signals and generally may own two stations in the same market:

 

•       if there is no Grade B overlap between the stations; or

•       if the market containing both the stations contains at leasteight separately-owned full-power television stations (the “eight voices test”)and not more than one station is among the top-four rated stations in themarket.

 

In addition, a party may request a waiver of the ruleto acquire a second station in the market if the station to be acquired iseconomically distressed or unbuilt and there is no party who does not own alocal television station who would purchase the station for a reasonable price.

 

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

 

In 1988, Congress enacted SHVA which enabled satellitecarriers to provide broadcast programming to those satellite subscribers whowere unable to obtain broadcast network programming over-the-air.  SHVA did not permit satellite carriers toretransmit local broadcast television signals directly to theirsubscribers.  The Satellite Home ViewerImprovement Act of 1999 (“SHVIA”) revised SHVA to reflect changes in thesatellite and broadcasting industry. This legislation allows satellite carriers to provide local televisionsignals by satellite within a station market, and requires satellite carriersto carry all local signals in any market where it carries any local signalscommenced January 1, 2002.  SHVIArequires all television stations to elect to exercise certain “must carry” or“retransmission consent” rights in connection with their carriage by satellitecarriers on or before July 1, 2001.  Wehave entered into agreements granting the two primary satellite carriersretransmission consent to carry our station.

 

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**Must-Carry/RetransmissionConsent**

 

Pursuant to the Cable Act of 1992, televisionbroadcasters are required to make triennial elections to exercise eithercertain “must-carry” or “retransmission consent” rights in connection withtheir carriage by cable systems in each broadcaster’s local market.  By electing the must-carry rights, abroadcaster demands carriage on a specified channel on cable systems within itsDMA, in general as defined by the Nielsen DMA Market and Demographic RankReport of the prior year.  Thesemust-carry rights are not absolute, and their exercise is dependent onvariables such as:

 

•       the number of activated channels on a cable system,

•       the location and size of a cable system, and

•       the amount of programming on a broadcast station thatduplicates the programming of another broadcast station carried by the cablesystem.

 

Therefore, under certain circumstances, a cable systemmay decline to carry a given station. Alternatively, if a broadcaster chooses to exercise retransmissionconsent rights, it can prohibit cable systems from carrying its signal or grantthe appropriate cable system the authority to retransmit the broadcast signalfor a fee or other consideration.  InOctober 1999, we elected retransmission consent with respect to KDSM.  Our stations continue to be carried on allpertinent cable systems, and we do not believe that our elections have resultedin the shifting of our stations to less desirable cable channel locations.  Many of the agreements we have negotiatedfor cable carriage are short term, subject to month-to-month extensions.  We are currently evaluating whether to electmust-carry or retransmission consent which, election must be made later thisyear.

 

The FCC recently determined not to apply must-carryrules to require cable companies to carry both the analog and digital signalsof local broadcasters during the DTV transition period between 2002 and 2006when television stations will be broadcasting both signals.  As a result of this decision by the FCC,cable customers in our broadcast markets may not receive the station’s digitalsignal.

 

**Syndicated Exclusivity/TerritorialExclusivity**

 

The FCC’s syndicated exclusivity rules allow localbroadcast television stations to demand that cable operators black outsyndicated non-network programming carried on “distant signals” (i.e., signalsof broadcast stations, including so-called “superstations,” which serve areassubstantially removed from the cable system’s local community).  The FCC’s network non-duplication rulesallow local broadcast network television affiliates to require that cableoperators black out duplicating network programming carried on distantsignals.  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.

 

**Restrictions on Broadcast Advertising**

** **

Advertising of cigarettes and certain other tobaccoproducts on broadcast stations has been banned for many years.  Various states also restrict the advertisingof alcoholic beverages and certain members of Congress are currentlycontemplating legislation to place restrictions on the advertisement of suchalcoholic beverage products.  FCC rulesalso restrict the amount and type of advertising which can appear inprogramming broadcast primarily for an audience of children twelve years oldand younger.

 

The Communications Act and FCC rules also placerestrictions on the broadcasting of advertisements by legally qualifiedcandidates for elective office.  Amongother things,

 

•                    stations mustprovide “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 ourstation’s advertising revenues. Legislation currently pending in Congress would revise the lawsregarding the rates charged by television stations to legally qualifiedcandidates for office and the rules regarding “soft money” advertising andadvocacy advertising by labor unions and corporations.  The future of this legislation is unknownand we cannot predict the effect of such legislation on our station’s advertisingrevenues should the legislation be enacted. Observers agree that if the legislation is enacted, a constitutionalchallenge is likely.

 

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**Programming and Operation**

** **

*General. *TheCommunications Act requires broadcasters to serve the “public interest.” TheFCC has relaxed or eliminated many of the more formalized procedures it haddeveloped in the past to promote the broadcast of certain types of programmingresponsive to the needs of a station’s community of license.  FCC licensees continue to be required,however, to present programming that is responsive to issues, needs andinterest of their communities, and to maintain certain records demonstratingsuch responsiveness.  Complaints fromviewers concerning a station’s programming may be considered by the FCC when itevaluates renewal applications of a licensee, although such complaints may befiled at any time and generally may be considered by the FCC at any time.  Stations also must pay regulatory andapplication fees, and follow various rules promulgated under the CommunicationsAct that regulate, among other things, political advertising, sponsorshipidentifications, obscene and indecent broadcasts, and technical operations,including limits on radio frequency radiation.

* *

*Equal Employment Opportunities. *During 2000, the FCC adopted rules to requirebroadcast licensees to create equal employment opportunity outreach programsand maintain records and make filing with the FCC evidencing such efforts.  In January 2001, the United States Court ofAppeals for the District of Columbia Circuit vacated these rules.  The FCC subsequently issued a Public Noticesuspending the outreach and record-keeping aspects of the rules.  On December 21, 2001, the FCC released asecond Notice of Proposed Rule Making which proposes a new broadcast equalemployment opportunity rule.  Commentson this proposal are due in mid-April 2002.

* *

*Children’s Television Programming. *Television stations are required to broadcast aminimum of three hours per week of “core” children’s educational programming,which the FCC defines as programming that

 

•      has the significant purpose of servicingthe educational and informational needs of children 16 years of age and under;

•      is regularly scheduled, weekly and atleast 30 minutes in duration; and

•      is aired between the hours of 7:00 a.m.and 10:00 p.m.  Furthermore, “core”children’s educational programs, in order to qualify as such, are required tobe identified as educational and informational programs over the air at thetime they are broadcast, and are required to be identified in the children’sprogramming reports required to be placed quarterly in stations’ publicinspection files and filed quarterly with the FCC.

 

Additionally, television stations are required toidentify and provide information concerning “core” children’s programming topublishers of program guides.  The FCCis considering whether or not to require the use of the digital broadcastspectrum for the broadcast of additional amounts of “core” children’sprogramming.

 

*Television Program Content. *The television industry has developed a ratings systemthat has been approved by the FCC, that is designed to provide parents withinformation regarding the content of the programming being aired.  Furthermore, the FCC requires certaintelevision sets to include the so-called “V-chip,” a computer chip that allowsblocking of rated programming.

 

*Video Description . *Inorder to make television programming more accessible to persons with visualdisabilities, the Commission has adopted new rules requiring broadcast stationsto make critical details of emergency information accessible to such persons.

 

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**Digital Television**

** **

The FCC has taken a number of steps to implementdigital television (“DTV”) broadcasting services.  The FCC has adopted an allotment table that provides allauthorized television stations with a second channel on which to broadcast aDTV signal.  The FCC has attempted toprovide DTV coverage areas that are comparable to stations’ existing serviceareas.  The FCC has ruled thattelevision broadcast licensees may use their digital channels for a widevariety of services such as high-definition television, multiple standarddefinition television programming, audio, data, and other types ofcommunications, subject to the requirement that each broadcaster provide atleast one free video channel equal in quality to the current technical standardand further subject to the requirement that broadcasters pay a fee of 5% ofgross revenues on all DTV subscription services.

 

DTV channels are generally located in the range ofchannels from channel 2 through channel 51. The FCC required that affiliates of ABC, CBS, NBC and FOX in the top 10television markets begin digital broadcasting by May 1, 1999 and thataffiliates of these networks in markets 11 through 30 begin digitalbroadcasting by November 1999.  Allother commercial stations are required to begin digital broadcasting by May 1,2002.  KDSM is required to commencedigital operations by May 1, 2002.  Anapplication for KDSM’s digital facilities was filed by November 1, 1999.  The FCC also created a procedure allowingstations to apply for up to a six month extension as of May 1, 2002deadline.  The FCC’s plan calls for theDTV transition period to end in the year 2006, at which time the FCC expectsthat television broadcasters will cease non-digital broadcasting and return oneof their two channels to the government, allowing that spectrum to be recoveredfor other uses.  The FCC has beenauthorized by Congress to extend the December 31, 2006 deadline for reclamationof a television station’s non-digital channel 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 such stations have“exercised due diligence” in attempting to convert to digital broadcasting, or

•                                            lessthan 85% of the television households in the station’s market subscribe to amultichannel video service (cable, wireless cable or direct-to-home broadcastsatellite television (“DBS”) that carries at least one digital channel fromeach of the local stations in that market, or

•                                            lessthan 85% of the television households in the market can receive digital signalsoff the air using either a set–top converter box for an analog televisionset or a new DTV television set.

 

Congress directed the FCC to auction the remainingnon-digital channels by September 30, 2002 even though they are not to bereclaimed by the government until at least December 31, 2006.  If any of the auctioned channels areauthorized for DTV use, broadcasters are permitted to bid on such channels incities with populations greater than 400,000. The FCC has initiated separate proceedings to consider the surrender ofexisting television channels and how these frequencies will be used after theyare eventually recovered from broadcasters. The FCC envisions that these frequencies will be used for a variety ofwireless and broadcast-type applications including two-way interactive servicesand services using COFDM technology.

 

Implementation of digital television will also imposesubstantial additional costs on television stations because of the need toreplace equipment and because some stations will need to operate at higherutility costs and there can be no assurance that our television stations willbe able to increase revenue to offset such costs.  The FCC has proposed imposing new public interest requirements ontelevision licensees in exchange for their receipt of DTV channels.

 

**Pending Matters**

** **

The Congress and the FCC have under consideration, andin the future may consider and adopt, new laws, regulations and policiesregarding a wide variety of matters that could affect, directly or indirectly,the operation, ownership and profitability of our broadcast station, result inthe loss of audience share and advertising revenues for our broadcast station,and affect our ability to acquire additional broadcast stations or finance suchacquisitions.  In addition to thechanges and proposed changes noted above, such matters may include, forexample, the license renewal process, spectrum use fees, political advertisingrates, potential restrictions on the advertising of certain products (beer,wine and hard liquor, for example), and the rules and policies with respect toequal employment opportunity.

 

Other matters that could affect KDSM includetechnological innovations and developments generally affecting competition inthe mass communications industry, such as direct television broadcast satelliteservice, Class A television service, the continued establishment of wirelesscable systems and low power television stations, digital television technologies,the Internet and the advent of telephone company participation in the provisionof video programming service.

 

9

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**Other Considerations**

** **

The foregoing summary does not purport to be acomplete discussion of all provisions of the Communications Act or othercongressional acts or of the regulations and policies of the FCC.  For further information, reference should bemade to the Communications Act, the 1996 Act, other congressional acts, andregulations and public notices promulgated from time to time by the FCC.  There are additional regulations andpolicies of the FCC and other federal agencies that govern politicalbroadcasts, advertising, equal employment opportunity, and other mattersaffecting our business and operations.

