ITEM 1. BUSINESS.
General
Chris-Craft Industries, Inc. ("Chris-Craft"), the registrant, was organized in Delaware in 1928 and adopted its present name in 1962. Chris-Craft's principal business is television broadcasting, conducted through its majority owned (79.96% at February 28, 1999) subsidiary, BHC Communications, Inc. ("BHC"), which owns 100% of Chris-Craft Television, Inc. ("CCTV"), 100% of Pinelands, Inc. ("Pinelands") and, as of February 28, 1999, 58.5% of United Television, Inc. ("UTV").
At February 28, 1999, Chris-Craft (including UTV) had 1,188 full-time employees and 129 part-time employees.
The information appearing in Note 10 of Notes to Consolidated Financial Statements in the Annual Report, Industry Segment Information, is incorporated herein by reference.
Television Division
BHC operates six very high frequency ("VHF") television stations and three ultra high frequency ("UHF") television stations, together constituting Chris-Craft's Television Division. Commercial television broadcasting in the United States is conducted on 68 channels numbered 2 through 69. Channels 2 through 13 are in the VHF band, and channels 14 through 69 are in the UHF band. In general, UHF stations are at a disadvantage relative to VHF stations, because UHF frequencies are more difficult for households to receive. This disadvantage is eliminated when a viewer receives the UHF station through a cable system.
Commercial broadcast television stations may be either affiliated with one of the three major national networks (ABC, NBC and CBS); three more recently established national networks (Fox Broadcasting Company ("Fox"), United Paramount Network ("UPN"), and The WB Network ("WB")), which provide substantially fewer hours of programming; or may be independent.
The following table sets forth certain information with respect to BHC stations and their respective markets:
Television stations derive their revenues primarily from selling advertising time. The television advertising sales market consists primarily of national network advertising, national spot advertising and local spot advertising. An advertiser wishing to reach a nationwide audience usually purchases advertising time directly from the national networks, "superstations" (i.e., broadcast stations carried by cable operators in areas outside their broadcast coverage area), barter program syndicators, national basic cable networks, or "unwired" networks (groups of otherwise unrelated stations whose advertising time is combined for national sale). A national advertiser wishing to reach a particular regional or local audience usually buys advertising time from local stations through national advertising sales representative firms having contractual arrangements with local stations to solicit such advertising. Local businesses generally purchase advertising from the stations' local sales staffs.
Television stations compete for television advertising revenue primarily with other television stations and cable television channels serving the same DMA. There are 210 DMAs in the United States. DMAs are ranked annually by the estimated number of households owning a television set within the DMA. Advertising rates that a television station can command vary in part with the size, in terms of television households, of the DMA served by the station.
Within a DMA, the advertising rates charged by competing stations depend primarily on four factors: the stations' program ratings, the time of day the advertising will run, the demographic qualities of a program's viewers (primarily age and sex), and the amount of each station's inventory. Ratings data for television markets are measured by A.C. Nielsen Company ("Nielsen"). This rating service uses two terms to quantify a station's audience: rating points and share points. A rating point represents one percent of all television households in the entire DMA tuned to a particular station, and a share point represents one percent of all television households within the DMA actually using at least one television set at the time of measurement and tuned to the station in question.
Because the major networks regularly provide first-run programming during prime time viewing hours (in general, 8:00 P.M. to 11:00 P.M. Eastern/Pacific time), their affiliates generally (but do not always) achieve higher audience shares, but have substantially less advertising time ("inventory") to sell, during those hours than affiliates of the newer networks or independent stations, since the major networks use almost all of their affiliates' prime time inventory for network programming. Although the newer networks generally use the same amount of their affiliates' inventory during network broadcasts, the newer networks provide less programming; accordingly, their affiliates, as well as non-affiliated stations, generally have substantially more inventory for sale than the major-network affiliates. The newer network affiliates' and independent stations' smaller audiences and greater inventory during prime time hours generally result in lower advertising rates charged and more advertising time sold during those hours, as compared with major affiliates' larger audiences and limited inventory, which generally allow the major-network affiliates to charge higher advertising rates for prime time programming. By selling more advertising time, the new-network or independent station typically achieves a share of advertising revenues in its market greater than its audience ratings. On the other hand, total programming costs for such a station, because it broadcasts more syndicated programming than a major-network affiliate, are generally higher than those of a major-network affiliate in the same market. These differences have been reduced by the growth of the Fox network, which currently provides 15 weekly hours of programming during prime time and additional programming in other periods, and are being reduced further as the other newer networks provide expanded schedules of programming.
Programming
BHC's UPN stations depend heavily on independent third parties for programming, as do KTVX and KMOL for their non-network broadcasts. Recognizing the need to have a more direct influence on the quality of programming available to its stations, and desiring to participate in potential profits through national syndication of programming, BHC has joined in the formation of UPN, and, additionally, invests directly in the development of original programming. The aggregate amount invested in original programming through December 31, 1998 was not significant to Chris-Craft's financial position. BHC television stations also produce programming directed to meet the needs and interests of the area served, such as local news and events, public affairs programming, children's programming and sports.
Programs obtained from independent sources consist principally of syndicated television shows, many of which have been shown previously on a major network, and syndicated feature films, which were either made for
network television or have been exhibited previously in motion picture theaters (most of which films have been shown previously on network or cable television). Syndicated programs are sold to individual stations to be broadcast one or more times. Television stations not affiliated with a major network generally have large numbers of syndication contracts; each contract is a license for a particular series or program that usually prohibits licensing the same programming to other television stations in the same market. A single syndication source may provide a number of different series or programs.
Licenses for syndicated programs are often offered for cash sale (i.e., without any barter element) to stations; however, some are offered on a barter or cash plus barter basis. In the case of a cash sale, the station purchases the right to broadcast the program, or a series of programs, and sells advertising time during the broadcast. The cash price of such programming varies, depending on the perceived desirability of the program and whether it comes with commercials that must be broadcast (i.e., on a cash plus barter basis). Barter programming is offered to stations for no cash consideration, but comes with a greater number of commercials that must be broadcast and, therefore, with less inventory.
Barter and cash plus barter programming reduce both the amount of cash required for program purchases and the amount of time available for sale. Although the direct impact on broadcasters' operating income generally is believed to be neutral, program distributors that acquire barter air time compete with television stations and broadcasting networks for sales of air time. Chris-Craft believes that the effect of barter on BHC television stations is not significantly different from its impact on the industry as a whole.
BHC television stations are frequently required to make substantial financial commitments to obtain syndicated programming while such programming is still being broadcast by another network and before it is available for broadcast by BHC stations, or even before it has been produced. Generally, syndication contracts require the station to acquire an entire program series, before the number of episodes of original showings that will be produced has been determined. While analyses of network audiences are used in estimating the value and potential profitability of such programming, there is no assurance that a successful network program will continue to be successful or profitable when broadcast after initial network airing.
Pursuant to generally accepted accounting principles, commitments for programming not available for broadcast are not recorded as liabilities until the programming becomes available for broadcast, at which time the related contract right is also recorded as an asset. BHC television stations had unamortized film contract rights for programming available for telecasting, and deposits on film contracts for programming not available for telecasting aggregating $123,502,000 as of December 31, 1998. The stations were committed for film and sports rights contracts aggregating $337,800,000 for programming not available for broadcasting as of that date. License periods for particular programs or films generally run from one to five years. Long-term contracts for the broadcast of syndicated television series generally provide for an initial telecast and subsequent reruns for a period of years, with full payment to be made by the station over a period of time shorter than the rerun period. See Notes 1(C) and 9 of Notes to Consolidated Financial Statements.
KTVX and KMOL are primary affiliates of their respective networks. Network programs are produced either by the networks themselves or by independent production companies and are transmitted by the networks to their affiliated stations for broadcast.
Most networks have begun to enter into affiliation agreements for terms as long as ten years. UTV has entered into 10-year affiliation agreements for KTVX and KMOL. Current FCC rules do not limit the duration of affiliation agreements.
