-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SISttsB0Qv1LC4ZP3+dtj7MysN6Ow5aLD92aKHZbgNnWZQDu+XFT/t0fYkYnDXzI paFGaSJWhREIpDfjlSLGEw== 0000895759-99-000011.txt : 19990330 0000895759-99-000011.hdr.sgml : 19990330 ACCESSION NUMBER: 0000895759-99-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990329 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHRIS CRAFT INDUSTRIES INC CENTRAL INDEX KEY: 0000020067 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 941461226 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-02999 FILM NUMBER: 99575733 BUSINESS ADDRESS: STREET 1: 767 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10153 BUSINESS PHONE: 2124074898 MAIL ADDRESS: STREET 1: 5355 TOWN CENTER ROAD STREET 2: SUITE 200 CITY: BOCA RATON STATE: FL ZIP: 33486 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL AUTOMOTIVE FIBRES INC DATE OF NAME CHANGE: 19681112 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------------- FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission file number 1-2999 CHRIS-CRAFT INDUSTRIES, INC. (Exact name of registrant as specified in its charter) Delaware 94-1461226 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 767 Fifth Avenue New York, New York 10153 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (212) 421-0200 Securities registered pursuant to Section 12(b) of the Act: Name of each Exchange Title of each class on which registered Prior Preferred Stock New York Stock Exchange $1.00 cumulative dividend Pacific Exchange Convertible Preferred Stock New York Stock Exchange $1.40 cumulative dividend Pacific Exchange Common Stock, $.50 par value New York Stock Exchange Pacific Exchange Securities registered pursuant to Section 12(g) of the Act: Class B Common Stock, $.50 par value (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes[x] No[ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] 2 The aggregate market value of the voting stock held by non-affiliates of the registrant, as of February 28, 1999, was approximately $1,175,000,000. As of February 28, 1999, there were 24,520,262 shares of the registrant's Common Stock and 8,097,684 shares of the registrant's Class B Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE The documents incorporated by reference into this Form 10-K and the Parts hereof into which such documents are incorporated are listed below: Document Part Those portions of the registrant's annual report to stockholders for the fiscal year ended December 31, 1998 (the "Annual Report") that are specifically identified herein as incorporated by reference into this Form 10-K. I, II Those portions of the registrant's proxy statement for the registrant's 1999 Annual Meeting (the "Proxy Statement") that are specifically identified herein as incorporated by reference into this Form 10-K. III 3 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: 4
Total DMA DMA Commercial Cable Network TV Stations TV Station and Affiliation/ House- DMA Operating in Penetra- Location(a) Channel holds(b) Rank (b) Market (c) tion(d) - ----------- ------------ -------- -------- ------------ ------- WWOR (e) UPN 9 6,812,540 1st 6VHF 73% Secaucus 14UHF KCOP UPN 13 5,135,140 2nd 7VHF 63% Los Angeles 10UHF KPTV UPN 12 993,540 23rd 4VHF 62% Portland 2UHF KMSP UPN 9 1,457,130 15th 4VHF 52% Minneapolis/ 3UHF St. Paul KTVX ABC 4 707,070 36th 4VHF 54% Salt Lake 2UHF City KMOL NBC 4 667,750 37th 3VHF 65% San Antonio 3UHF KBHK UPN 44 2,368,970 5th 4VHF 71% San Francisco 10UHF KUTP UPN 45 1,343,090 17th 4VHF 58% Phoenix 4UHF WUTB UPN 24 991,610 24th 3VHF 67% Baltimore 3UHF - ------------ (a) KCOP and KPTV are owned by CCTV; WWOR is owned by Pinelands; the remaining stations are owned by UTV. In October 1997, UTV agreed to purchase the assets of UHF television station WRBW in Orlando, Florida, for $60,000,000 and possible future consideration. The acquisition is subject to approval by the Federal Communications Commission ("FCC") and other conditions. (b) Designated Market Area ("DMA") is an exclusive geographic area consisting of all counties in which the home-market commercial stations received a preponderance of total viewing hours. The ranking shown is the nationwide rank, in terms of television households in DMA, of the market served by the station. Source: Nielsen Media Research television households universe estimates. (c) Additional channels have been allocated by the FCC for activation as commercial television stations in certain of these markets. Also, additional stations may be located within the respective DMAs of BHC stations but outside the greater metropolitan television markets in which BHC stations operate. (d) Cable penetration refers to the percentage of DMA television viewing households receiving cable television service, as estimated by Nielsen Media Research. (e) WWOR UPN 9 broadcasts across a tri-state area including the entire New York City metropolitan area.
5 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 6 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. 7 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 8 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 9 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 10 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. 11 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 12 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. 13 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. 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.