 

**EMPLOYEES**

 

As of December 31, 2001, we had approximately 33employees.  None of the employees arerepresented by labor 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 andtower sites.  Transmitter and towersites are located to provide maximum signal coverage of the station’smarket.  The following table generallydescribes our principal owned and leased real property in the Des Moinesmarket:

 
| **Type of Facility and Use**  |   | **Owned or  Leased**        |   | **Approximate  Size (sq.feet)** |
|-------------------------------|--------|-----------------------------|--------|---------------------------------|
| KDSM Studio & Office Site |   | Owned                       |   | 13,000                          |
| KDSM Transmitter Bldg/Tower   |   | Owned                       |   | 2,000                           |
| KDSM Transmitter Land         |   | Leased (expires 11/08/2034) |   | 40 Acres                        |
| KDSM Translator tower/shed    |   | Leased (expires 12/31/2010) |   | 48                              |
| KDSM Tower                    |   | Leased (expires 8/1/2026)   |   | 2,343                           |

 

We believe that all of our properties, both owned andleased, are generally in good operating condition, subject to normal wear andtear, and are suitable and adequate for our current business operations.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

Lawsuits and claims are filed against us from time totime in the ordinary course of business. These actions are in various preliminary stages, and no judgments ordecisions have been rendered by hearing boards or courts.  Management does not believe that theseactions, individually or in the aggregate, will have a material adverse affecton our financial condition or results of operations.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

** **

No matters were submitted to a vote of ourstockholders during the fourth quarter of 2001.

 

10

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**PART II**

 

**ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDERMATTERS**

** **

None.

 

**ITEM 6.  SELECTED FINANCIAL DATA**

 

The selected consolidated financial data for the yearsended December 31, 2001, 2000, 1999, 1998 and 1997 have been derived from ouraudited Consolidated Financial Statements. The Consolidated Financial Statements for the years ended December 31,2001, 2000 and 1999 are included elsewhere in this Form 10-K.

 

The information below should be read in conjunctionwith “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” and the Consolidated Financial Statements included elsewhere inthis Form 10-K.

 
|                                            |   | **Years  Ended December 31,** |   |
|-------------------------------------------------|--------|-------------------------------|--------|
|                                            |   | **2001**                      |   | **2000** |   | **1999** |   | **1998** |   | **1997** |   |
|                                            |   | **(dollars in thousands)**    |   |
| **Statement  of Operations Data:**              |   |                          |   |   |   |   |   |   |   |   |   |
| Net broadcast  revenues (a)                     |   | $                             | 7,758  |   | $ | 8,807 |   | $ | 8,461 |   | $ | 8,363 |   | $ | 8,140 |   |
| Barter revenues                                 |   | 775                           |   | 731 |   | 541 |   | 552 |   | 398 |   |
|                                            |   |                          |   |   |   |   |   |   |   |   |   |
| Total revenues                                  |   | 8,533                         |   | 9,538 |   | 9,002 |   | 8,915 |   | 8,538 |   |
|                                            |   |                          |   |   |   |   |   |   |   |   |   |
| Operating costs  (b)                            |   | 4,593                         |   | 4,241 |   | 3,997 |   | 3,742 |   | 3,658 |   |
| Expenses from  barter arrangements              |   | 629                           |   | 636 |   | 392 |   | 377 |   | 283 |   |
| Depreciation and  amortization (c)              |   | 3,442                         |   | 2,952 |   | 2,915 |   | 3,676 |   | 2,916 |   |
| Stock-based  compensation                       |   | 24                            |   | 26 |   | 23 |   | 23 |   | 23 |   |
|                                            |   |                          |   |   |   |   |   |   |   |   |   |
| Broadcast  operating income                     |   | (155                          | )      | 1,683 |   | 1,675 |   | 1,097 |   | 1,658 |   |
| Parent’s  preferred stock dividend income  |   | 26,033                        |   | 26,033 |   | 26,033 |   | 26,033 |   | 20,826 |   |
| Subsidiary trust  minority interest expense (d) |   | (23,890                       | )      | (23,890 | ) | (23,890 | ) | (23,923 | ) | (19,205 | ) |
| Capital lease  interest expense                 |   | (81                           | )      | — |   | — |   | — |   | — |   |
| Interest and  other income                      |   | 1,095                         |   | 1,179 |   | 671 |   | 239 |   | — |   |
|                                            |   |                          |   |   |   |   |   |   |   |   |   |
| Income before  income taxes                     |   | $                             | 3,002  |   | $ | 5,005 |   | $ | 4,489 |   | $ | 3,446 |   | $ | 3,279 |   |
|                                            |   |                          |   |   |   |   |   |   |   |   |   |
| Net income                                      |   | $                             | 3,002  |   | $ | 5,005 |   | $ | 8,977 |   | $ | 729 |   | $ | 1,895 |   |
|                                            |   |                          |   |   |   |   |   |   |   |   |   |
| Net income  available to common shareholders    |   | $                             | 3,002  |   | $ | 5,005 |   | $ | 8,977 |   | $ | 729 |   | $ | 1,895 |   |
|                                            |   |                          |   |   |   |   |   |   |   |   |   |
| **Other  Data:**                                |   |                          |   |   |   |   |   |   |   |   |   |
| Broadcast cash  flow (e)                        |   | $                             | 2,094  |   | $ | 3,284 |   | $ | 3,433 |   | $ | 3,693 |   | $ | 3,661 |   |
| Broadcast cash  flow margin (f)                 |   | 27.0                          | %      | 37.3 | % | 40.6 | % | 44.2 | % | 45.0 | % |
| Adjusted EBITDA  (g)                            |   | $                             | 1,804  |   | $ | 2,992 |   | $ | 3,175 |   | $ | 3,423 |   | $ | 3,378 |   |
| Adjusted EBITDA  margin (f)                     |   | 23.3                          | %      | 34.0 | % | 37.5 | % | 40.9 | % | 41.5 | % |
| Program contract  payments                      |   | $                             | 1,561  |   | $ | 1,669 |   | $ | 1,438 |   | $ | 1,373 |   | $ | 1,219 |   |
| Corporate  overhead expense                     |   | 290                           |   | 292 |   | 258 |   | 270 |   | 283 |   |
| Capital  expenditures                           |   | 1,727                         |   | 955 |   | 151 |   | 235 |   | 197 |   |
| Cash flows from  operating activities           |   | 6,220                         |   | 6,968 |   | 10,428 |   | 4,210 |   | 4,060 |   |
| Cash flows from  investing activities           |   | (1,727                        | )      | (955 | ) | (151 | ) | (235 | ) | (207,973 | ) |
| Cash flows from  financing activities           |   | (4,557                        | )      | (5,950 | ) | (10,275 | ) | (3,979 | ) | 203,921 |   |
|                                            |   |                          |   |   |   |   |   |   |   |   |   |
| **Balance  Sheet Data:**                        |   |                          |   |   |   |   |   |   |   |   |   |
| Cash and cash  equivalents                      |   | $                             | 8      |   | $ | 72 |   | $ | 9 |   | $ | 7 |   | $ | 11 |   |
| Total assets                                    |   | 279,075                       |   | 272,705 |   | 268,061 |   | 259,519 |   | 258,540 |   |
| HYTOPS (h)                                      |   | 200,000                       |   | 200,000 |   | 200,000 |   | 200,000 |   | 200,000 |   |
| Total  stockholders equity                      |   | 71,462                        |   | 68,460 |   | 63,455 |   | 54,478 |   | 53,749 |   |

 

11

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(a)          “Net broadcast revenues”are defined as broadcast revenues net of agency commissions.

 

(b)         Operating costs includeprogram and production expenses and selling, general and administrativeexpenses less stock based compensation.

 

(c)          Depreciation and amortizationincludes amortization of program contract costs and net realizable valueadjustments, depreciation and amortization of property and equipment, andamortization of acquired intangible broadcasting assets and other assets, andcosts related to excess syndicated programming.

 

(d)         Subsidiary trust minorityinterest expense represents the distributions on the HYTOPS (see footnote h)and the amortization of deferred financing costs.  Previously the amortized costs associated with the issuance ofindebtedness had been classified as depreciation and amortization instead ofbeing classified as interest expense. Accordingly, we reclassified $640, $640, $673 and $605 as interestexpense for the fiscal years ended December 31, 2000, 1999, 1998, and 1997, respectively.

 

(e)          “Broadcast cash flow” isdefined as broadcast operating income plus corporate overhead expense, specialbonuses paid to executive officers, stock-based compensation, restructuringcosts and contract termination costs, impairment and write-down of long livedassets, depreciation 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.  Special bonuses paid toexecutive officers are considered unusual and non-recurring.  We have presented broadcast cash flow data,which we believe are comparable to the data provided by other companies in theindustry, because such data are commonly used as a measure of performance forbroadcast companies.  However, broadcastcash flow does not purport to represent cash provided by operating activitiesas reflected in our consolidated statements of cash flows, is not a measure offinancial performance under generally accepted accounting principles and shouldnot be considered in isolation or as a substitute for measures of performanceprepared in accordance with generally accepted accounting principles.

 

(f)            “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.

 

(g)         “Adjusted EBITDA” isdefined as broadcast cash flow less corporate expenses and is a commonly usedmeasure of performance for broadcast companies.  Adjusted EBITDA does not purport to represent cash provided byoperating activities as reflected in our consolidated statements of cash flows,is not a measure of financial performance under generally accepted accountingprinciples and should not be considered in isolation or as a substitute formeasures of performance prepared in accordance with generally acceptedaccounting principles.

 

(h)         HYTOPS represents ourObligated Mandatorily Redeemable Security of Subsidiary Trust Holding SolelyKDSM Senior Debentures representing $200 million aggregate liquidation value.

 

**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**INTRODUCTION**

 

Our operating revenues are derived from local andnational advertisers and, to a much lesser extent, from political advertisersand television network compensation. Our revenues from local advertisers have continued to trend upward andrevenues from national advertisers have continued to trend downward whenmeasured 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 nationaladvertisers a means by which to advertise their goods and services.  Our efforts to mitigate the effect ofincreasing national media outlets include continuing our efforts to increaselocal revenues and the development of innovative marketing strategies to selltraditional and non-traditional services to national advertisers.

 

Our primary operating expenses are syndicated programrights fees, commissions on revenues, employee salaries and station promotionalcosts.  Amortization and depreciation ofcosts associated with the acquisition of the station are also significantfactors 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.

 

12

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*Allowancefor 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 whichbecome payable within one year is reflected as a current liability in theConsolidated Balance 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 to realize management’sestimate of future advertising revenues, additional writedowns to netrealizable 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 broadcastrevenues received by our station for the periods indicated and the percentagecontribution of each type to our total gross broadcast revenues:

 

**BROADCASTREVENUES**

**(dollarsin thousands)**

 
|                        |   | **Years  ended December 31,** |   |
|-----------------------------|--------|-------------------------------|--------|
|                        |   | **2001**                      |   | **2000** |   | **1999** |   |
| Local/regional  advertising |   | $                             | 7,314  |   | 83.0 | % | $ | 7,531 |   | 75.4 | % | $ | 6,996 |   | 72.7 | % |
| National  advertising       |   | 1,446                         |   | 16.4 | % | 2,356 |   | 23.6 | % | 2,536 |   | 26.4 | % |
| Network  compensation       |   | —                        |   | 0.0 | % | — |   | 0.0 | % | — |   | 0.0 | % |
| Political  advertising      |   | 1                             |   | 0.0 | % | 26 |   | 0.3 | % | 17 |   | 0.2 | % |
| Production                  |   | 50                            |   | 0.6 | % | 70 |   | 0.7 | % | 73 |   | 0.7 | % |
| Broadcast  revenues         |   | 8,811                         |   | 100.0 | % | 9,983 |   | 100.0 | % | 9,622 |   | 100.0 | % |
| Less: agency  commissions   |   | (1,053                        | )      |   |   | (1,176 | ) |   |   | (1,161 | ) |   |   |
| Broadcast  revenues, net    |   | 7,758                         |   |   |   | 8,807 |   |   |   | 8,461 |   |   |   |
| Barter revenues             |   | 775                           |   |   |   | 731 |   |   |   | 541 |   |   |   |
| Total revenues              |   | $                             | 8,533  |   |   |   | $ | 9,538 |   |   |   | $ | 9,002 |   |   |   |

 

Our primary types of programming and their approximatepercentages of 2001 net broadcast revenues were syndicated programming (57.5%),network programming (15.9%), sports programming (11.9%), news programming(9.2%), paid programming (4.8%), and children’s programming (0.7%).  Similarly, our six largest categories ofadvertising and their approximate percentages of 2001 net broadcast revenues wereautomotive (20.8%), services (15.5%), restaurants (12.7%), food (7.5%),furniture (7.2%), and soft drinks (5.9%). No other advertising category accounted for more than 5.8% of our netbroadcast revenues in 2001.  Noindividual advertiser accounted for more than 5.2% of the station’s net broadcastrevenues in 2001.