An affiliation agreement gives the affiliate the right to broadcast all programs transmitted by the network. The affiliate must run in its entirety, together with all network commercials, any network programming the affiliate elects or is required to broadcast, and is allowed to broadcast a limited number of commercials it has sold. For each hour of programming broadcast by the affiliate, the major networks generally have paid their affiliates a fee, specified in the agreement (although subject to change by the network), which varies in amount depending on the time of day during which the program is broadcast and other factors. Prime time programming generally earns the highest fee. A network may, and sometimes does, designate certain programs to be broadcast with no compensation to the station.
Subject to certain limitations contained in the affiliation agreement, an affiliate may accept or reject a program offered by the network and instead broadcast programming from another source. Rejection of a program may give the network the right to offer that program to another station in the area.
United Paramount Network
UPN, owned 50% by BHC and 50% by Viacom Inc.'s Paramount Television Group ("Paramount"), broadcasts ten hours of original prime time programming on five nights per week. The network also broadcasts two hours of previously exhibited movies, on Saturday afternoons, and two hours of children's programming, plus a one-hour rerun of Star Trek: Voyager, on Sundays. UPN intends to expand its non-prime time programming over the next several years.
UPN licenses its programming on the same bases as are customary in the industry. UPN seeks license or ownership rights for programming from all available sources on arms-length terms.
As of March 19, 1999, UPN's programming was carried by 186 affiliates, in markets covering a total of 95.0% of all U.S. households. Of these station affiliates, 113 are primary affiliates, including all of BHC's and Paramount's previously independent stations, in markets covering 80.8% of U.S. households, and 73 are secondary affiliates in markets covering an additional 14.2% of such households. UPN continues to seek additional affiliates to expand its household reach. The terms of UPN's primary affiliate station agreements range up to ten and a half years and provide commercial time for sale by the stations as consideration for broadcasting the network's programming.
UPN funding requirements, shared equally by BHC and Paramount, are expected to continue to be significant for the next several years. See Management's Discussion and Analysis of Financial Condition and Results of Operations and Note 2 of Notes to Consolidated Financial Statements.
Sources of Revenue
The principal source of revenues for BHC stations is the sale of advertising time to national and local advertisers. Such time sales are represented by spot announcements purchased to run between programs and program segments and by program sponsorship. The relative contributions of national and local advertising to BHC's gross cash advertising revenues vary from time to time. Most advertising contracts are short-term. BHC's television business is seasonal, like that of the television broadcasting business generally. In terms of revenues, generally the fourth quarter is strongest, followed by the second, third and first.
Advertising is generally placed with BHC stations through advertising agencies, which are allowed a commission generally equal to 15% of the price of advertising placed. National advertising time is usually sold through a national sales representative, which also receives a commission, while local advertising time is sold by each station's sales staff. UTV has established a national sales representative organization, United Television Sales, Inc. ("UTS"), to represent, initially, all BHC stations. Practices with respect to the sale of advertising time do not differ markedly between BHC's major network and UPN stations, although the major-network affiliated stations have less inventory to sell.
Government Regulation
Television broadcasting operations are subject to the jurisdiction of the FCC under the Communications Act of 1934, as amended (the "Communications Act"). The Communications Act empowers the FCC, among other things, to issue, revoke or modify broadcast licenses, to assign frequencies, to determine the locations of stations, to regulate the broadcasting equipment used by stations, to establish areas to be served, to adopt such regulations as may be necessary to carry out the provisions of the Communications Act and to impose certain penalties for violation of its regulations. BHC television stations are subject to a wide range of technical, reporting and operational requirements imposed by the Communications Act or by FCC rules and policies. The Communications Act was recently and substantially amended by the Telecommunications Act of 1996 (the "Telecom Act") and by
the Budget Reconciliation Act of 1997, some provisions of which have been incorporated into the FCC's rules and regulations during the past year.
The Communications Act provides that a license may be granted to any applicant if the public interest, convenience and necessity will be served thereby, subject to certain limitations, including the requirement that the FCC allocate licenses, frequencies, hours of operation and power in a manner that will provide a fair, efficient and equitable distribution of service throughout the United States. Prior to 1998, television licenses generally were issued for five-year terms, but such licenses and their renewals are now normally issued for eight years. Upon application, and in the absence of adverse questions as to the licensee's qualifications or operations, television licenses have usually been renewed for additional terms without a hearing by the FCC. An existing license automatically continues in effect once a timely renewal application has been filed until a final FCC decision is issued.
KMSP UPN 9's license renewal was granted on April 15, 1993, and was due to expire on April 1, 1998. A renewal application for KMSP was timely filed on December 1, 1997 and remains pending. On March 2, 1998, Lakeland Group Television, Inc., licensee of television station KGLT, Minneapolis, Minnesota, filed a petition to deny the KMSP renewal unless and until UTV permits KGLT's antenna to remain on UTV's television tower on reasonable and equitable terms. UTV has opposed the petition, which it does not believe will have a material adverse effect on UTV's license for KMSP; the license remains in effect pending FCC action on the renewal application. KTVX's license renewal was granted on October 9, 1998, and is due to expire on October 1, 2006. KUTP UPN 45's license renewal was granted on March 28, 1994, and was due to expire on October 1, 1998. A renewal application for KUTP was timely filed on June 1, 1998 and is still pending. KCOP UPN 13's license renewal was granted on January 8, 1999, and is due to expire on December 1, 2006. KBHK UPN 44's license renewal was granted on January 8, 1999, and is due to expire on December 1, 2006. KPTV UPN 12's license renewal was granted on January 28, 1999, and is due to expire on February 1, 2006. KMOL's license renewal was granted on November 12, 1998, and is due to expire on August 1, 2006. WWOR UPN 9's license renewal was granted July 16, 1996 and is due to expire on June 1, 1999. A renewal application for WWOR was timely filed on February 1, 1999. WUTB UPN 24's license was assigned to UTV of Baltimore, Inc., a subsidiary of UTV, on January 20, 1998 and is due to expire on October 1, 2001.
Under existing FCC regulations governing multiple ownership of broadcast stations, a license to operate a television station generally will not be granted to any party (or parties under common control), if such party directly or indirectly owns, operates, controls or has an attributable interest in another television or radio station serving the same market or area. The FCC, however, is favorably disposed to grant waivers of this rule for radio station-television station ownership combinations in the top 25 television markets, in which there will be at least 30 separately owned, operated and controlled broadcast stations, and in certain other circumstances. The Telecom Act directs the FCC to extend this waiver policy to the top 50 markets, consistent with the public interest, and to conduct a rule-making proceeding to determine whether to retain or modify the current restriction on same-market multiple television station ownership.
FCC regulations further provide that a broadcast license will not be granted if that grant would result in a concentration of control of radio and television broadcasting in a manner inconsistent with the public interest, convenience or necessity. FCC rules deem such concentration of control to exist if any party, or any of its officers, directors or stockholders, directly or indirectly, owned, operated, controlled or had an attributable interest in television stations capable of reaching, in the aggregate, a maximum of 35% of the national audience. This percentage is determined by the DMA market rankings of the percentage of the nation's television households considered within each market. Because of certain limitations of the UHF signal, however, the FCC will attribute only 50% of a market's DMA reach to owners of UHF stations for the purpose of calculating the audience reach limits. Applying the 50% reach attribution rule to BHC's three UHF stations, the nine BHC stations are deemed to reach approximately 18% of the nation's television households. The FCC is considering whether to eliminate the 50% attribution reduction under this rule for UHF stations.
The FCC's multiple ownership rules require the attribution of the licenses held by a broadcasting company to its officers, directors and certain of its stockholders, so there would ordinarily be a violation of FCC regulations where an officer, director or such a stockholder and a television broadcasting company together hold interests in stations exceeding the maximum audience reach or more than one station that serves the same area. In the case of a corporation controlling or operating television stations, such as Chris-Craft, there is attribution only to stockholders
who own 5% or more of the voting stock, except for institutional investors, including mutual funds, insurance companies and banks acting in a fiduciary capacity, which may own up to 10% of the voting stock without being subject to such attribution, provided that such entities exercise no control over the management or policies of the broadcasting company.