Factory and Office Space (Square Site Plant Location Principal Product Feet) (Acres) - -------------- ----------------- ------------- ------- Gary, Indiana Plastic flexible films and water-soluble hospital bags 48,000 5 Northbrook, Illinois Health care products 5,166 -- South Holland, Illinois Warehouse for healthcare products distribution 33,000 -- ------------------
15 Chris-Craft believes its properties are adequate for their present uses. 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. 16 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. 17 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:
Has served Positions with Chris-Craft and as officer Name age as of February 28, 1999 since - ---- ------------------------------ --------- Herbert J. Siegel Chairman of the Board and President; 70 1968 Evan C Thompson Executive Vice President and President, 1982 Television Division; 56 John C. Siegel Senior Vice President; 46 1985 William D. Siegel Senior Vice President; 44 1985 Joelen K. Merkel Vice President and Treasurer; 47 1980 Brian C. Kelly Vice President and General Counsel and Secretary; 47 1992
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. 18 PART II 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. SELECTED FINANCIAL DATA. The information appearing in the Annual Report under the caption SELECTED FINANCIAL DATA is incorporated herein by this reference. 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. 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. 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. Not applicable. 19 PART III 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. 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. 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. 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. 20 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. 21 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 22 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 23 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)
BHC BHC BHC PCI PCI Network Network Network Network Network Partner Partner II Partner III Partner Partner II Total --------- ---------- ----------- --------- ---------- ---------- Balance at December 31, 1995 $ (8,942) $ (98,872) $ - $ - $ - $ (107,814) Capital contributions - - 20,000 - - 20,000 Conversion of debt to equity 8,398 164,101 63,016 - - 235,515 Conversion of accrued interest to equity 12 9,500 4,641 - - 14,153 Allocation of 1996 net loss (3,640) (78,432) (78,388) - - (160,460) --------- ---------- ----------- --------- ---------- ---------- Balance at December 31, 1996 (4,172) (3,703) 9,269 - - 1,394 Exercise of option by PCI Partners - - - 155,014 38,754 193,768 Allocation of option exercise 3,881 73,731 77,612 (124,178) (31,046) - Distribution to partners (2,907) (55,224) (58,130) - - (116,261) Capital contributions 1,205 22,888 24,092 36,268 9,067 93,520 Allocation of 1997 net loss (2,186) (41,529) (43,715) (66,214) (16,553) (170,197) --------- ---------- ----------- --------- ---------- ---------- Balance at December 31, 1997 (4,179) (3,837) 9,128 890 222 2,224 Capital contributions 2,202 41,848 44,050 70,480 17,620 176,200 Allocation of 1998 net loss (2,215) (42,083) (44,299) (70,878) (17,718) (177,193) --------- ---------- ----------- --------- ---------- ---------- Balance at December 31, 1998 $ (4,192) $ (4,072) $ 8,879 $ 492 $ 124 $ 1,231 ========= ========= =========== ========= ========= ==========
UNITED PARAMOUNT NETWORK STATEMENTS OF CASH FLOWS - ------------------------------------------------------------------ (in thousands)
For the Year Ended December 31, ----------------------------------- 1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net loss $(177,193) $(170,197) $(160,460) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of program costs 177,771 169,771 126,793 Payments for programming (195,580) (118,912) (121,822) Depreciation and amortization 2,069 1,794 364 Abandonment reserve (2,666) 2,108 982 Changes in assets and liabilities: (Increase) decrease in accounts receivable 20,500 (14,230) (16,017) Increase in accounts payable, accrued expenses and other current liabilities 1,468 8,470 25,116 (Increase) decrease in other assets (3,329) (12,110) 207 --------- --------- --------- Net cash used in operating activities (176,960) (133,306) (144,837) --------- --------- --------- Cash flows from investing activities: Additions to property and equipment (1,565) (467) - Cash removed from (placed in) restricted account 3,415 (7,598) (183) Net investment in joint venture (8) 304 (77) --------- --------- --------- Net cash used in investing activities 1,842 (7,761) (260) --------- --------- --------- Cash flows from financing activities: Advances from related party - - 125,580 Exercise of option by PCI Partners - 186,873 - Capital contributions 176,200 93,520 20,000 Distributions to partners - (116,261) - --------- --------- --------- Net cash provided by financing activities 176,200 164,132 145,580 --------- --------- --------- Net increase in cash and cash equivalents 1,082 23,065 483 Cash and cash equivalents: Beginning of year 23,622 557 74 --------- --------- --------- End of year $ 24,704 $ 23,622 $ 557 ========= ========= ========= Supplemental schedule of non-cash items: Non-cash additions to program costs $ 9,822 $ 51,748 $ 10,875 ========= ========= ========= Start-up costs incurred by PCI Partners and contributed to the partnership $ - $ 6,895 $ - ========= ========= ========= Advances from related party converted to equity $ - $ - $ 235,515 ========= ========= ========= Accrued interest converted to equity $ - $ - $ 14,153 ========= ========= ========= The accompanying notes are an integral part of these financial statements.