 

13

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The following table sets forth certain of ouroperating data for the years ended December 31, 2001, 2000 and 1999.  For definitions of items, see footnotes totable in “Item 6.  Selected FinancialData”.

 

**OPERATINGDATA**

**(dollars in thoursands)**

 
|                                            |   | **Years  ended December 31,** |   |
|-------------------------------------------------|--------|-------------------------------|--------|
|                                            |   | **2001**                      |   | **2000** |   | **1999** |   |
| Net broadcast  revenues (a)                     |   | $                             | 7,758  |   | $ | 8,807 |   | $ | 8,461 |   |
| Barter revenues                                 |   | 775                           |   | 731 |   | 541 |   |
| Total revenues                                  |   | 8,533                         |   | 9,538 |   | 9,002 |   |
| Operating costs  (b)                            |   | 4,593                         |   | 4,241 |   | 3,997 |   |
| Expenses from  barter arrangements              |   | 629                           |   | 636 |   | 392 |   |
| Depreciation and  amortization (c)              |   | 3,442                         |   | 2,952 |   | 2,915 |   |
| Stock-based  compensation                       |   | 24                            |   | 26 |   | 23 |   |
| Broadcast  operating income                     |   | (155                          | )      | 1,683 |   | 1,675 |   |
| Parent preferred  stock dividend income         |   | 26,033                        |   | 26,033 |   | 26,033 |   |
| Subsidiary trust  minority interest expense (d) |   | (23,890                       | )      | (23,890 | ) | (23,890 | ) |
| Capital lease  interest expense                 |   | (81                           | )      | — |   | — |   |
| Interest and  other income                      |   | 1,095                         |   | 1,179 |   | 671 |   |
| Income before  income taxes                     |   | $                             | 3,002  |   | $ | 5,005 |   | $ | 4,489 |   |
| Net income                                      |   | $                             | 3,002  |   | $ | 5,005 |   | $ | 8,977 |   |
| Net income  available to common shareholders    |   | $                             | 3,002  |   | $ | 5,005 |   | $ | 8,977 |   |
|                                            |   |                          |   |   |   |   |   |
| **BROADCAST  CASH FLOW (BCF) DATA:**            |   |                          |   |   |   |   |   |
| BCF (e)                                         |   | $                             | 2,094  |   | $ | 3,284 |   | $ | 3,433 |   |
| BCF margin (f)                                  |   | 27.0                          | %      | 37.3 | % | 40.6 | % |
|                                            |   |                          |   |   |   |   |   |
| **OTHER  DATA:**                                |   |                          |   |   |   |   |   |
| Adjusted EBITDA  (g)                            |   | $                             | 1,804  |   | $ | 2,992 |   | $ | 3,175 |   |
| Adjusted EBITDA  margin (f)                     |   | 23.3                          | %      | 34.0 | % | 37.5 | % |
| Program contract  payments                      |   | $                             | 1,561  |   | $ | 1,669 |   | $ | 1,438 |   |
| Corporate  overhead expense                     |   | 290                           |   | 292 |   | 258 |   |
| Capital  expenditures                           |   | 1,727                         |   | 955 |   | 151 |   |
| Cash flows from  operating activities           |   | 6,220                         |   | 6,968 |   | 10,428 |   |
| Cash flows from  investing activities           |   | (1,727                        | )      | (955 | ) | (151 | ) |
| Cash flows from  financing activities           |   | (4,557                        | )      | (5,950 | ) | (10,275 | ) |

 

14

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**RESULTS OF OPERATIONS**

** **

**Years Ended December 31, 2001 and2000**

 

Net broadcast revenues decreased to $7.8 million forthe year ended December 31, 2001 from $8.8 million for the year ended December31, 2000.  When comparing the year endedDecember 31, 2001 to the year ended December 31, 2000, revenues from localadvertisers decreased approximately $217,000, or 2.9% and revenues fromnational advertisers 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 forthe 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 ended December 31, 2001, as compared to the yearended December 31, 2000 primarily related to the Company’s commencement of itsshared news programming with KGAN-TV, a Sinclair station in Cedar Rapids, IA,that began in early March 2001.  Weincurred $350,000 in 2001 related to its news programming.

 

Depreciation and amortization increased to $3.4million for the year ended December 31, 2001 from $3.0 million for the yearended December 31, 2000.  The increasein depreciation and amortization for the year ended December 31, 2001 ascompared to the year ended December 31, 2000 primarily resulted from anincrease in program contract additions related to our investment to upgrade ourprogramming, and the $248,000 write-off of damaged, obsolete, or abandonedproperty.

 

In June 2001 the Financial Accounting Standards Boardapproved Statement of Financial Accounting Standard (“SFAS”) No. 141, “BusinessCombinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFASNo. 141 prospectively prohibits the pooling of interests method of accountingfor business combinations initiated after June 30, 2001.  SFAS No. 142 requires companies to ceaseamortizing goodwill and certain other intangible assets including broadcastlicenses.  SFAS No. 142 also establishesa new method of testing goodwill and the broadcast license 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 our carryingvalue.  The adoption of SFAS No. 142will result in the discontinuation of amortization of our goodwill andbroadcast license; however, we will be required to test our goodwill andbroadcast license for impairment under the new standard during 2002, whichcould have an adverse effect on our future results of operations if animpairment occurs.  We are currently inthe process of testing goodwill and our broadcast license for impairment andthe overall impact of SFAS No. 142, however, we have not yet had sufficienttime to complete such evaluation. During the year ended December 31, 2001, we incurred goodwillamortization expense of $673,000. During the year ended December 31, 2001, we incurred amortizationexpense related to our broadcast license of $199,000.  Amortization expense for the year 2002 was projected to be$673,000 related to our goodwill and $199,000 related to our broadcastlicense.  As a result of implementingSFAS No. 142 on January 1, 2002, our pretax income will be higher by theseamounts, assuming no impairment charges are incurred.

 

Broadcast operating loss for the year ended December31, 2001 was $155,000 compared to broadcast operating income of $1.7 millionfor the year ended December 31, 2000. The decrease in broadcast operating income for the year ended December31, 2001 was primarily attributable to the soft advertising market noted aboveand increased operating expenses noted above.

 

Parent preferred stock dividend income of $26.0million for the year ended December 31, 2001 is related to our investment in12.625% series C preferred stock (the parent preferred securities) issued bySinclair, completed March 12, 1997. Subsidiary trust minority interest expense of $23.9 million for the yearended December 31, 2001 is related to the private placement of the subsidiarytrust preferred securities (the “HYTOPS”) and $640,000 of deferred financingcost amortization.  Our ability to makefuture subsidiary trust minority interest payments is directly contingent uponthe parent’s ability to pay dividends on parent preferred stock.

 

We recorded no income tax provision or benefit for theyears ended December 31, 2001 and December 31, 2000.  The income taxes did not change for the year ended December 31,2001 as compared to the year ended December 31, 2000 because of the dividendsreceived deduction associated with the HYTOPS. Our effective tax rate for the years ended December 31, 2001 andDecember 31, 2000 was zero.

 

Net deferred taxes remained consistent at zero as ofDecember 31, 2001 as compared to December 31, 2000.  Federal income taxes are allocated to or from us by Sinclair atthe statutory 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 or provision, respectively.

 

15

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Net income decreased to $3.0 million for the yearended December 31, 2001 from $5.0 million for the year ended December 31,2000.  The decrease in net income forthe year ended December 31, 2001 as compared to the year ended December 31,2000 is primarily due to the soft advertising market, an increase in operatingcosts and the impact of the September 11, 2001 terrorist attacks as notedabove.

 

Broadcast cash flow decreased to $2.1 million for theyear ended December 31, 2001 from $3.3 million for the year ended December 31,2000, or 36.4%.  Our broadcast cash flowmargin decreased to 27.0% for the year ended December 31, 2001 from 37.3% forthe year ended December 31, 2000.  Thedecrease in broadcast cash flow and broadcast cash flow margin for the yearended December 31, 2001 as compared to the year ended December 31, 2000primarily resulted from a soft advertising market, an increase in operatingexpenses and the impact of the September 11, 2001 terrorist attacks as notedabove.

 

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

 

**Years Ended December 31, 2000 and1999**

 

Net broadcast revenues increased to $8.8 million forthe year ended December 31, 2000 from $8.5 million for the year ended December31, 1999, or 3.5%.  When comparing theyear ended December 31, 2000 to the year ended December 31, 1999, revenues fromlocal advertisers increased approximately $536,000, or 7.7% and revenues fromnational advertisers decreased approximately $180,000, or 7.1%.  Our decrease in national advertising wasmitigated by an offsetting increase in local advertising revenue.  The decrease in national revenue is a trendthat we believe is resulting from an increase in the number of media outletsproviding national advertisers a means by which to advertise their goods andservices.

 

Station operating costs increased to $4.2 million forthe year ended December 31, 2000 from $4.0 million for the year ended December31, 1999, or 5.0%.  The increase inoperating costs for the year ended December 31, 2000, as compared to the yearended December 31, 1999 primarily related to an increase in programming costsof $182,000 related to our FOX agreement to purchase additional inventory.

 

Depreciation and amortization increased to $3.0million for the year ended December 31, 2000 from $2.9 million for the yearended December 31, 1999.

 

Broadcast operating income remained consistent at $1.7million for the year ended December 31, 2000 as compared to the year endedDecember 31, 1999.

 

Parent preferred stock dividend income of $26.0million for the year ended December 31, 2000 is related to our investment in12.625% series C preferred stock (the parent preferred securities) issued bySinclair, completed March 12, 1997. Subsidiary trust minority interest expense of $23.3 million for the yearended December 31, 2000 is related to the private placement of the subsidiarytrust preferred securities (the “HYTOPS”). Our ability to make future subsidiary trust minority interest paymentsis directly contingent upon the parent’s ability to pay dividends on parentpreferred stock.

 

We recorded no income tax provision or benefit for theyear ended December 31, 2000 compared to an income tax benefit of $4.5 millionfor the year ended December 31, 1999. The change in income taxes for the year ended December 31, 2000 ascompared to the year ended December 31, 1999 is attributable to the dividendsreceived deduction associated with the HYTOPS. Our effective tax rate for the year ended December 31, 2000 was zero ascompared to (100.0%) for the year ended December 31, 1999.  The change in our effective tax rate for2000 primarily resulted from the dividends received deduction associated withthe HYTOPS, resulting in no income tax provision in 2000 and a benefit in 1999related to Sinclair’s recognition of earnings and profits for the year endedDecember 31, 1999 and 2000.  The benefitrecorded for the year ended December 31, 1999 resulted from a reduction of anet deferred tax liability to zero.