The FCC has begun a proceeding to consider modification of the various TV ownership restrictions described above, as well as changes in the rules for attributing the licenses held by an enterprise to various parties. Chris-Craft cannot predict the outcome of the FCC proceedings.
FCC regulations also prohibit common ownership or control between two of ABC, NBC, CBS, and Fox, or any one of those four networks and either UPN or WB.
The Telecom Act directed the FCC to conduct a rule-making proceeding to require the inclusion, in all television sets 13 inches or larger, of a feature (commonly referred to as the V-Chip) designed to enable viewers to block display of programs carrying a common rating and authorized the FCC to establish an advisory committee to recommend a system for rating video programming that contains sexual, violent, or other indecent material about which parents should be informed, before it is displayed to children, if the television industry does not establish a satisfactory voluntary rating system of its own. On March 12, 1998, the FCC voted to accept an industry proposal providing for a voluntary ratings system of "TV Parental Guidelines" under which all video programming will be designated in one of six categories to permit the electronic blocking of selected video programming. The FCC has begun a separate proceeding to address technical issues related to the "V-Chip." The FCC has directed that all television receiver models with picture screens 13 inches or greater be equipped with "V-Chip" technology under a phased implementation beginning on July 1, 1999. Chris-Craft cannot predict how changes in the implementation of the ratings system and "V-Chip" technology will affect Chris-Craft's business. The Telecom Act also directed the FCC to adopt regulations requiring increased closed-captioning of video programming, and the FCC recently did so. Subject to various exemptions, television stations will be required to begin broadcasting specified amounts or a specified percentage of new programs with closed captioning in the year 2000 and specified percentages of pre-rule programming commencing in the year 2008.
FCC regulations prohibit the holder of an attributable interest in a television station from having an attributable interest in a cable television system located within the predicted coverage area of that station. FCC regulations also prohibit the holder of an attributable interest in a television station from having an attributable interest in a daily newspaper located within the predicted coverage area of that station. The FCC intends to conduct a rule-making proceeding to consider possible modification of this latter regulation.
FCC regulations implementing the Cable Television Consumer Protection and Competition Act of 1992 (the "1992 Cable Act") require each television broadcaster to elect, at three-year intervals beginning June 17, 1993, either to (i) require carriage of its signal by cable systems in the station's market ("must-carry") or (ii) negotiate the terms on which such broadcast station would permit transmission of its signal by the cable systems within its market ("retransmission consent"). In June 1997, the U.S. Supreme Court upheld the constitutionality of the must-carry provisions.
On August 8, 1996, under the Children's Television Act of 1990 (the "CTA"), the FCC amended its rules to establish a "processing guideline" for broadcast television stations, of at least three hours per week, averaged over a six-month period, of "programming that furthers the educational and informational needs of children 16 and under in any respect, including the child's intellectual/cognitive or social/emotional needs." Children's "Core Programming" has been defined as educational and informational programming that, among other things (i) has serving the educational and informational needs of children "as a significant purpose," (ii) has a specified educational and informational objective and a specified target child audience, (iii) is regularly scheduled, weekly programming, (iv) is at least 30 minutes in length, and (v) airs between 7:00 a.m. and 10:00 p.m. Any station that satisfied the processing guideline by broadcasting at least three weekly hours of Core Programming will receive FCC staff-level approval of the portion of its license renewal application pertaining to the CTA. Alternatively, a station may qualify for staff-level approval even if it broadcasts "somewhat less" than three hours per week of Core Programming by demonstrating that it has aired a weekly package of different types of educational and informational programming that is "at least equivalent" to three hours of Core Programming. Non-Core Programming that can qualify under this alternative includes specials, public service announcements, short-form programs and regularly scheduled non-weekly programs, with "a significant purpose of educating and informing
children." A licensee that does not meet the processing guidelines under either of these alternatives will be referred by the FCC's staff to the Commissioners of the FCC, who will evaluate the licensee's compliance with the CTA on the basis of both its programming and its other efforts related to children's educational and informational programming, e.g., its sponsorship of Core Programming on other stations in the market, or nonbroadcast activities "which enhance the value" of such programming. A television station ultimately found not to have complied with the CTA could face sanctions including monetary fines and the possible non-renewal of its broadcast license. Chris-Craft believes that each of its stations currently meets the three-hour programming guideline.
The FCC has taken a number of steps to implement digital television service ("DTV") (including high definition) in the United States. In December 1996, the FCC adopted a DTV broadcast standard. On February 17, 1998, the FCC affirmed an amended table of digital channel allotments and rules for the implementation of DTV, initially adopted in 1997. The digital table of allotments provides each existing television station licensee or permittee with a second broadcast channel to be used during the transition to DTV, conditioned upon the surrender of one of the channels at the end of the DTV transition period. The DTV channels assigned to the BHC television stations are as follows: KCOP, channel 66; KBHK, channel 45; KMSP, channel 26; WWOR, channel 38; KPTV, channel 30; KMOL, channel 58; KTVX, channel 40; KUTP, channel 26; and WUTB, channel 41. Implementation of DTV will improve the technical quality of television. Furthermore, the implementing rules permit broadcasters to use their assigned digital spectrum flexibly to provide either standard or high-definition video signals and additional services, including, for example, data transfer, subscription video, interactive materials, and audio signals as long as they continue to provide at least one free, over-the-air television service. However, the digital table of allotments was devised on the basis of certain technical assumptions which have not been subjected to extensive field testing and which, along with specific digital channel assignments, may be subjected to further administrative and judicial review. Conversion to DTV may reduce the geographic reach of the BHC television stations or result in increased interference, with, in either case, a corresponding loss of population coverage. DTV implementation will impose additional costs on the BHC television stations, primarily due to the capital costs associated with construction of DTV facilities and increased operating costs both during and after the transition period. In addition, the Telecommunications Act requires the FCC to assess and collect a fee for any use of a broadcaster's DTV channel for which it receives subscription fees or other compensation other than advertising revenue. The FCC has set a target date of 2006 for expiration of the transition period, subject to biennial reviews to evaluate the progress of DTV, including the rate of consumer acceptance. Chris-Craft expects that, during 1999, some of BHC's television stations will begin broadcasting on their DTV channels in addition to their analog broadcasts. Future capital expenditures by Chris-Craft will be compatible with the new technology whenever possible. The FCC is also conducting a rule-making proceeding to determine whether and the extent to which cable television systems should be obligated to carry the signals of broadcast DTV stations.
The FCC currently is reviewing certain of its rules governing the relationship between broadcast television networks, including UPN, and their affiliated stations. In a rulemaking proceeding, the FCC is examining its rules prohibiting a national sales representative organization, such as UTS, which is commonly owned with a national network such as UPN, from representing affiliates of that network other than affiliates that are also under common ownership with the network for the sale of non-network advertising time and from influencing or controlling the rates set by their affiliates for the sale of such time. Separately, the FCC is conducting a rulemaking proceeding to consider relaxing or eliminating its rules prohibiting broadcast networks from (i) restricting their affiliates' rights to reject network programming, (ii) reserving an option to use specified amounts of their affiliates' broadcast time, and (iii) forbidding their affiliates from broadcasting the programming of another network; and to consider the relaxation of its rule prohibiting network affiliated stations from preventing other stations from broadcasting the programming of their network. Chris-Craft is unable to predict the outcome of these proceedings.
The Communications Act limits the amount of capital stock that aliens (including their representatives, foreign governments, their representatives, and entities organized under the laws of a foreign country) may own in a television station licensee or any corporation directly or indirectly controlling such licensee. No more than 20% of a licensee's capital stock and, if the FCC so determines, no more than 25% of the capital stock of a company controlling a licensee, may be owned, directly or indirectly, or voted by aliens or their representatives. Should alien ownership exceed this limit, the FCC may revoke or refuse to grant or renew a television station license or approve the assignment or transfer of such license. Chris-Craft believes the ownership by aliens of its stock and that of BHC and UTV to be below the applicable limit.