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, 1989 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. EX-13 2 STOCK PRICE, DIVIDEND AND RELATED INFORMATION - --------------------------------------------- Chris-Craft common stock is traded on the New York Stock Exchange and the Pacific Exchange. The high and low sales prices reported in the consolidated transaction reporting system are shown below for the periods indicated. Since Chris-Craft Class B common stock is ordinarily nontransferable, there is no trading market for such class. 1998 1997 High Low High Low -------------------------------------- First Quarter 59 3/8 49 1/8 44 3/4 39 3/8 Second Quarter 60 3/8 51 1/4 50 38 3/4 Third Quarter 56 15/16 41 1/4 52 15/16 47 3/4 Fourth Quarter 49 39 7/8 55 48 1/16 Chris-Craft paid 3% stock dividends on its common stock in April 1998 and April 1997. Chris-Craft has declared a 3% stock dividend payable in April 1999. The Board of Directors plans to continue to consider, on an annual basis, the payment of dividends in common stock. As of February 26, 1999, there were 2,511 holders of record of common stock and 1,578 holders of record of Class B common stock. REPORT OF INDEPENDENT ACCOUNTANTS PricewaterhouseCoopers LLP February 10, 1999 1301 Avenue of the Americas New York, New York 10019 To the Board of Directors and Shareholders of Chris-Craft Industries, Inc. In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, shareholders' investment and cash flows present fairly, in all material respects, the financial position of Chris-Craft Industries, Inc. and its subsidiaries at December 31, 1998 and 1997, and the results of their operations and their 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 the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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. /s/ PricewaterhouseCoopers LLP CONSOLIDATED STATEMENTS OF CASH FLOWS - ---------------------------------------------------------------------- Year ended December 31, (In thousands of dollars) 1998 1997 1996 - ---------------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 29,470 $ 93,501 $ 812 Adjustments to reconcile net income to net cash provided from operating activities: Film contract amortization 88,507 95,244 95,291 Film contract payments (100,824) (99,513) (90,802) Prepaid broadcast rights - 21,114 5,252 Depreciation and other amortization 22,088 19,568 19,787 Equity in United Paramount Network loss 88,597 87,430 146,313 Gain on change of ownership in United Paramount Network - (153,933) - Minority interest 24,440 49,483 18,522 Other (2,830) 4,965 (1,488) Changes in assets and liabilities: Accounts receivable 1,090 1,463 2,158 Other assets 7,271 (7,816) (259) Accounts payable and other liabilities 1,198 14,921 3,891 Income taxes 8,900 21,004 (6,355) - ----------------------------------------------------------------------------- Net cash provided from operating activities 167,907 147,431 193,122 - ----------------------------------------------------------------------------- Cash Flows from Investing Activities: Disposition of marketable securities 414,133 1,002,103 1,089,124 Purchase of marketable securities (391,963) (948,862) (899,924) Station acquisition (includes $77,646 of intangible assets) (80,214) - - Distribution from United Paramount Network - 116,261 - Investment in United Paramount Network (88,100) (48,185) (145,580) Other investments (22,153) (4,631) (40,423) Capital expenditures, net (12,260) (7,788) (10,472) Other (1,852) (4,042) (1,585) - ----------------------------------------------------------------------------- Net cash (used in) provided from investing activities (182,409) 104,856 (8,860) - ----------------------------------------------------------------------------- Cash Flows from Financing Activities: Capital transactions of subsidiaries (56,408) (101,756) (93,437) Purchase of treasury stock (20,171) (22,449) (17,897) Proceeds from exercise of employee stock options 5,783 14,664 1,359 Dividends on preferred stock (414) (420) (444) - ----------------------------------------------------------------------------- Net cash used in financing activities (71,210) (109,961) (110,419) - ----------------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (85,712) 142,326 73,843 Cash and Cash Equivalents at Beginning of Year 290,009 147,683 73,840 - ----------------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 204,297 $ 290,009 $ 147,683 ============================================================================= The accompanying notes to consolidated financial statements are an integral part of these statements. CONSOLIDATED STATEMENTS OF INCOME - ------------------------------------------------------------------------ Year ended December 31, (In thousands except per share data) 1998 1997 1996 - ------------------------------------------------------------------------ Operating Revenues: Television revenues $ 445,850 $ 443,499 $ 446,292 Sales of manufactured products 21,243 21,147 19,403 - ------------------------------------------------------------------------ 467,093 464,646 465,695 - ------------------------------------------------------------------------ Operating Expenses: Television expenses 210,947 212,183 217,928 Cost of manufactured products sold 13,754 14,336 13,472 Selling, general and administrative 147,722 142,602 131,027 - ------------------------------------------------------------------------ 372,423 369,121 362,427 - ------------------------------------------------------------------------ Operating income 94,670 95,525 103,268 - ------------------------------------------------------------------------ Other Income (Expense): Interest and other income, net 80,337 80,556 81,879 Equity in United Paramount Network loss (88,597) (87,430) (146,313) Gain on change of ownership in United Paramount Network - 153,933 - - ------------------------------------------------------------------------ (8,260) 147,059 (64,434) - ------------------------------------------------------------------------ Income before provision for income taxes and minority interest 86,410 242,584 38,834 Provision for Income Taxes 32,500 99,600 19,500 - ------------------------------------------------------------------------ Income before minority interest 53,910 142,984 