 

Net deferred taxes remained consistent at zero as ofDecember 31, 2000 as compared to December 31, 1999.  Federal income taxes are allocated to or from us by Sinclair atthe statutory 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 or provision, respectively.

 

Net income decreased to $5.0 million for the yearended December 31, 2000 from $9.0 million for the year ended December 31,1999.  The decrease in net income forthe year ended December 31, 2000 as compared to the year ended December 31,1999 is primarily due to the change in income taxes combined with an increasein net broadcast revenues offset by the increase in operating costs as notedabove.

 

Broadcast cash flow decreased to $3.3 million for theyear ended December 31, 2000 from $3.4 million for the year ended December 31,1999, or 2.9%.  Our broadcast cash flowmargin decreased to 37.3% for the year ended December 31, 2000 from 40.6% forthe year ended December 31, 1999.  The decreasein broadcast cash flow and broadcast cash flow margin for the year endedDecember 31, 2000 as compared to the year ended December 31, 1999 primarilyresulted from an increase in operating expenses as noted above combined with anincrease in program contract payments offset by an increase in net broadcastrevenues.

 

16

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Adjusted EBITDA decreased to $3.0 million for the yearended December 31, 2000 from $3.2 million for the year ended December 31, 1999,or 6.7%.  Our Adjusted EBITDA margindecreased to 34.0% for the year ended December 31, 2000 from 37.5% for the yearended December 31, 1999.  The decreasein adjusted EBITDA and Adjusted EBITDA margin for the year ended December 31,2000 as compared to the year ended December 31, 1999 primarily resulted from anincrease in operating expenses as noted above combined with an increase inprogram contract payments offset by an increase in net broadcast revenues.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

As of December 31, 2001, we had cash balances ofapproximately $8,000 and working capital of approximately $388,000.  Our primary source of liquidity is cash fromoperations which management believes to be sufficient to meet operating cashrequirements.  Cash requirements orexcess cash from operations are funded by or deposited into Sinclair’scentralized banking system utilized by all of its wholly owned subsidiaries.

 

We do not anticipate capital expenditures in thecoming year to exceed historical capital expenditures, which were approximately$1,727,000 in 2001.  If we are requiredto make capital expenditures to keep up with emerging technologies, managementbelieves we will be able to fund such expenditures from cash flow and from theproceeds of indebtedness or financing that is allowed to be incurred orobtained under our senior debenture indenture (provided that our debt toAdjusted EBITDA ratio is 4 to 1 or less) or from capital contributions fromSinclair to the extent permitted under Sinclair’s debt instruments.  Under these instruments, Sinclair wouldcurrently be able to make capital contributions to us in an amount sufficientto cover such costs if it chose to do so.

** **

**Seasonality**

** **

Our results usually are subject to seasonalfluctuations, which result in fourth quarter broadcast operating income beinggreater usually than first, second and third quarter broadcast operatingincome.  This seasonality is primarilyattributable to increased expenditures by advertisers in anticipation ofholiday season spending and an increase in viewership during this period.  In addition, revenues from politicaladvertising tend to be higher in even numbered years.

** **

**SummaryDisclosures about Contractual Obligations and Commercial Commitments**

 

The following table reflects a summary of ourcontractual cash obligations and other commercial commitments as of December31, 2001:

 
|                                |   | **Payments  Due by Year**   |       |
|-------------------------------------|--------|-----------------------------|------------|
|                                |   | **Total**                   |       | **2002** |   | **2003** |   | **2004** |   | **2005 and  thereafter** |   |
|                                |   | **(amounts  in thousands)** | ** ** |
| **Contractual Cash Obligations**    |   |                        | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
|                                |   |                        |       |   |   |   |   |   |   |   |   |
| HYTOPS                              |   | 367,594                     |       | 23,250 |   | 23,250 |   | 23,250 |   | 297,844 |   |
|                                |   |                        |       |   |   |   |   |   |   |   |   |
| Operating leases                    |   | 11                          |       | 5 |   | 6 |   |   |   |   |   |
| Maintanence and  support            |   | 170                         |       | 47 |   | 39 |   | 41 |   | 43 |   |
| Personnel  employment contracts     |   | 96                          |       | 96 |   |   |   |   |   |   |   |
| Programming  services               |   | 714                         |       | 272 |   | 170 |   | 150 |   | 122 |   |
| Film liability  -active             |   | 3,602                       |       | 1,737 |   | 843 |   | 671 |   | 351 |   |
| Film liability  -future             |   | 718                         |       | 37 |   | 133 |   | 173 |   | 375 |   |
| Other operating  contracts          |   | 27                          |       | 5 |   | 4 |   | 4 |   | 14 |   |
|                                |   |                        |       |   |   |   |   |   |   |   |   |
| Total  contractual cash obligations |   | $                           | 372,932    |   | $ | 25,449 |   | $ | 25,428 |   | $ | 23,657 |   | $ | 298,398 |   |
|                                     |        |                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

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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.

** **

**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 Trust Offered PreferredSecurities (“HYTOPS”). *SinclairCapital, a subsidiary trust of Sinclair, has issued $200 million aggregate liquidationamount of HYTOPS.  “Aggregateliquidation amount” means the amount Sinclair Capital must pay to the holderswhen it redeems the HYTOPS or upon liquidation.  Sinclair Capital must redeem the HYTOPS in 2009.  Sinclair is indirectly liable for the HYTOPSobligations because it issued $206.2 million liquidation amount of series Cpreferred stock to us to support $200 million aggregate principal amount of 11..625% notes that we issued to Sinclair Capital to support the HYTOPS.

 

*ProgramC**ontracts Payable and Programming Commitments. *Total current and long-termprogram contracts payable at December 31, 2001 were $1.7 million and $1.9million, respectively.  In addition, weentered into commitments to purchase future programming.  Under these commitments, we were obligatedon December 31, 2001 to make future payments totaling $718,000.

 

*Other. *Ourcommitments also include operating leases, sports programming, personnelcontracts and other liabilities.  Theamount of these commitments may be material.

 

Periods of declining revenues pose the following risks:

 

•                                            Wemay not be able to fund necessary expenditures from cash flow and must rely onSinclair 's capital contributions. Sinclair’s lenders may not be as willing to lend additional amounts tothem for our future working capital needs, additional acquisitions, or otherpurposes.

 

•                                            Ourability to pay our obligations as they come due could become more difficult.

 

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

** **

**Wedepend on advertising revenue, which has decreased recently as a result of anumber 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;

 

•                                            thepopularity of our programming;

 

•                                            changesin the makeup of the population in the area where our station is located;

 

•                                            pricingfluctuations in local and national advertising;

 

•                                            theactivities of our competitors, including increased competition from other formsof advertising-based mediums, particularly network, cable television, directsatellite television, Internet and radio;

 

•                                            thedecreased demand for political advertising in non-election years; and

 

•                                            otherfactors that may be beyond our control.

 

There was a dramatic decline in advertising revenue generally in2001.  As a result of the foregoingfactors, our advertising revenue has also decreased significantly.

 

**Theevents of September 11, 2001 have exacerbated a weak advertising market.**

 

Before the events of September 11, 2001, our revenuesand cash flow had declined as compared to the previous year as a result of asoft advertising market resulting from a weak overall economicenvironment.  The terrorist attacks onSeptember 11, 2001 caused advertising revenues to decline further as a resultof commercial-free news coverage and uncertainty in the wake of theseattacks.  The terrorist attacks led tothe pre-emption and cancellation of advertisements, which caused a $68,000revenue loss during the year ended December 31, 2001.  These impacts are likely to continue in 2002 and could materiallyand adversely impact our business and liquidity.

 

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**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 television programming.  If a particular program is not popular inrelation to its costs, we may not be able to sell enough advertising time tocover the costs of the program.  Sincewe purchase programming content from others rather than produce it ourselves,we also have little control over the costs of programming.  We usually must purchase programming severalyears in advance, and may have to commit to purchase more than one year’s worthof programming.  Finally, we may replaceprograms that are doing poorly before we have recaptured any significantportion of the costs we incurred, or accounted fully for the costs on our booksfor financial reporting purposes.  Anyof these factors could reduce our revenues or otherwise cause our costs toescalate relative to revenues.  Thesefactors are exacerbated during a weak advertising market.  Additionally, our business is subject to thepopularity of the programs provided by the networks with which we haveaffiliation agreements or which provide us programming.  Each of our affiliation groups experiencedrevenue declines in 2001 and this trend could continue in the future.

** **

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

 

Affiliation agreements between our station and FOXnetwork expired in 2001, in part as a result of FOX having failed to exercisean option to renew the affiliation agreement for our station for an additionalfive years.  We continue to carry FOXprogramming notwithstanding the fact that their affiliation agreement has expiredand Sinclair is currently in discussion with FOX to secure long-termaffiliation agreements.

 

If we do not enter into an affiliation agreement toreplace the expired agreement, we may no longer be able to carry programming ofthe FOX network.  This loss ofprogramming would require us to obtain replacement programming, which mayinvolve higher costs and which may not be as attractive to our targetaudiences.

** **

**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:

* *

*New Technology and the Subdivision of Markets. *New technologies enableour competitors to tailor their programming for specific segments of the viewingpublic to a degree not possible before. As a result, the overall market share of broadcasters, includingourselves, whose approach or equipment may not permit such a discriminatingapproach is under new pressures.  Thenew technologies and approaches include:

 

•                                            cable,

 

•                                            satellite–to–homedistribution,

 

•                                            pay–per–view,and

 

•                                            homevideo and entertainment systems.

 

*Future Technology 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 “video compression techniques” will reduce thecost of creating channels, and may lead to the division of the televisionindustry into ever more specialized niche markets.  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 channels may also encourage newcompetitors to enter our markets and compete with us for advertising revenue.

* *

*In–Market Competition. *We also face more conventional competition fromrivals that may be larger and have greater resources than we have.  These include:

 

•                                            otherlocal free over–the–air broadcast stations, and

 

•                                            other media, such as newspapers andperiodicals.

 

*Deregulation. *Recentchanges in law have also increased competition.  The 1996 Act created greater flexibility and removed some limitson station ownership.  Telephone, cableand some other companies are also free to provide video services in competitionwith us.  On February 19, 2002, the U.S.Court of Appeals for the D.C. Circuit vacated the FCC’s rule prohibiting thecommon ownership of a television station and a cable system that serve the samemarket.  As a result, new companies areable to enter our markets to compete with us. In addition, the court remanded to the FCC the FCC’s decision to upholdits national ownership rule limiting entities from having “attributableinterests” in television stations that reach more than 35% of all televisionhouseholds in the U.S. We currently reach approximately 25% of U.S. televisionhouseholds on a actual basis and approximately 15% using the formula specifiedby the FCC.  Our ability to expand throughthe acquisition of additional stations in new markets is limited by the currentrules.

 

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**ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCUSSION ABOUT MARKET RISKS**

** **

We believe that we do not have any material exposureto market risk associated with activities in derivative financial instruments,other financial instruments, and derivative commodity instruments.

 

**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

** **

Our financial statement and supplementary datarequired by this item are filed as exhibits, are listed under Item 14(a)(1) and(2), and are incorporated by reference.

 

**ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING FINANCIAL DISCLOSURE**

** **

None.

 

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** **

**PART III**

 

**ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

Set forth below iscertain information relating to our executive officers, directors, certain keyemployees and persons expected to become executive officers, directors or keyemployees.