The Communications Act prohibits the assignment of a broadcast license or the transfer of control of a licensee without the prior approval of the FCC. Legislation was introduced in the past that would impose a transfer fee on sales of broadcast properties. Although that legislation was not adopted, similar proposals, or a general spectrum licensing fee, may be advanced and adopted in the future. Recent legislation has imposed annual regulatory fees applicable to BHC stations, currently ranging as high as $35,025 per station.
The foregoing does not purport to be a complete summary of all the provisions of the Communications Act or regulations and policies of the FCC thereunder. Reference is made to the Communications Act, such regulations and the public notices promulgated by the FCC for further information.
Other Federal agencies, including principally the Federal Trade Commission, also impose a variety of requirements that affect the business and operations of broadcast stations. Proposals for additional or revised requirements are considered by the FCC, other Federal agencies or Congress from time to time. Chris-Craft cannot predict what new or revised Federal requirements may result from such consideration or what impact, if any, such requirements might have upon the operation of BHC television stations.
Competition
BHC television stations compete for advertising revenue in their respective markets, primarily with other broadcast television stations and cable television channels, and compete with other advertising media as well. Such competition is intense.
In addition to programming, management ability and experience, technical factors and television network affiliations are important in determining competitive position. Competitive success of a television station depends primarily on public response to the programs broadcast by the station in relation to competing entertainment, and the results of this competition affect the advertising revenues earned by the station from the sale of advertising time.
Audience ratings provided by Nielsen have a direct bearing on the competitive position of television stations. In general, major network programs achieve higher ratings than other programs.
There are at least five other commercial television stations in each market served by a BHC station. Chris-Craft believes that the three VHF major-network affiliates and the two other VHF stations in New York City generally attract a larger viewing audience than does WWOR UPN 9, and that WWOR UPN 9 generally attracts a viewing audience larger than the audiences attracted by the UHF stations in the New York City market. In Los Angeles, the three VHF major-network affiliates, three other VHF stations, and one UHF station generally attract a larger viewing audience than does KCOP UPN 13, and KCOP UPN 13 generally attracts a viewing audience larger than the other nine UHF stations in Los Angeles. In Portland, the three VHF major-network affiliated stations generally attract a larger audience than does KPTV UPN 12, which generally attracts an audience equal to one and larger than the other of the independent stations, both of which are UHF stations. Chris-Craft believes that, in Minneapolis/St. Paul, KMSP UPN 9 generally attracts a smaller viewing audience than the three major network-affiliated VHF stations, but a larger viewing audience than the other three stations, all of which are UHF stations. In Salt Lake City, KTVX generally ranks second of the six television stations in terms of audience share. In San Antonio, KMOL generally ranks first of the six stations in terms of audience share. Of the 14 commercial television stations in San Francisco, KBHK UPN 44, generally ranks fifth in terms of audience share, behind the three major network-affiliated VHF television stations, and the VHF Fox affiliate. KUTP UPN 45 generally ranks sixth in terms of audience share, of the eight commercial stations in the Phoenix market. Prior to its acquisition by UTV in January 1998, WUTB, the Baltimore station, operated as a Home Shopping Network affiliate. It now generally ranks sixth of the six commercial stations in terms of audience share.
BHC stations may face increased competition in the future from additional television stations that may enter their respective markets. See note (c) to the table under Television Division.
Cable television is a major competitor of television broadcasting stations. Because cable television systems operate in each market served by a BHC station, the stations are affected by rules governing cable operations. If a station is not widely accessible by cable in those markets having strong cable penetration, it may lose effective access to a significant portion of the local audience. Even if a television station is carried on a local cable system, an
unfavorable channel or service tier position on the cable system may adversely affect the station's audience ratings and, in some circumstances, a television set's ability to receive the station being carried on an unfavorable channel position. Some cable system operators may be inclined to place broadcast stations in unfavorable channel locations.
While Federal law has until recently generally prohibited local telephone companies from providing video programming to subscribers in their service areas, this prohibition has been substantially eliminated by the Telecom Act. The FCC has also recently adopted rules for "Open Video Systems" -- a new structure of video delivery system authorized by the Telecom Act for provision by local telephone companies and, if permitted by the FCC, others. Chris-Craft is unable to predict the outcome or effect of these developments. As of June 1998, there were approximately 66,000 subscribers to OVS systems.
"Syndicated exclusivity" rules allow television stations to prevent local cable operators from importing distant television programming that duplicates syndicated programming in which local stations have acquired exclusive rights. In conjunction with these rules, network nonduplication rules protect the exclusivity of network broadcast programming within the local video marketplace. The FCC is also reviewing its "territorial exclusivity" rule, which limits the area in which a broadcaster can obtain exclusive rights to video programming. Chris-Craft believes that the competitive position of BHC stations would likely be enhanced by an expansion of broadcasters' permitted zones of exclusivity.
Alternative technologies could increase competition in the areas served by BHC stations and, consequently, could adversely affect their profitability. The emergence of home satellite dish antennas has made it possible for individuals to receive a host of video programming options via satellite transmission. Four direct to home satellite systems ("DTH") currently provide service. The number of subscribers to DTH services increased substantially during the past four years, to approximately 10.6 million as of December 1998. An additional challenge is now posed by wireless cable systems, including multichannel distribution services ("MDS"). Two four-channel MDS licenses have been granted in most television markets. MDS operation can provide commercial programming on a paid basis. A similar service can also be offered using the instructional television fixed service ("ITFS"). The FCC now allows the educational entities that hold ITFS licenses to lease their "excess" capacity for commercial purposes. The multichannel capacity of ITFS could be combined with either an existing single channel MDS or a newer multichannel multi-point distribution service to increase the number of available channels offered by an individual operator. At the end of 1998, wireless cable systems served about 1.0 million subscribers.
Technological developments in television transmission have created the probability that one or more of the broadcast and nonbroadcast television media will provide enhanced or "high definition" pictures and sound to the public of a quality that is technically superior to that of the pictures and sound currently available. It is not yet clear when and to what extent technology of this kind will be available to the various television media; whether and how television broadcast stations will be able to avail themselves of these various improvements; whether viewing audiences will make choices among services upon the basis of such differences; or, if they would, whether significant additional expense would be required for television stations to provide such services. Many segments of the television industry are intensively studying digital television technology. Chris-Craft is unable to predict the outcome of these developments.
The broadcasting industry is continuously faced with technological changes, competing entertainment and communications media and governmental restrictions or actions of Federal regulatory bodies, including the FCC. These technological changes may include the introduction of digital compression by cable systems that would significantly increase the number and availability of cable program services with which BHC stations compete for audience and revenue, the establishment of interactive video services, and the offering of multimedia services that include data networks and other computer technologies. Such factors have affected, and will continue to affect, the revenue growth and profitability of Chris-Craft.
Industrial Division
Chris-Craft Industrial Products, Inc., the wholly owned subsidiary of Chris-Craft that constitutes its Industrial Division, is primarily engaged in manufacturing plastic flexible films and distributing containment systems to the healthcare industry. These products are marketed as roll and cut stock as well as proprietary and private-label end products. The end products include plastic flexible films and water-soluble hospital laundry bags.
Significant portions of the sales of the Industrial Division are to the flexible film packaging industry, composite material fabricators, and health care facilities. Sales of particular items may vary widely from year to year as specifications, designs and other conditions change. The products of the Industrial Division are sold by it directly and by sales agents and distributors.
Sales of one kind of plastic film to a large chemical manufacturer equaled 20.4%, and sales to two health care customers equaled 9.7% and 8.7%, of 1998 Division revenues. Sales to these accounts are generally made on the basis of competitive bidding on each item sold. Similar arrangements with these customers have prevailed for a number of years. The loss of these customers, unless their business was replaced by others, would have an adverse effect on the Industrial Division.