19,334 Minority Interest 24,440 49,483 18,522 - ------------------------------------------------------------------------ Net income $ 29,470 $ 93,501 $ 812 ======================================================================== Weighted Average Common Shares Outstanding 33,539 33,429 32,949 ======================================================================== Earnings per Share: Basic $ .87 $ 2.78 $ .01 ======================================================================== Diluted $ .69 $ 2.20 $ .01 ======================================================================== The accompanying notes to consolidated financial statements are an integral part of these statements. CONSOLIDATED BALANCE SHEETS - ------------------------------------------------------------------------- December 31, (In thousands of dollars) 1998 1997 - ------------------------------------------------------------------------- Assets Current Assets: Cash and cash equivalents $ 204,297 $ 290,009 Marketable securities (substantially all U.S. Government securities) 1,211,246 1,211,920 Accounts receivable, less allowance for doubtful accounts of $4,956 and $5,736 88,382 89,472 Film contract rights 99,883 95,859 Prepaid expenses and other current assets 52,933 62,254 - ------------------------------------------------------------------------- Total current assets 1,656,741 1,749,514 - ------------------------------------------------------------------------- Investments 69,881 50,130 - ------------------------------------------------------------------------- Film Contract Rights, including deposits, less estimated portion to be used within one year 23,619 26,118 - ------------------------------------------------------------------------- Property and Equipment, at cost: Land, buildings and improvements 44,305 43,207 Machinery and equipment 115,314 106,209 - ------------------------------------------------------------------------- 159,619 149,416 Less Accumulated depreciation 108,040 102,014 - ------------------------------------------------------------------------- 51,579 47,402 - ------------------------------------------------------------------------- Intangible Assets 428,254 339,792 Other Assets 15,349 13,473 - ------------------------------------------------------------------------- $ 2,245,423 $ 2,226,429 ========================================================================= December 31, (In thousands of dollars) 1998 1997 - ------------------------------------------------------------------------- Liabilities and Shareholders' Investment Current Liabilities: Film contracts payable within one year $ 96,595 $ 98,033 Accounts payable and accrued expenses 130,515 131,869 Income taxes payable 41,653 33,056 - ------------------------------------------------------------------------ Total current liabilities 268,763 262,958 - ------------------------------------------------------------------------ Film Contracts Payable after One Year 62,050 70,934 - ------------------------------------------------------------------------ Other Long-Term Liabilities 26,321 25,089 - ------------------------------------------------------------------------ Minority Interest 479,820 484,268 - ------------------------------------------------------------------------ Commitments and Contingencies (Note 9) Shareholders' Investment: Cumulative preferred stock - Prior preferred stock - $1.00 dividend; stated at liquidating value of $21.50 per share; currently authorized 73,399 shares; outstanding 73,399 shares 1,578 1,578 Convertible preferred stock - $1.40 dividend; stated at $17.50 per share; currently authorized 235,935 shares; outstanding 235,935 and 246,601 shares (liquidating value $23.00 per share, aggregating $5,427) 4,129 4,315 Class B common stock par value $.50 per share; currently authorized 50,000,000 shares; outstanding 8,127,937 and 7,930,384 shares 4,064 3,965 Common stock - par value $.50 per share; currently authorized 100,000,000 shares; outstanding 24,556,196 and 23,652,015 shares 13,069 12,617 Capital surplus 376,375 343,956 Retained earnings 993,184 1,010,384 Accumulated other comprehensive income 16,070 6,365 - ------------------------------------------------------------------------ 1,408,469 1,383,180 - ------------------------------------------------------------------------ $ 2,245,423 $ 2,226,429 ======================================================================== The accompanying notes to consolidated financial statements are an integral part of these statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
Treasury Outstanding Shares Shares ----------------------------------------- --------- Class B $1.00 $1.40 Common Common Preferred Preferred Common - ------------------------------------------------------------------------------------ Balance at December 31, 1995 21,478,079 7,652,273 73,399 275,758 - Comprehensive income: Net income - - - - - Other comprehensive loss: Unrealized net loss on securities (net of tax of $2,895) - - - - - Reclassification adjustment (net of tax of $1,504) - - - - - Other comprehensive loss, net of tax - - - - - Total comprehensive loss - - - - - Capital transactions of subsidiaries - - - - - Dividends on preferred stock - - - - - Common stock dividend - 3% 645,915 227,205 - - - Conversion of preferred stock 306,970 412,734 - (22,563) - Conversion of Class B common stock 421,405 (421,405) - - - Stock options, including related tax benefits 53,940 - - - - Acquisition of treasury stock - - - - (433,900) Retirement of treasury stock (433,900) - - - 433,900 - ------------------------------------------------------------------------------------ Balance at December 31, 1996 22,472,409 7,870,807 73,399 253,195 - Comprehensive income: Net income - - - - - Other comprehensive income: Unrealized net gain on securities (net of tax of $4,668) - - - - - Reclassification adjustment (net of tax of $397) - - - - - Other comprehensive income, net of tax - - - - - Total comprehensive income - - - - - Capital transactions of subsidiaries - - - - - Dividends on preferred stock - - - - - Common stock dividend - 3% 676,458 238,283 - - - Conversion of preferred stock 103,482 108,335 - (6,594) - Conversion of Class B common stock 287,041 (287,041) - - - Stock options, including related tax benefits 599,125 - - - - Acquisition of treasury stock - - - - (486,500) Retirement of treasury stock (486,500) - - - 486,500 - ------------------------------------------------------------------------------------ Balance at December 31, 1997 23,652,015 7,930,384 73,399 246,601 - Comprehensive income: Net income - - - - - Other comprehensive income: Unrealized net gain on securities (net of tax of $8,954) - - - - - Reclassification adjustment (net of tax of $1,887) - - - - - Other comprehensive income, net of tax - - - - - Total comprehensive income - - - - - Capital transactions of subsidiaries - - - - - Dividends on preferred stock - - - - - Common stock dividend - 3% 708,435 237,302 - - - Conversion of preferred stock 151,109 209,566 - (10,666) - Conversion of Class B common stock 249,315 (249,315) - - - Stock options, including related tax benefits 190,722 - - - - Acquisition of treasury stock - - - - (395,400) Retirement of treasury stock (395,400) - - - 395,400 - ------------------------------------------------------------------------------------ Balance at December 31, 1998 24,556,196 8,127,937 73,399 235,935 - ====================================================================================
Dollar Amount (In thousands) -------------------------------------------------------------------------------- Accumulated Compre- Other hensive Common Preferred Capital Retained Treasury Comprehensive Income Stocks Stocks Surplus Earnings Stock Income (Loss) - -------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1995 $15,356 $6,404 $301,351 $989,181 $ - $ 6,728 Comprehensive loss: Net Income - - - 812 - - $ 812 -------- Other comprehensive loss: Unrealized net loss on securities (net of tax of $2,895) - - - - - - (3,234) Reclassification adjustment (net of tax of $1,504) - - - - - - (2,218) -------- Other comprehensive loss, net of tax - - - - - (5,452) (5,452) -------- Total comprehensive loss - - - - - - $(4,640) ======== Capital transactions of subsidiaries - - (8,840) - - - Dividends on preferred stock - - - (444) - - Common stock dividend-3% 436 - 35,065 (35,501) - - Conversion of preferred stock 360 (395) 34 - - - Conversion of Class B common stock - - - - - - Stock options, including related tax benefits 27 - 1,602 - - - Acquisition of treasury stock - - - - (17,806) - Retirement of treasury stock (217) - (17,589) - 17,806 - - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 1996 15,962 6,009 311,623 954,048 1,276 Comprehensive income: Net income - - - 93,501 - - $93,501 -------- Other comprehensive income: Unrealized net gain on securities (net of tax of $4,668) - - - - - - 5,537 Reclassification adjustment (net of tax of $397) - - - - - - (448) -------- Other comprehensive income, net of tax - - - - - 5,089 5,089 -------- Total comprehensive income - - - - - - $98,590 ======== Capital transactions of subsidiaries - - 714 - - - Dividends on preferred stock - - - (420) - - Common stock dividend-3% 457 - 36,288 (36,745) - - Conversion of preferred stock 106 (116) 8 - - - Conversion of Class B common stock - - - - - - Stock options, including related tax benefits 300 - 17,976 - - - Acquisition of treasury stock - - - - (22,896) - Retirement of treasury stock (243) - (22,653) - 22,896 - - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 1997 16,582 5,893 343,956 1,010,384 - 6,365 Comprehensive income: Net income - - - 29,470 - - $29,470 -------- Other comprehensive income: Unrealized net gain on securities (net of tax of $8,954) - - - - - - 12,199 Reclassification adjustment (net of tax of $1,887) - - - - - - (2,494) -------- Other comprehensive income, net of tax - - - - - 9,705 9,705 -------- Total comprehensive income - - - - - - $39,175 ======== Capital transactions of subsidiaries - - (924) - - - Dividends on preferred stock - - - (414) - - Common stock dividend-3% 473 - 45,783 (46,256) - - Conversion of preferred stock 180 (186) 6 - - - Conversion of Class B common stock - - - - - - Stock options, including related tax benefits 96 - 6,877 - - - Acquisition of treasury stock - - - - (19,521) - Retirement of treasury stock (198) - (19,323) - 19,521 - - ----------------------------------------------------------------------------------------------------------- Balance at December 31, 1998 $17,133 $5,707 $376,375 $993,184 $ - $16,070 ===========================================================================================================
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ----------------------------------------------------------------- Note 1 - ----------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (A) Business and Basis of Presentation Chris-Craft's primary business is television broadcasting, conducted through its majority owned (79.96% at December 31, 1998 and 78.6% at December 31, 1997) television broadcasting subsidiary, BHC Communications, Inc. BHC wholly owned subsidiaries operate three television stations, and BHC's majority owned (58.5% at December 31, 1998 and December 31, 1997) subsidiary, United Television, Inc. (UTV), operates six television stations, one of which was acquired in January 1998. BHC accounts for its interest in the partnership that operates the United Paramount Network (UPN), a broadcast television network which premiered in January 1995, under the equity method. BHC recorded 100% of UPN's start-up losses from the network's 1994 inception through January 15, 1997, when Viacom Inc. completed its acquisition of a 50% interest in the partnership. Thereafter, BHC has recorded 50% of UPN's start-up losses. The accompanying consolidated financial statements include the accounts of Chris-Craft and its subsidiaries, after elimination of all significant intercompany accounts and transactions. The pro rata interests of BHC and UTV minority shareholders in the net income and net assets of BHC and UTV are set forth as Minority Interest in the Consolidated Statements of Income and Consolidated Balance Sheets, respectively. Chris-Craft adopted Statement of Financial Accounting Standards (SFAS) 130, "Reporting Comprehensive Income," in 1998 and has elected to present this information in the Consolidated Statements of Shareholders' Investment. Such amounts have been presented net of income taxes and minority interests. Preparation of financial statements