 

| **Name**          |   | **Age** |   | **Title**              |
|-------------------|--------|---------|--------|------------------------|
| David D. Smith    |   | 51      |   | President and Director |
| David B. Amy      |   | 49      |   | Secretary and Director |
| Dr. David McCarus |   | 50      |   | Director               |

 

Members of the board ofdirectors are elected for one-year terms and until their successors are dulyelected and qualified.  Executiveofficers are appointed by the board of directors annually to serve for one-yearterms and until their successors are duly appointed and qualified.

 

In 1978, David D. Smithfounded Comark Communications, Inc., a company engaged in the manufacture ofhigh power transmitters for UHF television stations, and was an officer anddirector of Comark until 1986.  He alsowas a principal in other television stations prior to serving as a GeneralManager of WCWB from 1984 until 1986. In 1986, David was instrumental in the formation of Sinclair BroadcastGroup, Inc.  He has served as Presidentand Chief Executive Officer since 1988 and as Chairman of the Board of SinclairBroadcast Group, Inc. since September 1990. David Smith is currently a member of the Board of Directors of SinclairVentures, Inc., Acrodyne Communications, Inc., G1440, Inc., Summa Holdings,Ltd., KDSM, Inc., and Safe Waterways in Maryland.

 

David B. Amy has servedas Executive Vice President and Chief Financial Officer (“CFO”) since March2001.  Prior to that, he served asExecutive Vice President since September 1999 and as Vice President and CFOfrom September 1998 to September 1999. Prior to that, he served as CFO since 1994.  In addition, he serves as Secretary of SCI, the Sinclairsubsidiary that owns and operates the broadcasting operations.  Prior to his appointment as Vice Presidentand CFO, Mr. Amy served as the Corporate Controller and the Chief AccountingOfficer of Sinclair beginning in 1986. Mr. Amy has over 18 years of broadcast experience, having joinedSinclair as a Business Manager for WCWB-TV in Pittsburgh.  Mr. Amy received his MBA degree from the Universityof Pittsburgh in 1981.  Mr. Amy iscurrently a member of the board of directors of Acrodyne Communications, Inc.,G1440, Inc., and KDSM, Inc., and an advisor to Allegiance Capital, L.P.

 

*Dr. David C. McCarus*has served as Director of KDSM since February 9, 1999.  Dr. McCarus is Board Certified in Obstetricsand Gynecology and has been in private practice since 1983.  Dr. McCarus has served on various committeesand medical staff for the Greater Baltimore Medical Center.  He currently serves as a member of theQuality Assurance Committee of Aetna US Healthcare and is an active member ofthe St. Joseph Medical Center staff.  Healso serves as the Head of the Division of Gynecology for MedTrend HealthSystems, Inc. and Towson Surgery Center, located in Maryland.  Dr. McCarus received his M.D. degree fromthe West Virginia University School of Medicine and completed his residencytraining at the Greater Baltimore Medical Center.

 

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**ITEM11.  EXECUTIVE COMPENSATION**

 

The following table setsforth certain information regarding the annual and long-term compensation bySinclair for services rendered in all capacities during the year ended December31, 2001 by the President and the other officers of KDSM who received totalannual salary and bonus of $100,000 or more in 2001 (the named executiveofficers):

 

**SUMMARYCOMPENSATION TABLE**

**Annual Compensation**

** **
| **Name and  Principle Position** |                     |   |       |      |          |   |    | **Long-Term** **Compensation**

**Securities**

**Underlying  Options**

**Granted** |    | **All Other** **Compensation (b)** |   |
|----------------------------------|--------------------------|--------|------------|-----------|---------------|--------|---------|-------------------------------------------------------------------------------------------|---------|-----------------------------------------|--------|
|                             |                     |   |       |      |          |   |    |                                                                                      |
|                             |                     |   |       |      |          |   |    |                                                                                      |
|                             | **Annual  Compensation** |   |       |      |
|                             | **Year**                 |   | **Salary** |      | **Bonus (a)** |   |    |                                                                                      |
| David D. SmithPresident          |                     | 2001   |       | $         | 1,000,008     |   | —  |                                                                                      | —  |                                    | $      | 4,713 |   |
|                             |                     | 2000   |       | 1,000,008 |          | — |    | $                                                                                         | 150,000 |                                    | 6,659  |   |
|                             |                     | 1999   |       | 1,072,500 |          | $      | 603,115 |                                                                                      | —  |                                    | 6,409  |   |
|                             |                     |   |       |      |          |   |    |                                                                                      |    |                                    |   |
| David B. AmySecretary            |                     | 2001   |       | 300,000   |          | — |    | —                                                                                    |    | 4,713                                   |   |
|                             |                     | 2000   |       | 300,000   |          | — |    | 100,000                                                                                   |    | 6,659                                   |   |
|                             |                     | 1999   |       | 300,000   |          | 75,000 |    | —                                                                                    |    | 9,145                                   |   |
|                                  |                          |        |            |           |               |        |         |                                                                                           |         |                                         |        |  |  |  |  |

 

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(a)          The bonuses reported inthis 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.

 

**StockOptions**

** **

The following table shows the number of stock optionsgranted during 2001 and the 2001 year-end value of the stock options held bythe named executive officers:

 
| **Name**       |   | **Number of  Securities   Underlying Options   Granted to  Employees in   Fiscal Year** |   | **Exercise   Price per   Share** |   | **Market   Price on   Date of   Grant** |   | **Expiration  Date** |    | **Potential Realizable Value At   Assumed Annual Rates Of Stock   Price Appreciation for Option Term** |   |
|----------------|--------|-----------------------------------------------------------------------------------------|--------|----------------------------------|--------|-----------------------------------------|--------|----------------------|---------|--------------------------------------------------------------------------------------------------------|--------|
|           |   |                                                                                    |   |                             | **0%** |                                    | **5%** |                 | **10%** |                                                                                                   |
| David D. Smith |   | —                                                                                  |   | —                           |   | —                                  |   | —               |    | —                                                                                                 |   | — |   | — |   |
| David B. Amy   |   | 10,000                                                                                  |   | 8.81                             |   | 8.81                                    |   |                 |    | —                                                                                                 |   | 55,406 |   | 140,409 |   |

 

**AggregatedOption Exercises in Last Fiscal Year and December 31, 2001 Option Values**

 

The following table shows information regarding options exercisedduring 2001 and the number of securities underlying, and the value of the “inthe money” options outstanding on December 31, 2001:

 
|           |   | **Shares  Acquired** |   | **Value**    |   | **Number of   Securities Underlying   Unexercised Options   at December 31, 2001** |   | **Value of  Unexercised   “In-the-Money” Options at   December 31, 2001 (a)** |   |
|----------------|--------|----------------------|--------|--------------|--------|------------------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------|--------|
| **Name**       |   | **On  Exercise**     |   | **Realized** |   | **Excercisable**                                                                   |   | **Unexercisable**                                                                       |   | **Exercisable** |   | **Unexercisable** |   |
| David D. Smith |   | —               |   | —       |   | 75,000                                                                             |   | 75,000                                                                                  |   | $ | 15,750 |   | $ | 15,750 |   |
| David B. Amy   |   | —               |   | —       |   | 151,250                                                                            |   | 158,750                                                                                 |   | 12,125 |   | 15,375 |   |
|                |        |                      |        |              |        |                                                                                    |        |                                                                                         |        |  |  |  |  |  |  |

 

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(a)          An “In-the-Money” optionis an option for which the option price of the underlying stock is less thanthe market price at December 31, 2001, and all of the value shown reflectsstock price appreciation since the granting of the option.

 

**Employment Agreements**

 

Sinclair entered into anemployment agreement with David D. Smith, President and Chief Executive Officerof Sinclair, on June 12, 1995, which expired on June 12, 1998.  Sinclair has not entered into a newagreement with Mr. Smith and does not currently anticipate entering into a newagreement.  As of January 1, 2001, DavidSmith receives a base salary of approximately $1,000,000.

 

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In September 1998,Sinclair entered into an amended employment agreement with David B. Amy,Executive Vice President and Chief Financial Officer of Sinclair and Secretaryof KDSM.  The agreement does not haveany specified termination date, and Sinclair has the right to terminate theemployment of Mr. Amy at any time, with or without cause, subject to thepayment of severance payments for termination without cause.  The severance payment due upon terminationwithout cause is equal to one month’s base salary in effect at the time of thetermination times the number of the years of continuous employment by Sinclairor its predecessor.  During each year,Mr. Amy will be entitled to receive compensation as determined by thecompensation committee of Sinclair in consultation with the Chief ExecutiveOfficer of Sinclair.  Mr. Amy’scompensation may include a bonus in the sole discretion of the compensationcommittee of Sinclair.  The agreementalso contains non-competition and confidentiality restrictions on Mr. Amy.

 

**Compensation Committee Interlocks andInsider Participation**

 

Other than as follows, nonamed executive officer is a director of a corporation that has a director orexecutive officer who is also a director of KDSM.  Each of David D. Smith and David B. Amy, both of whom areexecutive officers and directors of KDSM, is a director and/or executiveofficer of Sinclair.

 

During 2001, none of thenamed executive officers participated in any deliberations of our board ofdirectors or the compensation committee relating to compensation of the namedexecutive officers.

 

**ITEM 12.  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 15, 2002, byholders 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.   10706 Beaver Dam Road   Hunt Valley, MD 21030 |   | 100                   |   | 100% |   |

 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS**

** **

None.

 

23

----

 

**PART IV**

** **

**ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K**

 

(a) (1) Financial Statements

 

The following financialstatements required by this item are submitted in a separate section beginningon page F-1 of this report.

 
| Index to Financial  Statements                                                                              |
|-------------------------------------------------------------------------------------------------------------|
| Report of Independent  Public Accountants                                                                   |
| Consolidated Balance Sheets  as of December 31, 2001 and 2000                                               |
| Consolidated  Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999                 |
| Consolidated  Statements of Stockholder’s Equity for the Years Ended December 31, 2001,  2000 and 1999 |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999                 |
| Notes to  Consolidated Financial Statements                                                                 |

 

(a) (2) Index to Financial Statements Schedules

 

The financial statementsschedules required by this item are submitted on pages S-1 through S-3 of thisReport.

 
| Index to Schedules                                 |
|----------------------------------------------------|
| Report of  Independent Public Accountants          |
| Schedule II—Valuation and Qualifying  Account |

 

All other schedules areomitted because they are not applicable or the required information is shown inthe financial statements or the notes thereto.

 

(a) (3) Index to Exhibits

 

The exhibit index in Item14(c) is incorporated by reference in this report.

 

(b) Reports on Form 8-K

 

There were no reports on Form8-K filed by the registrant during the fourth quarter of the fiscal year endedDecember 31, 2001.

 

(c) Exhibits

 

24

----

 

The following exhibitsare 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              |   | Arthur Andersen, Representation Letter                                                                                                                                                         |

 

----

(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 14 (a) (2)

 

25

----

 

**SIGNATURES**

 

Pursuant to the requirementsof the Section 13 or 15(d) of the Securities Exchange Act of 1934, theRegistrant has duly caused this report on Form 10-K to be signed on its behalfby the undersigned, thereunto duly authorized on this 26th day ofMarch 2001.

 
|   | 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 THESEPRESENTS, that each person whose signature appears below under the heading“Signature” constitutes and appoints David B. Amy as his or her true and lawfulattorney-in-fact, each acting alone, with full power of substitution andresubstitution, for him or her and in his or her name, place and stead in anyand all capacities to sign any or all amendments to this 10-K and to file thesame, with all exhibits thereto, and other documents in connection therewith,with the SEC, granting unto said attorney-in-fact full power and authority to doand perform each and every act and thing requisite and necessary to be done inand about the premises, as fully for all intents and purposes as he or shemight or could do in person, hereby ratifying and confirming all that saidattorney-in-fact, or their substitutes, each acting alone, may lawfully do orcause to be done by virtue hereof.