Plastic Flexible Films
Chris-Craft's plastic flexible films are based primarily on polyvinyl alcohol polymers; some of the film products are water-soluble in their end use applications, while other applications do not require water solubility. Chris-Craft's major uses for such film are in water-soluble packaging for pre-measured amounts of chemical compounds and composite material fabrication. The films also are used in the manufacture of water-soluble hospital laundry bags. Management is aware of competition from one other domestic and several foreign producers of similar film.
Another series of polyvinyl alcohol film is used as a release medium in connection with the fabrication of fiberglass-reinforced and other plastic products. For certain of these applications, Chris-Craft's film competes with those of a number of producers of other types of films.
M.D. Industries, Inc., a subsidiary of the Industrial Division, markets health care products manufactured by the Division and by others, including proprietary products made for M.D. Industries.
The Industrial Division is faced with keen competition in each of its product lines from other companies that manufacture and sell these products.
Raw Materials
Principal raw materials used by the Industrial Division include polymers and chemical additives. These have generally been readily available from many sources.
ITEM 2.
ITEM 2. PROPERTIES.
Television Division
KCOP owns its studios and offices in two buildings in Los Angeles containing a total of approximately 54,000 square feet located on adjacent sites having a total area of approximately 1.93 acres. KCOP's transmitter is located atop Mt. Wilson on property utilized pursuant to a permit issued by the United States Forest Service.
KPTV owns its studios and offices in a building in Portland, Oregon, containing approximately 45,300 square feet located on a site of approximately 2.0 acres. Its transmitter is located on its own property at a separate site containing approximately 16.18 acres.
WWOR owns office and studio facilities in Secaucus, New Jersey, containing approximately 110,000 square feet on approximately 3.5 acres and leases additional office space in New York City. Along with almost all of the television stations licensed to the New York market, WWOR's transmitter is located on top of the World Trade Center in New York City pursuant to a lease agreement which expires in 2004, unless terminated by WWOR in May 1999.
Physical facilities consisting of offices and studio facilities are owned by UTV in Minneapolis, San Antonio and Phoenix and are leased in Baltimore, Salt Lake City and San Francisco. The Baltimore lease
expires in April 2005. The Salt Lake City lease expires in August 1999, but can be extended through April 2000. UTV has acquired a 6.03 acre site in Salt Lake City, on which UTV has begun construction of a new studio facility. The San Francisco lease expires in 2007. UTV also occupies leased facilities in various cities throughout the country.
The Minneapolis facility includes approximately 49,700 square feet of space on a 5.63-acre site. The current Salt Lake City facility is approximately 30,400 square feet on a 2.53-acre site. The Baltimore facility is approximately 11,700 square feet and is located in an office park in a suburb of Baltimore. The San Antonio facility is approximately 41,000 square feet on a .92-acre site. The San Francisco facility is approximately 27,700 square feet in downtown San Francisco. The Phoenix facility is approximately 26,400 square feet on a 3.03-acre site. Smaller buildings containing transmission equipment are owned by UTV at sites separate from the studio facilities.
UTV owns a 55-acre tract in Shoreview, Minnesota, of which 40 acres are used by KMSP for transmitter facilities and tower.
KTVX's transmitter facilities and tower are located at a site on Mt. Nelson, close to Salt Lake City, under a lease that expires in 2004. KTVX also maintains back-up transmitter facilities and tower at a site on nearby Mt. Vision under a lease that expires in July 2002 and is renewable, at no increase in rental, for a 50-year period.
KMOL's transmitter facilities are located at a site near San Antonio on land and on a tower owned by Texas Tall Tower Corporation, a corporation owned in equal shares by UTV and another television station that also transmits from the same tower.
KBHK's transmitter is located on Mt. Sutro, as part of the Sutro Tower complex, which also houses equipment for other San Francisco television stations and many of its FM radio stations. The lease for the Mt. Sutro facilities expires in 2005 and is renewable for two five-year periods.
KUTP's transmitter facilities and tower are located on a site within South Mountain Park, a communications park owned by the City of Phoenix, which also contains transmitter facilities and towers for the other television stations in Phoenix as well as facilities for several FM radio stations. The license for this space expires in 2012.
WUTB's transmitter facilities are located on a site near Baltimore. The building containing the transmitter, and the tower on which the antenna is mounted, are shared with another television station. The lease for the tower and building expires in December 1999 and is renewable for two five-year periods.
Industrial Division
As described below, the Industrial Division owns a plant in Gary, Indiana and leases facilities in Northbrook, Illinois and in South Holland, Illinois, which leases expire on October 31, 1999 and June 30, 2003, respectively.
Chris-Craft believes its properties are adequate for their present uses. ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Montrose Chemical Corporation of California ("Montrose"), whose stock is 50% owned by Chris-Craft and 50% by a subsidiary of Zeneca Inc. ("Zeneca"), discontinued its manufacturing operations in 1983 and has since been defending claims for costs and damages relating to environmental matters.
In 1983, the United States of America and the State of California instituted an action in the Federal District Court for the Central District of California, entitled United States of America et al. v. J.B. Stringfellow, et al., Case No. 83-2501 JMI (MCX), against Montrose and approximately 20 other defendants relating to alleged environmental impairment at the Stringfellow Hazardous Waste Disposal Site in California. Chris-Craft is not a defendant in this action. The action seeks to impose joint and several liability against all defendants for all costs of removal and remedial action incurred by the Federal and state governments at the site. In 1990, the United States Environmental Protection Agency ("EPA") issued a Record of Decision for the site which selected some of the interim remedial measures preferred by the EPA and the State, the estimated present value of the capital costs of which was estimated by them to be $169 million although the estimate purports to be subject to potential variations of up to 50%. Plaintiffs also seek recovery for remedial expenditures and unspecified damages for alleged harm to natural resources. In September 1998, the District Court entered a ruling allocating liability at the site under both the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA" or the "Superfund" statute) and state law. The CERCLA allocation was 65% to the State of California, 10% to the owners of the site and 25% to the generator defendants (including Montrose). The state law allocation was 100% to the State. In December 1998, the defendants (including Montrose) and the State executed a settlement agreement that establishes a framework for resolving the litigation. The agreement is subject to certain conditions, but does not contemplate any monetary contribution by Chris-Craft.
In May 1998, a group of current or former residents of the vicinity of the Stringfellow Site filed suit, entitled Austin v. Stringfellow, No. 312339, California Superior Court, Riverside County, alleging personal injury and property damage from exposure to the site. A second amended complaint was filed in November 1998 on behalf of approximately 750 plaintiffs, approximately 100 of whom are minors, and names Montrose and Chris-Craft and more than 160 additional defendants. The defendants have moved to dismiss the complaint as to the adult defendants on statute of limitations grounds. A similar action filed in 1984 entitled Newman v. Stringfellow was resolved by means of a settlement in which Montrose, but not Chris-Craft, made a monetary contribution to resolve the claims of approximately 3,000 individual plaintiffs.
In June 1990, the United States of America and the State of California commenced an action in the United States District Court for the Central District of California, entitled United States of America et al. v. Montrose Chemical Corporation of California et al., Civil Action No. 90-3122 AAH (JRX), against, among others, Montrose and Chris-Craft. Certain United States affiliates of Zeneca (the "Zeneca Affiliates"), as well as CBS Corporation (formerly Westinghouse Electric Corporation), which has no connection with Chris-Craft, were also named as defendants. Brought under CERCLA, plaintiffs alleged with respect to Montrose, Chris-Craft, and the Zeneca Affiliates, in the first cause of action, that Montrose released hazardous substances, including DDT, into the environment in and around Los Angeles, California, including the waters surrounding the Palos Verdes Peninsula, the Los Angeles-Long Beach Harbor, and the Channel Islands. The first cause of action also alleged that Westinghouse (now CBS) released PCBs into the same waters. The complaint sought a declaration that defendants are jointly and severally liable for damages (in amounts not specified) resulting from injury to natural resources caused by the alleged releases, including loss of use and costs of restoration, plus plaintiffs' costs in assessing such damages. Montrose, Chris-Craft and the Zeneca Affiliates have counterclaimed against the United States and the State on the grounds that they are the former and current owners of the contaminated sediments and allowed the sediments to be used as a repository for industrial sewage. In the second cause of action, plaintiffs also sought to hold Montrose, Chris-Craft, and the Zeneca Affiliates jointly and severally liable for all costs incurred and to be incurred in connection with alleged hazardous substance contamination to soil and ground water at the site of Montrose's former plant in Torrance, California. Montrose and EPA are investigating the former plant site and evaluating potential response actions.