in accordance with generally accepted accounting principles requires the use of management estimates. Certain prior year amounts have been restated to conform with the 1998 presentation. (B) Financial Instruments Cash and cash equivalents totalled $204,297,000 at December 31, 1998 and $290,009,000 at December 31, 1997. Cash equivalents are securities having maturities at time of purchase not exceeding three months. The fair value of cash equivalents approximates carrying value, reflecting their short maturities. All of Chris-Craft's marketable securities have been categorized as available for sale and are carried at fair market value. Since marketable securities are available for current operations, all are included in current assets, as follows: Gross Unrealized ---------------------------------- (In thousands) Fair Cost Gains Losses Value - ----------------------------------------------------------------- December 31, 1998: U.S. Government securities $1,093,744 $ 1,656 $ 27 $1,095,373 Other 83,881 33,034 1,042 115,873 - -------------------------------------------------------------------- $1,177,625 $ 34,690 $ 1,069 $1,211,246 ==================================================================== December 31, 1997: U.S. Government securities $1,097,346 $ 619 $ 182 $1,097,783 Other 100,794 17,008 3,665 114,137 - -------------------------------------------------------------------- $1,198,140 $ 17,627 $ 3,847 $1,211,920 ==================================================================== Of the U.S. Government securities held at December 31, 1998, 98% mature within one year and all within 15 months. Certain additional information related to Chris-Craft's marketable securities as of and for the years ended December 31, 1998, 1997 and 1996 is as follows: (In thousands) 1998 1997 1996 - ----------------------------------------------------------------- Sales proceeds $ 414,133 $1,002,103 $1,089,124 Realized gains 6,018 1,256 4,749 Realized losses 702 177 466 Net unrealized gain 33,621 13,780 2,073 Adjustment for unrealized gain, net of deferred income taxes and minority interests $ 16,070 $ 6,365 $ 1,276 ================================================================= For purposes of computing realized gains and losses, cost was determined using the specific identification method. (C) Film Contracts Chris-Craft's television stations own film contract rights which allow generally for limited showings of films and syndicated programs. Film contract rights and related liabilities are recorded when the programming becomes available for telecasting. Contracts are amortized over the estimated number of showings, using primarily accelerated methods as films are used, based on management's estimates of the flow of revenue and the ultimate total cost for each contract. In the opinion of management, future revenue derived from airing programming will be sufficient to cover related unamortized rights balances at December 31, 1998. The estimated costs of recorded film contract rights to be charged to income within one year are included in current assets; payments on such contracts due within one year are included in current liabilities. The approximate future maturities of film contracts payable after one year at December 31, 1998 are $39,064,000, $20,296,000, $1,735,000 and $955,000 in 2000, 2001, 2002 and thereafter, respectively. The net present value at December 31, 1998 of such payments, based on a 7.75% discount rate, was approximately $53,400,000. See Note 9. (D) Depreciation and Amortization Depreciation of property and equipment is generally provided on the straight-line method over the estimated useful lives of the assets, ranging from three to 40 years, except that leasehold improvements are amortized over the lives of the respective leases, if shorter. (E) Intangible Assets Intangible assets reflect the excess of the purchase prices of businesses acquired over net tangible assets at dates of acquisition. The carrying values of such intangibles as of December 31, 1998 and 1997 are as follows: (In thousands) 1998 1997 - ------------------------------------------------- Television Division $427,480 $339,018 Industrial Division 774 774 - ------------------------------------------------- $428,254 $339,792 ================================================= Television Division amounts primarily relate to television station WWOR, which was acquired in 1992, and television station WUTB, the assets of which were acquired in 1998, and are being amortized on a straight-line basis over 40-year periods. Accumulated amortization of intangible assets totalled $77,342,000 at December 31, 1998 and $65,905,000 at December 31, 1997. Intangible assets at December 31, 1998 include goodwill totalling $57,086,000 resulting from purchases by BHC of its own shares at prices greater than net book value. (F) Revenue Recognition and Barter Transactions Revenue is recognized upon broadcast of television advertising and upon shipment of manufactured products. The estimated fair value of goods or services received by Chris-Craft's television stations in barter (nonmonetary) transactions, most of which relate to the acquisition of programming, is recognized as revenue when the air time is used by the advertiser. Barter revenue totalled $47,654,000 in 1998, $43,944,000 in 1997 and $40,853,000 in 1996. Barter expense in each year approximated barter revenue. (G) Earnings per Share In accordance with SFAS 128, "Earnings per Share," adopted by Chris-Craft in 1997, per share amounts have been computed as follows: Year ended December 31, (In thousands except per share data) 1998 1997 1996 - ----------------------------------------------------------------- BASIC - Net income $29,470 $93,501 $ 812 Less: Preferred stock dividends (410) (420) (436) - ----------------------------------------------------------------- Income available to common shareholders $29,060 $93,081 $ 376 ================================================================= Weighted average common shares outstanding 33,539 33,429 32,949 ================================================================= Basic per share amount $ .87 $ 2.78 $ .01 ================================================================= DILUTED - Income available to common shareholders $29,060 $93,081 $ 376 Effect of dilutive securities - Convertible preferred stock dividend 337 347 - Dilution of UTV net income from UTV stock options (82) (138) (180) Income available assuming dilution $29,315 $93,290 $ 196 ================================================================= Weighted average common shares outstanding 33,539 33,429 32,949 Effect of dilutive securities - Convertible preferred stock dividend 8,453 8,641 - Stock options 303 354 197 - ----------------------------------------------------------------- Weighted average shares outstanding assuming dilution 42,295 42,424 33,146 ================================================================= Diluted per share amount $ .69 $ 2.20 $ .01 ================================================================= Amounts give retroactive effect to all stock dividends declared through February 10, 1999. All securities which could dilute per share amounts are included in the computation of diluted earnings per share. (H) Stock-Based Compensation Chris-Craft has adopted SFAS 123, "Accounting for Stock-Based Compensation." This statement encourages but does not require the recording of compensation cost for stock-based employee compensation plans at fair value. Chris-Craft has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." See Note 6. (I) Supplemental Cash Flow Information and Disclosure of Noncash Investing Activities Cash paid for income taxes totalled $30,600,000 in 1998, $79,400,000 in 1997 and $28,800,000 in 1996. The 1997 distribution from UPN to BHC was net of approximately $38,800,000, representing additional BHC capital contributions. (J) Segment Information In 1998, Chris-Craft adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS 131 supersedes SFAS 14, replacing the "industry segment" approach with the "management" approach. The management approach designates the internal organization that is used by management for making operating decisions and assessing performance as the source of Chris-Craft's reportable segments. The adoption of SFAS 131 did not affect results of operations or financial position but did affect the disclosure of segment information. See Note 10. Note 2 - ---------------------------------------------------------------- UNITED PARAMOUNT NETWORK: In July 1994, BHC, along with Viacom Inc.'s Paramount Television Group, formed the United Paramount Network, a broadcast television network which premiered in January 1995. BHC owned 100% of UPN from its inception through January 15, 1997, when Viacom completed the exercise of its option to acquire a 50% interest in UPN. The option price included approximately one-half of BHC's aggregate cash contributions to UPN through the exercise date, plus interest, and additional cash available for ongoing UPN expenditures. UPN distributed $116,261,000 to BHC pursuant to the option exercise, and BHC realized a 1997 pretax gain on the exercise of $153,933,000. BHC and Viacom now share equally in UPN funding requirements and in UPN losses. UPN has been organized as a partnership, and BHC's partnership interest is accounted for under the equity method. The carrying value of such interest, which reflects BHC funding of $88,100,000 in 1998 and $48,185,000 in 1997, plus the additional BHC capital contributions set forth above, and BHC's pro rata share of UPN losses in those years, totalled $615,000 at December 31, 1998 and $1,112,000 at December 31, 1997, and is included in Investments on the accompanying Consolidated Balance Sheets. UPN is still in its development and is expected to continue to incur significant start-up losses and to require significant funding for the next several years. Condensed consolidated financial statements of UPN are as follows: BALANCE SHEETS December 31, (In thousands) 1998 1997 - --------------------------------------------------------------- Current assets $ 92,934 $ 80,017 Other assets 27,305 29,926 - --------------------------------------------------------------- $ 120,239 $ 109,943 =============================================================== Current liabilities $ 119,008 $ 107,719 Partners' capital 1,231 2,224 - --------------------------------------------------------------- $ 120,239 $ 109,943 =============================================================== STATEMENTS OF OPERATIONS Year ended December 31, (In thousands) 1998 1997 1996 - --------------------------------------------------------------------- Operating revenues* $ 96,401 $ 89,997 $ 56,948 Operating expenses* 275,165 261,962 200,316 - --------------------------------------------------------------------- Operating loss (178,764) (171,965) (143,368) Other income (expense), net 1,571 1,768 (2,945) - --------------------------------------------------------------------- Loss before interest on BHC advances (177,193) (170,197) (146,313) Interest on BHC advances (eliminated in consolidation) - - (14,147) - --------------------------------------------------------------------- Net loss $ (177,193) $ (170,197) $ (160,460) ===================================================================== * With respect to certain of its programming, through August 31, 1997 UPN derived no revenue and incurred no programming expense. The following information as it relates to UPN is provided in accordance with SFAS 131. See Note 10. Year ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------- Depreciation and amortization $2,069 $1,794 $ 364 Capital expenditures $1,565 $ 467 $ - Note 3 - ---------------------------------------------------------------- ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following: December 31, (In thousands) 1998 1997 - --------------------------------------------------------------- Accounts payable $ 7,757 $ 8,465 Payable for securities purchased - 650 Accrued expenses - Payroll and compensation 63,011 68,611 Deferred barter revenue 38,824 38,721 Other 20,923 15,422 - --------------------------------------------------------------- $ 130,515 $ 131,869 =============================================================== Note 4 - ---------------------------------------------------------------- SHAREHOLDERS' INVESTMENT: Each share of $1.00 prior preferred stock is redeemable by Chris- Craft at $25.00. Each share of $1.40 convertible preferred stock is redeemable by Chris-Craft