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in the capacitiesand on the dates indicated.

 
| **Signature**         |   | **Title**                                                                                                                                            |                               | **Date**       |
|-----------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------|----------------|
|                  |   |                                                                                                                                                 |                               |
| /s/ David D. Smith    |   |                                                                                                                                                 | Director and President, KDSM, Inc. | March 26, 2002 |
| David D. Smith        |   |   (principal  executive officer)   Administrative Trustee, Sinclair Capital   (principal executive officer)                                |                               |
|                  |   |                                                                                                                                                 |                               |
| /s/ David B.Amy       |   |                                                                                                                                                 | Director and Secretary, KDSM Inc.  | March 26, 2002 |
| David B. Amy          |   |   (principal  financial and accounting officer)   Administrative Trustee, Sinclair Capital   (principal financial and accounting  officer) |                               |
|                  |   |                                                                                                                                                 |                               |
| /s/ Dr. David McCarus |   |                                                                                                                                                 | Director                           | March 26, 2002 |
| Dr. David McCarus     |   | KDSM, Inc.                                                                                                                                           |                               |
|                       |        |                                                                                                                                                      |                                    |                |  |  |  |

 

26

----

 

**KDSM,INC. AND SUBSIDIARIES**

**INDEX TO FINANCIAL STATEMENTS**

 
| **KDSM, INC. AND  SUBSIDIARIES**                                                                            |
|-------------------------------------------------------------------------------------------------------------|
|                                                                                                        |
| Report of  Independent Public Accountants                                                                   |
| Consolidated Balance Sheets  as of December 31, 2001 and 2000                                               |
| Consolidated  Statements of Operations for the Years Ended December 31, 2001, 2000 and 1999                 |
| Consolidated  Statements of Stockholder’s Equity for the Years Ended December 31, 2001,  2000 and 1999 |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999                 |
| Notes to  Consolidated Financial Statements                                                                 |

 

F-1

----

 

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To the Stockholders 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 the periodended December 31, 2001.  Thesefinancial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinionon these financial statements based on our audits.

 

We conducted our audits in accordance with auditingstandards generally accepted in the United States.  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve 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 as of December 31, 2001 and 2000, and the results oftheir operations and their cash flows for each of the three years in the periodended December 31, 2001, in conformity with accounting principles generallyaccepted in the United States.

 

ARTHUR ANDERSEN LLP

Baltimore, Maryland,

March 8, 2002

 

F-2

----

 

**KDSM, INC. AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS**

**(in thousands)**

** **
|                                                                                                           |   | **As of  December 31,** |    |
|----------------------------------------------------------------------------------------------------------------|--------|-------------------------|---------|
|                                                                                                           |   | **2001**                |    | **2000** |   |
| **ASSETS**                                                                                                     |   |                    |    |   |   |
| CURRENT ASSETS:                                                                                                |   |                    |    |   |   |
| Cash                                                                                                           |   | $                       | 8       |   | $ | 72 |   |
| Accounts  receivable, net of allowance for doubtful accounts of $46 and $21,  respectively                     |   | 1,587                   |    | 1,879 |   |
| Dividends  receivable from parent                                                                              |   | 1,085                   |    | 1,085 |   |
| Current portion  of program contract costs                                                                     |   | 1,350                   |    | 937 |   |
| Prepaid expenses  and other current assets                                                                     |   | 17                      |    | 14 |   |
| Deferred barter  costs                                                                                         |   | 63                      |    | 38 |   |
| Total current  assets                                                                                          |   | 4,110                   |    | 4,025 |   |
| PROPERTY AND  EQUIPMENT, net                                                                                   |   | 6,593                   |    | 3,350 |   |
| PROGRAM CONTRACT  COSTS, less current portion                                                                  |   | 889                     |    | 706 |   |
| INVESTMENT IN  PARENT PREFERRED SECURITIES                                                                     |   | 206,200                 |    | 206,200 |   |
| DUE FROM PARENT                                                                                                |   | 27,252                  |    | 22,717 |   |
| OTHER ASSETS,  net of accumulated amortization of $3,066 and $2,426, respectively                              |   | 4,612                   |    | 5,252 |   |
| ACQUIRED  INTANGIBLE BROADCAST ASSETS, net of accumulated amortization of $5,619 and  $4,583, respectively     |   | 29,419                  |    | 30,455 |   |
| Total Assets                                                                                                   |   | $                       | 279,075 |   | $ | 272,705 |   |
|                                                                                                           |   |                    |    |   |   |
| **LIABILITIES AND STOCKHOLDER’S  EQUITY**                                                                 |   |                    |    |   |   |
| CURRENT  LIABILITIES:                                                                                          |   |                    |    |   |   |
| Accounts payable                                                                                               |   | $                       | 303     |   | $ | 75 |   |
| Accrued  liabilities                                                                                           |   | 459                     |    | 364 |   |
| Current portion  of program contracts payable                                                                  |   | 1,737                   |    | 1,659 |   |
| Current portion  of capital lease                                                                              |   | 195                     |    | — |   |
| Deferred barter  revenues                                                                                      |   | 59                      |    | 57 |   |
| Subsidiary trust  minority interest expense payable                                                            |   | 969                     |    | 969 |   |
| Total current  liabilities                                                                                     |   | 3,722                   |    | 3,124 |   |
| CAPITAL LEASES                                                                                                 |   | 1,934                   |    | — |   |
| PROGRAM  CONTRACTS PAYABLE                                                                                     |   | 1,865                   |    | 1,121 |   |
| OTHER LONG TERM  LIABILITIES                                                                                   |   | 92                      |    | — |   |
| Total  Liabilities                                                                                             |   | 7,613                   |    | 4,245 |   |
| COMMITMENTS AND  CONTINGENCIES                                                                                 |   |                    |    |   |   |
| COMPANY  OBLIGATED MANDATORILY REDEEMABLE SECURITIESOF 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                                                                                             |   | 20,313                  |    | 17,311 |   |
| Total  Stockholder’s Equity                                                                               |   | 71,462                  |    | 68,460 |   |
| Total  Liabilities and Stockholder’s Equity                                                               |   | $                       | 279,075 |   | $ | 272,705 |   |

 

The accompanying notes are an integral part of these consolidatedstatements.

 

F-3

----

 

**KDSM,INC. AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**FORTHE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999**

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

 
|                                                                                               |   | **2001** |   | **2000** |   | **1999** |   |
|----------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **REVENUES****:**                                                                                  |   |     |   |     |   |     |   |
| Station  broadcast revenues, net of agency commissions of $1,053, $1,176 and $1,161,  respectively |   | $        | 7,758  |     | $      | 8,807    |   | $ | 8,461 |   |
| Revenues  realized from station barter arrangements                                                |   | 775      |   | 731      |   | 541      |   |
| Total revenues                                                                                     |   | 8,533    |   | 9,538    |   | 9,002    |   |
|                                                                                               |   |     |   |     |   |     |   |
| **OPERATING EXPENSES:**                                                                            |   |     |   |     |   |     |   |
| Program and  production                                                                            |   | 1,734    |   | 1,465    |   | 1,300    |   |
| Selling, general  and administrative                                                               |   | 2,883    |   | 2,802    |   | 2,720    |   |
| Expenses  realized from station barter arrangements                                                |   | 629      |   | 636      |   | 392      |   |
| Amortization of  program contract costs and net realizable value adjustments                       |   | 1,788    |   | 1,483    |   | 1,483    |   |
| Depreciation and  write-off of property and equipment                                              |   | 618      |   | 419      |   | 400      |   |
| Amortization of  acquired intangible broadcast assets and other assets                             |   | 1,036    |   | 1,050    |   | 1,032    |   |
| Total operating  expenses                                                                          |   | 8,688    |   | 7,855    |   | 7,327    |   |
| Broadcast  operating income                                                                        |   | (155     | )      | 1,683    |   | 1,675    |   |
|                                                                                               |   |     |   |     |   |     |   |
| **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                                                                    |   | (81      | )      | —   |   | —   |   |
| Interest income                                                                                    |   | 1,095    |   | 1,179    |   | 671      |   |
| Income before  allocation of consolidated federal income taxes and state income taxes              |   | 3,002    |   | 5,005    |   | 4,489    |   |
|                                                                                               |   |     |   |     |   |     |   |
| ALLOCATION OF CONSOLIDATED FEDERAL INCOME TAX  BENEFIT                                             |   | —   |   | —   |   | (3,642   | )      |
| STATE INCOME TAX  BENEFIT                                                                          |   | —   |   | —   |   | (846     | )      |
| NET INCOME                                                                                         |   | $        | 3,002  |     | $      | 5,005    |   | $ | 8,977 |   |
|                                                                                               |   |     |   |     |   |     |   |
| Net income per  common share                                                                       |   | $        | 30,020 |     | $      | 50,050   |   | $ | 89,770 |   |
|                                                                                               |   |     |   |     |   |     |   |
| WEIGHTED AVERAGE  COMMON SHARES OUTSTANDING – BASIC AND DILUTED                               |   | 100      |   | 100      |   | 100      |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

F-4

----

 

**KDSM, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFSTOCKHOLDER’S EQUITY**

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

**(in thousands)**

** **
|                        |   | **Common   Stock** |   | **Additional    Paid-In   Capital** |   | **Retained   Earnings** |   | **Total   Stockholder’s   Equity** |   |
|-----------------------------|--------|--------------------|--------|-------------------------------------|--------|-------------------------|--------|-----------------------------------------|--------|
| BALANCE,  December 31, 1998 |   | $                  | — |                                | $      | 51,149                  |   | $                                       | 3,329  |   | $ | 54,478 |   |
| Net income                  |   | —             |   | —                              |   | 8,977                   |   | 8,977                                   |   |
| BALANCE,  December 31, 1999 |   | —             |   | 51,149                              |   | 12,306                  |   | 63,455                                  |   |
| 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 |   |

 

The accompanying notesare an integral part of these consolidated statements.

 

F-5

----

 

**KDSM, INC. AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

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

**(in thousands)**

** **
|                                                                                      |   | **2001** |   | **2000** |   | **1999** |   |
|-------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| **CASH FLOWS FROM OPERATING ACTIVITIES:**                                                 |   |     |   |     |   |     |   |
| Net income                                                                                |   | $        | 3,002  |     | $      | 5,005    |   | $ | 8,977 |   |
| Adjustments to  reconcile net income to net cash flows from operating activities—    |   |     |   |     |   |     |   |
| Depreciation of  property and equipment                                                   |   | 618      |   | 419      |   | 400      |   |
| Amortization of  acquired intangible broadcast assets                                     |   | 1,036    |   | 1,050    |   | 1,032    |   |
| Amortization of  deferred financing costs                                                 |   | 640      |   | 640      |   | 640      |   |
| Amortization of  program contract costs and net realizable value adjustments              |   | 1,788    |   | 1,483    |   | 1,483    |   |
| Net effect of  change in deferred barter revenues and deferred barter costs               |   | (24      | )      | (4       | )      | (51      | )      |
| Changes in  assets and liabilities, net of effects of acquisitions and dispositions— |   |     |   |     |   |     |   |
| Decrease in  accounts receivable, net                                                     |   | 292      |   | 22       |   | 206      |   |
| Decrease  (increase) in prepaid expenses and other current assets                         |   | (3       | )      | (6       | )      | 17       |   |
| Increase in  accounts payable and accrued liabilities                                     |   | 323      |   | 28       |   | 8        |   |
| Decrease in  deferred state taxes                                                         |   | —   |   | —   |   | (846     | )      |
| Increase in  other long term liabilities                                                  |   | 109      |   | —   |   | —   |   |
| Payments on  program contracts payable                                                    |   | (1,561   | )      | (1,669   | )      | (1,438   | )      |
| Net cash flows  from operating activities                                                 |   | 6,220    |   | 6,968    |   | 10,428   |   |
| **CASH FLOWS FROM INVESTING  ACTIVITIES:**                                                |   |     |   |     |   |     |   |
| Acquisition of  property and equipment                                                    |   | (1,727   | )      | (955     | )      | (151     | )      |
| **CASH FLOWS FROM FINANCING  ACTIVITIES:**                                                |   |     |   |     |   |     |   |
| Net change in  due from parent                                                            |   | (4,557   | )      | (5,950   | )      | (10,275  | )      |
| NET (DECREASE)  INCREASE IN CASH                                                          |   | (64      | )      | 63       |   | 2        |   |
| CASH, beginning  of period                                                                |   | 72       |   | 9        |   | 7        |   |
| CASH, end of  period                                                                      |   | $        | 8      |     | $      | 72       |   | $ | 9 |   |
|                                                                                      |   |     |   |     |   |     |   |
| **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 notesare an integral part of these consolidated statements.