In July 1996, EPA issued two internal memoranda in which it concluded that ocean sediments on the Palos Verdes Shelf threaten human health and the environment, and stated its intention to undertake an Engineering Evaluation/Cost Analysis ("EE/CA") under CERCLA to identify appropriate interim response actions. EPA has said it may select such response actions by mid-1999. The actions under consideration include capping a portion of the contaminated sediments and/or instituting controls aimed at preventing contaminated fish from being caught and eaten. In August 1997, EPA initiated a formal rulemaking proceeding, which currently is ongoing, to add the area of sediments to EPA's National Priorities List of Contaminated Sites.
In March 1997, the plaintiffs lodged with the District Court an amended $45.7 million settlement with the Los Angeles County Sanitation District and a series of other local governmental entities that had been sued by Montrose, Chris-Craft and other defendants as third-party defendants (the "LACSD Defendants"), which purports to cover claims both for natural resource damages and also for response costs (which are asserted by EPA) relating to the Palos Verdes Shelf. In attempting to justify the settlement, plaintiffs have said they value their total natural resource damage and response cost claims with respect to the area of sediments at approximately $482 million. In December 1998, the plaintiffs lodged with the District Court a $9.5 million consent decree with CBS. The plaintiffs have not yet sought judicial approval of either the amended LACSD or the CBS consent decrees.
As to both causes of action, Chris-Craft contends that it is not liable and that it neither owned nor operated the facilities involved, nor did it arrange for the disposal of hazardous substances. Chris-Craft and its predecessors were shareholders of Montrose and provided certain management services to Montrose as it conducted its operations. Based on the available information, the status of the proceedings, and the applicable legal and accounting standards, Chris-Craft, in reliance on, among other things, the advice of counsel, believes that it should have no liability (under CERCLA or otherwise) for the operations of Montrose and does not presently consider liability to be "probable" in any of the Montrose-related cases. Accordingly, under Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies," no amount has been reserved in Chris-Craft's financial statements.
Since 1984, Montrose has been complying with a Consent Order entered into with the Nevada Department of Conservation and Natural Resources Division of Environmental Protection ("DEP") requiring operation of a ground water intercept treatment system near a production facility used by Montrose until 1985 in Henderson, Nevada. The EPA and DEP are currently reconsidering whether the complex that includes the Henderson facility should be included on the National Priority List. In April 1991, and again in February and June 1996, Montrose entered into additional consent orders with DEP and other parties requiring investigation of environmental conditions at the Henderson facility.
In September 1994, the EPA notified Chris-Craft that it had been designated as a "potentially responsible party" under CERCLA (a "PRP") in connection with the Diamond Alkali Superfund Site on the Passaic River in Newark, New Jersey. The EPA alleges that hazardous substances were released into the river from a facility operated by a predecessor company. The facility was located near the Diamond Alkali property, but not on the riverfront, and was sold by Chris-Craft in 1972. Chris-Craft disputes that it is a responsible party. At the request of the EPA, Maxus Energy Corp., the former owner of the Diamond Alkali property and a designated PRP at the site, is currently performing a feasibility study estimated to cost approximately $10 million to determine the extent of contamination in the area and to evaluate possible corrective actions. The Diamond Alkali Superfund Site matter does not involve Montrose, and based on the review to date by Chris-Craft and its counsel, they believe Chris-Craft has been erroneously identified as a PRP at the site; Chris-Craft is unable to determine at this stage if it could have any liability at the site.
If a court ultimately rejected Chris-Craft's defenses in one or more of the foregoing matters, under CERCLA Chris-Craft might be held jointly and severally liable, without regard to fault, for response costs and natural resource damages. A party's ultimate liability at a site generally depends on its involvement at the site, the nature and extent of contamination, the remedy selected, the role of other parties in creating the alleged contamination and the availability of contribution from those parties, as well as any insurance or indemnification agreements which may apply. In most cases, both the resolution of the complex issues involved and any necessary remediation expenditures occur over a number of years. Future legal and technical developments in each of the foregoing matters will be periodically reviewed to determine if an accrual of reserves would be appropriate.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT.
The executive officers of Chris-Craft, as of February 28, 1999, are as follows:
The principal occupation of each of the individuals for the past five years is stated in the foregoing table.
All officers hold office until the meeting of the Board following the next annual meeting of stockholders or until removed by the Board.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The information appearing in the Annual Report under the caption STOCK PRICE, DIVIDEND AND RELATED INFORMATION is incorporated herein by this reference.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
The information appearing in the Annual Report under the caption SELECTED FINANCIAL DATA is incorporated herein by this reference.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The information appearing in the Annual Report under the caption MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A") is incorporated herein by this reference.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The last two paragraphs before the subcaption RESULTS OF OPERATIONS - 1998 VERSUS 1997 in the MD&A are incorporated herein by this reference.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Consolidated Financial Statements, Notes thereto, Report of Independent Accountants thereon and Quarterly Financial Information (unaudited) appearing in the Annual Report are incorporated herein by this reference. Except as specifically set forth herein and elsewhere in this Form 10-K, no information appearing in the Annual Report is incorporated by reference into this report, nor is the Annual Report, deemed to be filed, as part of this report or otherwise, pursuant to the Securities Exchange Act of 1934.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information appearing in the Proxy Statement under the captions ELECTION OF DIRECTORS--Nominees of the Board of Directors and ELECTION OF DIRECTORS--Section 16(a) Beneficial Ownership Compliance is incorporated herein by this reference. Information relating to Chris-Craft's executive officers is set forth in Part I under the caption EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The information appearing in the Proxy Statement under the caption ELECTION OF DIRECTORS--Executive Compensation is incorporated herein by this reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information appearing in the Proxy Statement under the caption ELECTION OF DIRECTORS--Voting Securities of Certain Beneficial Owners and Management is incorporated herein by this reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information appearing in the Proxy Statement under the caption ELECTION OF DIRECTORS--Certain Relationships and Related Transactions is incorporated herein by this reference.
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. The financial statements and quarterly financial information incorporated by reference from the Annual Report pursuant to Item 8.
2. The financial statements of UPN and report thereon listed under the caption Schedules in the Index to Consolidated Financial Statements and Schedules.
3. Exhibits listed in the Exhibit Index, including compensatory plans or arrangements listed below:
-- Benefit Equalization Plan -- 1994 Management Incentive Plan -- 1994 Director Stock Option Plan -- Employment Agreement dated as of January 1, 1994 between Herbert J. Siegeland Chris-Craft. -- Employment Agreement dated as of January 1, 1994 between Evan C Thompson and Chris-Craft.