 

F-6

----

 

**KDSM, INC. AND SUBSIDIARIES**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

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

 

**1.****              SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES:**

 

**Basis of Presentation**

 

The accompanying consolidated financial statements include the accountsof KDSM, Inc., Sinclair Capital (a subsidiary trust), and KDSM Licensee, Inc.,which are collectively referred to hereafter as “the Company” or “KDSM”.  The Company is a television broadcasterserving the 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.

 

**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 allowancelevel.  The allowance for doubtfulaccounts at December 31, 2001 and 2000 was $46 and $21 respectively.

** **

**NewAccounting Pronouncement**

 

In June 2001, the Financial Accounting Standards Board approvedStatement of Financial Accounting Standard (“SFAS”) No. 141, “BusinessCombinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFASNo. 141 prospectively prohibits the pooling of interests method of accountingfor business combinations initiated after June 30, 2001. SFAS No. 142 requirescompanies to cease amortizing goodwill and certain other intangible assetsincluding broadcast licenses.  SFAS No.142 also establishes a new method of testing goodwill and the broadcast licensefor impairment on an annual basis or on an interim basis if an event occurs orcircumstances change that would reduce the fair value of a reporting unit belowits carrying value.  The adoption ofSFAS No. 142 will result in the Company’s discontinuation of amortization ofits goodwill and broadcast license; however, the Company will be required totest its goodwill and broadcast license for impairment under the new standardduring 2002, which could have an adverse effect on the Company’s future resultsof operations if an impairment occurs. The Company is currently in the process of testing goodwill and itsbroadcast license for impairment and the overall impact of SFAS No. 142,however management has not yet had sufficient time to complete suchevaluation.  During the year endedDecember 31, 2001, the Company incurred goodwill amortization expense of$673,000.  During the year endedDecember 31, 2001, the Company incurred amortization expense related to itsbroadcast license of $199,000. Amortization expense for the year 2002 is projected to be $673,000related to its goodwill and $199,000 related to its broadcast license.  As a result of implementing SFAS No. 142 onJanuary 1, 2002, the Company’s pretax income will be higher by these amounts,assuming no impairment charges are incurred.

** **

**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.  While actual results could differ from those estimates,management believes that actual results will not be materially different fromamounts provided in the accompanying consolidated financial statements.

** **

**Fair Value of Financial Instruments**

** **

Unless otherwise stated, the financial instruments in the accompanyingbalance sheets approximate fair value.

 

F-7

----

 

**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 when the license period begins and the program is availablefor its first showing.  The portion ofprogram contracts payable within one year is reflected as a current liabilityin 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 yields the greater amortization for each program.  Program contract costs estimated by managementto be amortized in the succeeding year are classified as current assets.  Payments of program contract liabilities aretypically paid on a scheduled basis and are not affected by adjustments foramortization or estimated net realizable value.

 

**Barter Arrangements**

 

Certain program contracts provide for the exchange of advertising airtime in 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 air time 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.

 

**OtherAssets**

** **

Other assets primarily consist of costsrelated to the issuance of the 11.625% High Yield Trust Offered PreferredSecurities (the “HYTOPS” or the “Trust Preferred Securities”) of Sinclair Capital,a subsidiary trust of the Company in March of 1997.  These costs are being amortized on a straight line basis over a12 year period which represents the date they are mandatorily redeemable.

 

**Acquired Intangible Broadcast Assets**

 

Acquired intangible broadcast assets are being amortized over periodsof 15 to 40 years.  These amounts resultfrom the acquisition of the broadcast assets of KDSM-TV by Sinclair BroadcastGroup, Inc. (“Sinclair”) from River City Broadcasting L.P. (“RCB”).  The Company monitors and continuallyevaluates the realizability of intangible and tangible assets and the existenceof any impairment to its recoverability based on the projected undiscountedcash flows of the respective stations.  Managementbelieves that the carrying amounts of the Company’s tangible and intangibleassets have not been impaired.

 

Intangible assets, at cost, as of December 31, 2001and 2000, consisted of the following (in thousands):

 

|                             |   | **Amortization    Period** |   | **2001** |   | **2000** |   |
|----------------------------------|--------|----------------------------|--------|----------|--------|----------|--------|
| Goodwill                         |   | 40 years                   |   | $        | 26,938 |     | $      | 26,938 |   |
| Decaying  advertiser base        |   | 15 years                   |   | 1,452    |   | 1,452    |   |
| FCC licenses                     |   | 25 years                   |   | 4,966    |   | 4,966    |   |
| Network  affiliations            |   | 25 years                   |   | 1,682    |   | 1,682    |   |
|                             |   |                       |   | 35,038   |   | 35,038   |   |
| Less -  Accumulated amortization |   |                       |   | (5,619   | )      | (4,583   | )      |
|                             |   |                       |   | $        | 29,419 |     | $      | 30,455 |   |

 

F-8

----

 

**Accrued Liabilities**

 

Accrued liabilities consisted of the following as of December 31, 2001and 2000 (in thousands):

 

|         |   | **2001** |   | **2000** |   |
|--------------|--------|----------|--------|----------|--------|
| Compensation |   | $        | 228    |     | $      | 223 |   |
| Other        |   | 231      |   | 141      |   |
|         |   | $        | 459    |     | $      | 364 |   |

 

**Revenues**

 

Broadcasting revenues are derived principally from the sale of programtime and spot announcements to local, regional, and national advertisers.  Advertising revenue is recognized in theperiod during which the program time and spot announcements are broadcast.

 

**Reclassifications**

 

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

 

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

 

Property and equipment are stated at cost, less accumulateddepreciation.  Depreciation is computedunder the straight-line method over the following estimated useful lives:

 

| Buildings and improvements     |   | 10 - 35 years |
|--------------------------------|--------|---------------|
| Station equipment              |   | 5 - 10 years  |
| Office furniture and equipment |   | 5 - 10 years  |
| Leasehold improvements         |   | 10 - 31 years |
| Automotive equipment           |   | 3 - 5 years   |

 

Property and equipment consisted of the following as of December 31,2001 and 2000 (in thousands):

 

|                             |   | **2001** |   | **2000** |   |
|----------------------------------|--------|----------|--------|----------|--------|
| Buildings and  improvements      |   | $        | 860    |     | $      | 843 |   |
| Station  equipment               |   | 5,298    |   | 3,133    |   |
| Office furniture  and equipment  |   | 362      |   | 331      |   |
| Leasehold  improvements          |   | 34       |   | 34       |   |
| Automotive  equipment            |   | 210      |   | 93       |   |
| Construction in  progress        |   | 1,941    |   | 661      |   |
|                             |   | 8,705    |   | 5,095    |   |
| Less -  Accumulated depreciation |   | (2,112   | )      | (1,745   | )      |
|                             |   | $        | 6,593  |     | $      | 3,350 |   |

 

During 2001, the Company wrote-off $251,000 of fixed assets whichrepresents the net book value of damaged, obsolete, or abandoned property.

 

F-9

----

 

**3.****              PROGRAMCONTRACTS PAYABLE:**

 

Future payments required under program contracts payable as of December31, 2001 were as follows (in thousands):

 

| 2002                                            |   | $      | 1,737  |   |
|-------------------------------------------------|--------|--------|--------|--------|
| 2003                                            |   | 843    |   |
| 2004                                            |   | 670    |   |
| 2005                                            |   | 313    |   |
| 2006                                            |   | 39     |   |
|                                            |   | 3,602  |   |
| Less: Current  portion                          |   | (1,737 | )      |
| Long-term  portion of program contracts payable |   | $      | 1,865  |   |

 

Included in the current portion amounts are payments due in arrears of$275,000.  In addition, the Company hasentered into non-cancelable commitments for future program rights aggregating$718,000 as of December 31, 2001.

 

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 utilizes sales information to estimate the futurerevenue of each commitment and measures that amount against the amount of thecommitment.  If the estimated futurerevenue is less than the amount of the commitment, a write down to the value ofthe asset is considered.

 

The Company has estimated the fair value of its program contractpayables and non-cancelable commitments at approximately $3.0 million and$578,000 , respectively, at December 31, 2001, and $2.4 million and $1.8million, respectively, as of December 31, 2000, based on future cash flowsdiscounted at the Company’s current borrowing rate.

** **

**4.****              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, 2001, 2000 and 1999 were approximately$290,000, $292,000 and $258,000, respectively. Certain of these costs have been allocated to KDSM based upon a ratio ofKDSM’s net revenue to total consolidated Sinclair net revenues.  Management believes that the allocationmethod is reasonable and that these amounts approximate the charges which wouldhave been incurred had KDSM been on a stand-alone basis.  Sinclair also provides and receivesshort-term cash advances to and from KDSM through a central cash managementsystem.  No interest is charged orreceived for these advances.  The totalamount due from Sinclair was approximately $27.3 million and $22.7 million asof December 31, 2001 and 2000, respectively.

** **

**5.****              INCOMETAXES:**

 

Sinclair files a consolidated federal income tax return and separatestate tax returns for each of its subsidiaries.  It is Sinclair’s policy to charge KDSM for its federal income taxprovision through intercompany charges, and KDSM is directly responsible forits current state tax liabilities.  Theaccompanying financial statements have been prepared in accordance with theseparate return method of SFAS No. 109, whereby the allocation of federal taxprovision/(benefit) due to/from the Parent is based on what the subsidiary’scurrent and deferred federal tax provision/(benefit) would have been had thesubsidiary filed a federal income tax return outside its consolidatedgroup.  KDSM is required to reimburseSinclair only when it experiences a federal tax provision and the benefitallocated to KDSM from the Parent related to dividends on the Parent PreferredStock is limited to KDSM’s cumulative federal tax provision.  The federal income tax provision is recordedas an intercompany charge and included as a reduction of the due from Parentamount in the accompanying consolidated balance sheets as a current obligation.  Accordingly, KDSM has no federal deferredincome taxes.  Since KDSM is directlyresponsible for its state taxes, all deferred tax assets or liabilities arerelated to state income taxes.  TheCompany had no alternative minimum tax credit carryforwards as of December 31,2001 and 2000.