(b) No reports on Form 8-K were filed by the registrant during the last quarter of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 26, 1999
CHRIS-CRAFT INDUSTRIES, INC. (Registrant)
By: WILLIAM D. SIEGEL William D. Siegel Senior Vice President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Title Date
HERBERT J. SIEGEL March 26, 1999 Herbert J. Siegel Chairman, President and Director (principal executive officer)
WILLIAM D. SIEGEL March 26, 1999 William D. Siegel Senior Vice President and Director (principal financial officer)
JOELEN K. MERKEL March 26, 1999 Joelen K. Merkel Vice President and Treasurer (principal accounting officer)
EVAN C THOMPSON March 26, 1999 Evan C Thompson Executive Vice President and Director
HOWARD ARVEY March 26, 1999 Howard Arvey Director
LAWRENCE R. BARNETT March 26, 1999 Lawrence R. Barnett Director
JOHN C. BOGLE March 26, 1999 John C. Bogle Director
T. CHANDLER HARDWICK, III March 26, 1999 T. Chandler Hardwick, III Director
JEANE J. KIRKPATRICK March 26, 1999 Jeane J. Kirkpatrick Director
DAVID F. LINOWES March 26, 1999 David F. Linowes Director
NORMAN PERLMUTTER March 26, 1999 Norman Perlmutter Director
JAMES J. ROCHLIS March 26, 1999 James J. Rochlis Director
JOHN C. SIEGEL March 26, 1999 John C. Siegel Director
CHRIS-CRAFT INDUSTRIES, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income - For the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - For the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Shareholders' Investment - For the Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
SCHEDULES:
UPN Financial Statements --
Report of Independent Accountants
Balance Sheets - December 31, 1998 and 1997
Statements of Operations - For the Years Ended December 31, 1998, 1997 and 1996
Statements of Changes in Partners' Capital (Deficit) For the Years Ended December 31, 1998, 1997 and 1996
Statements of Cash Flows - For the Years Ended December 31, 1998, 1997 and 1996
Notes to Financial Statements
United Paramount Network (a partnership between BHC Network Partner, Inc., BHC Network Partner II, Inc., BHC Network Partner III, Inc., PCI Network Partner Inc. and PCI Network Partner II Inc.) Report and Financial Statements December 31, 1998, 1997 and 1996
Report of Independent Accountants
January 29, 1999
To the Partners of United Paramount Network
In our opinion, the accompanying balance sheets and the related statements of operations, of changes in partners' capital (deficit) and of cash flows present fairly, in all material respects, the financial position of United Paramount Network (a partnership between BHC Network Partner, Inc., BHC Network Partner II, Inc., BHC Network Partner III, Inc., PCI Network Partner Inc., and PCI Network Partner II Inc.) at December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. These financial statements are the responsibility of United Paramount Network's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with generally accepted auditing standards which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
UNITED PARAMOUNT NETWORK BALANCE SHEETS - --------------------------------------------------------------------- (in thousands) December 31, ---------------------- 1998 1997 Assets --------- --------- - ------ Current assets: Cash and cash equivalents $ 24,704 $ 23,622 Accounts receivable (net of allowance for doubtful accounts of $430 and $430, respectively) 18,787 39,287 Program rights and development costs (net of reserve for abandonment of $5,055 and $7,721, respectively) 46,893 16,596 Other current assets 2,550 512 --------- --------- Total current assets 92,934 80,017 --------- --------- Restricted investments 5,340 8,755 Property and equipment, at cost: Furniture, fixtures, computer equipment and other (net of accumulated depreciation of $1,454 and $901, respectively) 1,949 966 Intangible assets (net of accumulated amortization of $2,972 and $1,484, respectively) 4,194 5,682 Other assets 15,822 14,523 --------- --------- $ 120,239 $ 109,943 ========= =========
Liabilities and Partners' Capital (Deficit) - ------------------------------------------ Current liabilities: Accounts payable $ 11,654 $ 16,258 Accrued program costs 73,130 61,040 Accrued expenses and other liabilities 34,224 30,421 --------- --------- Total current liabilities 119,008 107,719 --------- --------- Commitments and contingencies (Note 7)
Partners' capital (deficit): BHC Network Partner (4,192) (4,179) BHC Network Partner II (4,072) (3,837) BHC Network Partner III 8,879 9,128 PCI Network Partner 492 890 PCI Network Partner II 124 222 --------- --------- Total partners' capital 1,231 2,224 --------- --------- $ 120,239 $ 109,943 ========= =========
The accompanying notes are an integral part of these financial statements.
UNITED PARAMOUNT NETWORK STATEMENTS OF OPERATIONS - ------------------------------------------------------------------- (in thousands) For the Year Ended December 31, ------------------------------ 1998 1997 1996 -------- -------- -------- Net revenues $ 96,401 $ 89,997 $ 56,948
Operating costs and expenses: Operating expenses 182,225 177,874 132,593 Selling, general and administrative expenses 90,871 82,294 67,359 Depreciation and amortization 2,069 1,794 364 -------- -------- -------- 275,165 261,962 200,316 -------- -------- -------- Operating loss (178,764) (171,965) (143,368) -------- -------- -------- Other income (expense): Interest expense to related parties - - (14,147) Interest and other income 1,571 1,736 193 Net income (loss) on investment in joint venture - 32 (3,138) -------- -------- -------- 1,571 1,768 (17,092) -------- -------- -------- Net loss ($177,193) ($170,197) ($160,460) ======== ======== ========
UNITED PARAMOUNT NETWORK STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (DEFICIT) - --------------------------------------------------------------------- (in thousands)
UNITED PARAMOUNT NETWORK STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------
(in thousands)
UNITED PARAMOUNT NETWORK NOTES TO FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 - -------------------------------------------------------------------
NOTE 1 - ORGANIZATION
In July 1994, BHC Network Partner, Inc. ("BHC/NP"), a then wholly owned subsidiary of Chris-Craft Industries, Inc.'s majority owned subsidiary, BHC Communications, Inc. ("BHC"), along with PCI Network Partner Inc. ("PCI/NP"), a wholly owned indirect subsidiary of Viacom Inc.'s Paramount Television Group ("Viacom"), formed the United Paramount Network ("UPN" or the "Network"), a broadcast television network.
UPN was organized as a partnership in December 1994 between BHC/NP and BHC Network Partner II, Inc. ("BHC/NP II"), a wholly owned indirect subsidiary of BHC. BHC Network Partner III, Inc. ("BHC/NP III"), a wholly owned indirect subsidiary of BHC, became a partner in 1996. On December 30, 1996, all advances from related parties and related accrued interest were converted to partnership equity. PCI/NP had an option to acquire an interest in UPN equal to that of BHC/NP, BHC/NP II, and BHC/NP III (collectively referred to as the "BHC Partners"). The option price included approximately one-half of the BHC Partners' aggregate cash contributions to UPN through the exercise date, plus interest, and additional cash available for ongoing UPN expenditures. On January 15, 1997, PCI/NP and PCI Network Partner II, Inc., a wholly owned indirect subsidiary of Viacom, (collectively referred to as the "PCI Partners") completed the exercise of the option in accordance with the terms of the option agreement and became equal partners with BHC Partners in UPN. In accordance with the option agreement, BHC Partners received distributions amounting to approximately $116 million.
UPN began providing programming for broadcast in January 1995. At December 31, 1998, 1997 and 1996, the Network had 185 affiliates in markets covering approximately 95%, 187 affiliates in markets covering approximately 97%, and 164 affiliates in markets covering over 92% of U.S. television households, respectively. The Network's revenues are derived primarily from providing television programming and are, therefore, subject to fluctuations in the advertising industry.
Operating costs of the Network have been funded through capital contributions and loans made by BHC Partners and PCI Partners (collectively known as "Partners") and the sale of advertising. Profits or losses are allocated between the Partners in accordance with the partnership agreement. UPN is still in its development and the cost of developing and expanding its programming is expected to remain significant for several years. The Partners intend to continue funding UPN as UPN incurs obligations arising through the normal course of its business.
NOTE 2 - ACCOUNTING POLICIES
Financial Instruments ---------------------
Cash equivalents are securities having maturities at time of purchase not exceeding three months.
Program Rights and Development Costs ------------------------------------
Network programming rights and related liabilities are recorded at the contractual amounts when the programming becomes available for telecasting. Program costs are recorded at the lower of cost or net realizable value. Capitalized program costs are amortized over the estimated number of showings, using accelerated methods based on management's estimate of the flow of revenues. Management assesses the net realizable value of program rights on a day-part basis. The estimated costs of recorded program rights to be charged to income within one year are included in current assets; payments on such program rights due within one year are included in current liabilities.
Costs incurred for the development of programs are capitalized and included in the accompanying balance sheets, net of reserves established for projects which may be terminated prior to being placed into production.
Restricted Investments ----------------------
Restricted investments consist of cash and marketable securities placed in an account as a security deposit and as collateral for a loan to a third party. The restricted investments are not available for current operations of the Network and, therefore, have been classified as non-current in the accompanying balance sheets. In accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," marketable securities have been classified as held-to-maturity and are therefore carried at amortized cost.