 

F-10

----

 

The allocation of consolidated income taxes consists of the followingfor the years ended December 31, 2001, 2000 and 1999 (in thousands): 

 

|      |   | **2001** |   | **2000** |   | **1999** |   |
|-----------|--------|----------|--------|----------|--------|----------|--------|
| Current:  |   |     |   |     |   |     |   |
| Federal   |   | $        | — |     | $      | —   |   | $ | (3,642 | ) |
|      |   |     |   |     |   |     |   |
| Deferred: |   |     |   |     |   |     |   |
| State     |   | —   |   | —   |   | (846     | )      |
|      |   | $        | — |     | $      | —   |   | $ | (4,488 | ) |

 

The following is a reconciliation of federal income taxes at theapplicable statutory rate to the recorded provision:

 
|                                                            |   | **2001** |   | **2000** |   | **1999** |   |
|-----------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Statutory  federal income taxes                                 |   | 35.0     | %      | 35.0     | %      | 35.0     | %      |
| Adjustments -                                                   |   |     |   |     |   |     |   |
| State income  taxes                                             |   | 7.9      |   | 7.9      |   | 7.9      |   |
| Non-deductible  expense items                                   |   | 1.2      |   | 1.0      |   | 1.0      |   |
| Tax benefit  related to dividends on Parent Preferred stock (a) |   | (43.1    | )      | (42.9    | )      | (130.0   | )      |
| Other                                                           |   | (1.0     | )      | (1.0     | )      | (13.9    | )      |
|                                                            |   |     |   |     |   |     |   |
| Provision for  income taxes                                     |   | 0.0      | %      | 0.0      | %      | (100.0%  | )      |

 

----

(a)          In March 1997, theCompany issued the HYTOPS securities. In connection with this transaction, Sinclair Broadcast Group, Inc. (the“Parent”) issued $206.2 million of Series C Preferred Stock (the “ParentPreferred Stock”) to KDSM, Inc., a wholly owned subsidiary.  Parent Preferred Stock dividends paid toKDSM, Inc. are considered taxable income 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 Parent Preferred Stock in an amount equal to ParentPreferred Stock dividends received in each taxable year limited to the extentthat the Parent’s consolidated group has “earnings and profits.” To the extentthat dividends received by KDSM, Inc. are in excess of the Parent’sconsolidated group earnings and profits, KDSM will reduce its tax basis in theParent Preferred Stock which gives rise to a deferred tax liability (to berecognized upon redemption).  During theyears ended December 31, 1999 and 2000, the Parent generated a significantamount of “earnings and profits” though the sale of a significant amount ofassets at a gain.  KDSM thereforeavoided a reduction in basis of its Parent Preferred Stock.  In the year ended December 31, 2001, theParent had sufficient cumulative “earnings and profits” and KDSM avoided areduction of basis in its Parent Preferred Stock.

 

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, 2001 and 2000 (inthousands):

 
|                                    |   | **2001** |   | **2000** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|
| Deferred Tax  Assets                    |   |     |   |     |   |
| Net operating  losses                   |   | $        | 8,857  |     | $      | 6,956 |   |
| Other                                   |   | 11       |   | 9        |   |
|                                    |   | 8,868    |   | 6,965    |   |
| Valuation  allowance                    |   | (4,766   | )      | (2,951   | )      |
|                                    |   | $        | 4,102  |     | $      | 4,014 |   |
| Deferred Tax  Liabilities               |   |     |   |     |   |
| Fixed assets and  intangibles           |   | $        | (639   | )        | $      | (556 | ) |
| Preferred stock  deferred tax liability |   |     |   |     |   |
| [see (a) above]                         |   | (3,462   | )      | (3,462   | )      |
| Other                                   |   | (1       | )      | 4        |   |
|                                    |   | $        | (4,102 | )        | $      | (4,014 | ) |

 

F-11

----

 

The Company establishes valuation allowances in accordance with theprovisions of SFAS No. 109, *Accounting for Income Taxes. *The Company continually reviewsthe adequacy of the valuation allowance and is recognizing these benefits onlyas reassessment indicates that it is more likely than not that the benefitswill 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, 2001 and2000.

** **

**6.****              EMPLOYEEBENEFITS:**

 

KDSM participates in Sinclair’s retirement savings plan under Section401(k) of the Internal Revenue Code. This plan covers substantially all employees of the Company who meetminimum age or service requirements and allows participants to defer a portionof their annual compensation on a pre-tax basis.  Contributions from the Company are made on an annual basis in anamount equal to 50% of the participating employee contributions, to the extentsuch contributions do not exceed 4% of the employees’ eligible compensationduring the year.

** **

**7.****              COMMITMENTSAND 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.

 

**Leases**

 

The Company leases certain property and equipment under non-cancelableoperating lease agreements.  Rentalexpense charged to income for the years ended December 31, 2001, 2000, and 1999was approximately $14,000, $12,000, and $23,000, respectively.  In addition, in 2001, the Company enteredinto a 25 year capital lease for a digital tower.  The lease was recorded at $2.1 million, which is the presentvalue of the future minimum lease payments. Future minimum payments under the leases are as follows (in thousands):

 
| **Year  ending  December 31, 2001**        |   | **Capital   leases** |   | **Operating   leases** |   |
|-------------------------------------------------|--------|----------------------|--------|------------------------|--------|
| 2002                                            |   | $                    | 195    |                   | $      | 5 |   |
| 2003                                            |   | 202                  |   | 2                      |   |
| 2004                                            |   | 210                  |   | 2                      |   |
| 2005                                            |   | 219                  |   | 2                      |   |
| 2006                                            |   | 228                  |   | —                 |   |
| Thereafter                                      |   | 6,878                |   | —                 |   |
| Total future  minimum lease payments            |   | 7,932                |   | $                      | 11     |   |
| Less - interest                                 |   | (5,803               | )      |                   |   |
| Less current  portion                           |   | (195                 | )      |                   |   |
| Present value of  future capital lease payments |   | $                    | 1,934  |                   |   |   |

 

**AffiliationAgreement**

 

The Company continues to carry Fox programming notwithstanding the factthat their affiliation agreement has expired. Fox affiliation agreement expired in 2001, in part as a result of Foxhaving failed to exercise an option to renew the affiliation agreement for anadditional five years.  Sinclair iscurrently in discussion with Fox to secure a long-term affiliation agreementfor KDSM and expects such discussions to be successful.

 

Upon the termination of the above affiliation agreement, the Companywould be required to establish a new affiliation with another network oroperate as an independent.  At suchtime, the remaining value of the network affiliation asset may be impaired andthe Company would be required to write down the value of the asset.

 

F-12

----

 

**8.****              COMPANYOBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIESOF SUBSIDIARY TRUST HOLDING 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.

 

Pursuant to a Registration Rights Agreemententered into in connection with the private placement of the Trust PreferredSecurities, Sinclair Capital offered holders of the Trust Preferred Securitiesthe right to exchange the Trust Preferred Securities with new Trust PreferredSecurities having the same terms as the existing securities, except that theexchange of the new Trust Preferred Securities for the existing Trust PreferredSecurities has been registered under the Securities Act.  On May 2, 1997, the Company filed aregistration statement on Form S-4 with the Securities and Exchange Commissionfor the purpose of registering the new Trust Preferred Securities to be offeredin exchange for the aforementioned existing Trust Preferred Securities issuedby the Company in March 1997 (the “Exchange Offer”).  The Company’s Exchange Offer was closed and became effective onAugust 11, 1997, at which time all of the existing Trust Preferred Securitieswere exchanged for new Trust Preferred Securities.

** **

**9.****              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 ParentPreferred”) with New Parent Preferred Securities (the “New Parent Preferred”)registered under the Securities Act. The terms of the New Parent Preferred are identical in all materialrespects to those of the Old Parent Preferred. A registration statement was filed on May 2, 1997 with respect toregistering the New Parent Preferred, and was declared effective on July 14,1997 and the exchange has been 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.

** **

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

** **
|                         |   | **Quarter  Ended**   |   |
|------------------------------|--------|----------------------|--------|
|                         |   | **March 31,   2001** |   | **June 30,   2001** |   | **September  30,   2001** |   | **December  31,   2001** |   |
| Total revenues               |   | $                    | 2,157  |   | $ | 2,083 |   | $ | 1,945 |   | $ | 2,348 |   |
| Operating income             |   | (26                  | )      | 148 |   | (68 | ) | (209 | ) |
| Net income                   |   | 765                  |   | 963 |   | 761 |   | 513 |   |
| Net income per  common share |   | 7,650                |   | 9,630 |   | 7,610 |   | 5,130 |   |
|                              |        |                      |        |  |  |  |  |  |  |  |  |  |  |

** **
|                         |   | **Quarter  Ended**   |   |
|------------------------------|--------|----------------------|--------|
|                         |   | **March 31,   2000** |   | **June 30,   2000** |   | **September  30,   2000** |   | **December  31,   2000** |   |
| Total revenues               |   | $                    | 2,401  |   | $ | 2,366 |   | $ | 2,247 |   | $ | 2,524 |   |
| Operating income             |   | 180                  |   | 585 |   | 443 |   | 475 |   |
| Net income                   |   | 867                  |   | 1,269 |   | 1,413 |   | 1,456 |   |
| Net income per  common share |   | 8,670                |   | 12,690 |   | 14,130 |   | 14,560 |   |
|                              |        |                      |        |  |  |  |  |  |  |  |  |  |  |

 

F-13

----

 

**KDSM, INC. AND SUBSIDIARIES**

**INDEXTO SCHEDULES**

** **
| Report of  Independent Public Accountants        |
|--------------------------------------------------|
| Schedule II - Valuation and Qualifying  Accounts |

 

All schedules except those listed above are omitted as not applicableor not required or the required information is included in the consolidatedfinancial statements or in the notes thereto.

 

S-1

----

 

**REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS**

 

To the Stockholders of

Sinclair Broadcast Group, Inc.:

 

We have audited in accordance with auditing standards generallyaccepted in the United States, the consolidated balance sheets, statements ofoperations, changes in stockholder’s equity and cash flows of KDSM, Inc. andSubsidiaries included in this Form 10-K and have issued our report thereondated March 8, 2002.  Our audit was madefor the purpose of forming an opinion on the basic financial statements takenas a whole.  The schedule listed in theaccompanying index is the responsibility of the Company’s management and ispresented for purposes of complying with the Securities and ExchangeCommissions rules and is not part of the basic financial statements.  This schedule has been subjected to theauditing procedures applied in the audit of the basic financial statements and,in our opinion, fairly states in all material respects the financial datarequired to be set forth therein in relation to the basic financial statementstaken as a whole.

 

ARTHUR ANDERSEN LLP

Baltimore, Maryland,

March 8, 2002

 

S-2

----

 

**SCHEDULEII**

**KDSM, INC. AND SUBSIDIARIES**

**VALUATION AND QUALIFYING ACCOUNTS**

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

**(in thousands)**

** **
| **Description**                  |   | **Balance at    Beginning   of Period** |   | **Charged   to Costs   and   Expenses** |   | **Deductions** |   | **Balance   at End of   Period** |   |
|----------------------------------|--------|-----------------------------------------|--------|-----------------------------------------|--------|----------------|--------|----------------------------------|--------|
| **1999**                         |   |                                    |   |                                    |   |           |   |                             |   |
| Allowance for  doubtful accounts |   | $                                       | 33     |                                    | $      | 25             |   | $                                | 39     |   | $ | 19 |   |
| **2000**                         |   |                                    |   |                                    |   |           |   |                             |   |
| Allowance for  doubtful accounts |   | 19                                      |   | 51                                      |   | 49             |   | 21                               |   |
| **2001**                         |   |                                    |   |                                    |   |           |   |                             |   |
| Allowance for  doubtful accounts |   | 21                                      |   | 56                                      |   | 31             |   | 46                               |   |
|                                  |        |                                         |        |                                         |        |                |        |                                  |        |  |  |  |  |

 

S-3

----