Property and Equipment ----------------------
Property and equipment is recorded at cost. Depreciation of furniture, fixtures and computer equipment is computed on the straight-line method over the estimated useful lives of the assets which range from three to five years. Amortization of leasehold improvements is computed on a straight-line basis over the life of the lease.
Intangible Assets -----------------
Intangible assets represent primarily the costs incurred by PCI Partners during the start up phase of the Network and contributed to the partnership as a result of the acquisition by PCI Partners of an interest in the partnership (Note 1). Also included in intangible assets are costs associated with logo design and development. The assets have been amortized on a straight-line basis over five years. See New Accounting Pronouncements for information relating to the future treatment of these costs.
Other Assets ------------
Other assets represent primarily an investment in a joint venture with Saban Entertainment and deferred network costs. The joint venture was entered into for the purpose of developing, producing, and distributing children's television programming. Under terms of the joint venture agreement, UPN funded certain programming costs in return for certain distribution rights to such programming and a share of aggregate revenue. UPN accounts for its interest in the joint venture using the equity method. Network costs are amortized over the same period as the related agreements.
Revenue Recognition -------------------
Revenues are recognized as advertisements are aired, at contractual rates.
Use of Estimates in Preparation of Financial Statements -------------------------------------------------------
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Income Taxes ------------
As a general partnership, the Network's losses are allocated to, and reported by, the individual Partners. Therefore, no income tax benefit is included in the accompanying financial statements.
New Accounting Pronouncements -----------------------------
In April 1998, the American Institute of Certified Public Accountants Accounting Standards Executive Committee issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up Activities". This SOP provides guidance on the financial reporting of start-up costs and organization costs. It requires costs of start-up activities and organization costs to be expensed as incurred. Initial application of this SOP will be reported as a cumulative change in accounting principles, as described in Accounting Principles Board Opinion No. 20, "Accounting Changes". The SOP is effective for the Network for the year ending December 31, 1999. The Network will adopt the SOP during the first quarter of 1999. Adoption of this SOP will require the Network to write-off unamortized start-up costs of $4,194,000 as of December 31, 1998, incurred by PCI Partners during the start-up phase of the Network and contributed to the Network.
NOTE 3 - OTHER ASSETS
At December 31, 1998 and 1997, other assets are comprised of deferred network costs of $13,291,000 and $12,000,000, respectively, and investment in joint venture of $2,531,000 and $2,523,000, respectively. The investment in joint venture is presented net of reserves of $2,119,000 at December 31, 1998 and 1997.
NOTE 4 - ACCRUED EXPENSES AND OTHER LIABILITIES
Accrued expenses and other liabilities consist of the following:
(in thousands) December 31, ---------------------- 1998 1997 --------- --------- Accrued advertising and marketing costs $ 24,123 $ 19,907 Accrued compensation 5,135 4,917 Other accrued expenses 4,966 5,597 --------- --------- $ 34,224 $ 30,421 ========= =========
NOTE 5 - RELATED PARTY TRANSACTIONS
Prior to September 1997, advertising time was sold through Premier Advertising Sales ("Premier") a wholly owned subsidiary of Paramount Communications, Inc., which is a subsidiary of Viacom Inc. (Note 1). Net revenues for sales made by Premier totaled $43,019,000 in 1997 and at December 31, 1997, the Network had an accounts receivable balance with Premier of $1,825,000. In September 1997, the Network established its own sales force which sells advertising time for broadcast on UPN programs.
During the normal course of business, the Network enters into various contracts to purchase programming from related parties. In 1998 and 1997, additions to capitalized programming costs from related parties totaled $120,335,000 and $71,663,000, respectively.
Prior to September 1997, with respect to certain of its programming provided by Viacom, UPN derived no revenue and incurred no programming expense.
During the normal course of business, various services are provided to the Network by related parties. In 1998 and 1997, payments for these services totaled approximately $3,240,000 and $2,404,000, respectively.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
During 1995, UPN entered into a five year lease obligation for its office space with an option to extend for an additional period of five years. The lease calls for certain penalty payments upon cancellation after three years. Rental expense was $802,000, $766,000 and $766,000 for the years ended December 31, 1998, 1997 and 1996, respectively.
During 1998, UPN entered into a nine year and ten month lease obligation for its New York office space with an option to extend for an additional period of five years. The lease is noncancelable for six years and three months and calls for a cancellation fee if the early cancellation clause is utilized. Rental expense was $354,000 for the year ended December 31, 1998. Additionally, as required by the lease agreement, UPN obtained an irrevocable letter of credit in the amount of $1,200,000 on behalf of the lessor.
As of December 31, 1998 the future minimum rental payments under operating leases are as follows:
1999 $1,164,000 2000 839,000 2001 403,000 2002 403,000 2003 435,000 Thereafter 1,912,000 ---------- Total $5,156,000 ==========
As of December 31, 1998, the Network had entered into various network related agreements and contracts for programming which was not currently available for telecasting. The aggregate amounts of the payments required under these agreements totaled approximately $121,556,000 and $168,807,000 at December 31, 1998 and 1997, respectively.
In the normal course of business, the Network is at times subject to pending and threatened legal actions. In management's opinion, any liabilities or benefits resulting from these matters will not have a material effect on the financial position or results of operations of the Network.
EXHIBIT INDEX
Incorporated by Reference to: Exhibit No. Exhibit - --------------- ----------- --------
Exhibit 3(A) [1] 3.1 Restated Certificate of Incorporation
Exhibit 3(B) [1] 3.2 By-Laws
Exhibit 11(H) [2] 10.1 Benefit Equalization Plan of registrant
Exhibit 10(B)(1) [5] 10.2 Amendment No. 1 thereto
Exhibit 10.3 [9] 10.3 Amendment No. 2 thereto
Exhibit 10(B) [7] 10.4 Employment Agreement dated January 1, 1994 between registrant and Herbert J. Siegel
Exhibit 10(C) [7] 10.5 Split-Dollar Agreement dated January 6, 1994 between registrant and William D. Siegel
Exhibit 10(D) [7] 10.6 Split-Dollar Agreement dated January 6, 1994 between registrant and John C. Siegel
Exhibit 10(E) [3] 10.7 Form of Agreement under Executive Deferred Income Plan of registrant
Exhibit 10(F) [7] 10.8 Employment Agreement dated January 1, 1994 between registrant and Evan C Thompson
Exhibit 10(c) [4] 10.9 Management Agreement between the registrant and BHC dated July 21,
Exhibit 19 [6] 10.10 Amendment No. 1 thereto dated October 31, 1991
Exhibit 10(H)(2) [7] 10.11 Amendment No.2 thereto dated March 24, 1994
Exhibit A to registrant's proxy statement dated March 25, 1994 (File No.1-2999) 10.12 1994 Management Incentive Plan
Exhibit B to registrant's proxy statement dated March 25, 1994 (File No. 1-2999) 10.13 1994 Director Stock Option Plan
Exhibit 10.10 [8] 10.14 Option Agreement dated July 19, 1994 between BHC Network Partner, Inc. and PCI Network Partner, Inc.
* 13 Portions of the Annual Report incorporated by reference
* 21 Subsidiaries of the registrant
* 23 Consent of PricewaterhouseCoopers LLP
* 27 Financial Data Schedule
- -------------------------
* Filed herewith.
[1] Registrant's Annual Report on Form 10-K for the year ended December 31, 1986.
[2] Registrant's Registration Statement on Form S-1 (Regis. No. 2-65906).
[3] Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1983.
[4] BHC's Registration Statement on Form S-1 (Regis. No. 33-31091).
[5] Registrant's Annual Report on Form 10-K for the year ended December 31, 1989.
[6] Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1991.
[7] Registrant's Annual Report on Form 10-K for the year ended December 31, 1993.
[8] BHC's Annual Report on Form 10-K for the year ended December 31, 1994.
[9] Registrant's Annual Report on Form 10-K for the year ended December 31, 1994.