at $40.00 and is convertible into common stock as set forth below. Chris-Craft has authorized 10,000,000 shares of preferred stock, $1.00 par value, that may be issued without further shareholder approval, in one or more series, the terms and provisions of which shall be set by the Board of Directors. Each share of Class B common stock entitles the holder to ten votes (common stock entitles the holder to one vote per share), is convertible at all times into common stock on a share-for-share basis, is not transferable except to specified persons ("Permitted Transferees") and, in general, carries the same per share dividend and liquidation rights as a share of common stock, except that the Board of Directors may in its discretion declare greater cash dividends per share on the common stock than on the Class B common stock. No additional Class B shares may be issued without further shareholder approval, except upon the conversion of $1.40 convertible preferred shares by holders of record on November 10, 1986 (the record date for the initial distribution of Class B common stock) or Permitted Transferees, or in payment of stock dividends or stock splits on outstanding shares of Class B common stock. So long as any Class B common stock is outstanding, each share of $1.40 convertible preferred stock will entitle the holder on November 10, 1986, or Permitted Transferees, to convert such share of $1.40 convertible preferred stock into 11.28894 shares of common stock and 22.57786 shares of Class B common stock, and to 237.3 votes (11.62760, 23.25520 and 243.6, respectively, as adjusted for the 1999 stock dividend described below). The foregoing special conversion and voting rights will be available to holders of $1.40 convertible preferred stock transferred after November 10, 1986 only under the same circumstances as those in which the Class B common stock is transferable. Each share of $1.40 convertible preferred stock transferred after November 10, 1986 entitles its holder (other than a Permitted Transferee) to convert such share into 33.86680 shares of common stock and 33.9 votes (34.88280 and 34.9, respectively, as adjusted for the 1999 stock dividend described below). Chris-Craft, from time to time, has purchased shares of its capital stock, including 1998 purchases of 395,400 shares of common stock. At December 31, 1998, 832,102 shares of common stock and 12,899 shares of $1.00 prior preferred stock remained authorized for purchase. As of December 31, 1998, shares of Chris-Craft's authorized but unissued common stock were reserved for issuance as follows: Shares - ---------------------------------------------------------------- Conversion of Class B common stock 8,127,937 Conversion of $1.40 convertible preferred stock* 7,990,363 Stock options (including options outstanding for 1,214,431 shares)** 2,853,324 - ---------------------------------------------------------------- 18,971,624 ================================================================ * Including Class B common shares. ** Options for 1,516,800 shares were granted subsequent to December 31, 1998. On January 26, 1999, the Board of Directors declared a 3% common stock dividend, payable in April 1999, which will increase by 3% Chris-Craft's common and Class B common shares outstanding and will also increase by 3% the number of common shares issuable upon conversion of Chris-Craft's $1.40 convertible preferred stock and upon exercise of stock options. Applicable conversion rates and exercise prices will be adjusted as noted above. Note 5 - ---------------------------------------------------------------- CAPITAL TRANSACTIONS OF SUBSIDIARIES: BHC had outstanding, at December 31, 1998, 4,511,605 shares of Class A common stock and 18,000,000 shares of Class B common stock. Chris-Craft owns all outstanding Class B common shares, which represented 79.96% of BHC's then outstanding equity and 97.6% of BHC's voting power. From January 1990, when BHC became a public company and was 60% owned by Chris-Craft, through December 31, 1998, BHC purchased 6,895,590 shares of its Class A common stock, including 226,503 from UTV in 1998, at an aggregate cost of $516,503,000. BHC treasury stock expenditures totalled $46,305,000 in 1998, $95,408,000 in 1997 and $62,639,000 in 1996. At December 31, 1998, 185,497 Class A common shares remained authorized for purchase. UTV has also acquired its own shares, expending $7,010,000 in 1998, $2,755,000 in 1997 and $32,810,000 in 1996, and received proceeds of $3,579,000 in 1998, $3,939,000 in 1997 and $4,008,000 in 1996 from the exercise of stock options. BHC's ownership in UTV has accordingly increased to 58.5% at December 31, 1998 from 57.3% at December 31, 1995. Such transactions, together with BHC special dividends of $1.00 per share in 1998 and 1997, and UTV dividends of $.50 per share in 1998, 1997 and 1996, are reflected in the accompanying Consolidated Statements of Cash Flows and Consolidated Statements of Shareholders' Investment under the caption Capital transactions of subsidiaries, net of intercompany eliminations and minority interests. Note 6 - ---------------------------------------------------------------- STOCK OPTIONS: Under the 1994 Management Incentive Plan, options (including Incentive Stock Options) to purchase shares of common stock may be granted from time to time to employees of Chris-Craft and its subsidiaries, at prices not less than the fair market value at date of grant. Options are exercisable in cumulative annual installments of 33 1/3% commencing one year from date of grant and expire over a period determined by the Plan Committee, which may not exceed ten years from date of grant. Options currently outstanding expire either five or ten years from date of grant. The Plan replaced a similar plan which was terminated with respect to the grant of additional options when the 1994 Plan became effective. The Plan permits the Plan Committee to award stock appreciation rights to holders of options granted under the Plan. Such rights entitle the holders, in lieu of exercising their options, to receive payment from Chris-Craft in cash, stock or a combination thereof, equal to the greater of the appreciation in market value or book value of the shares covered by exercisable options. No stock appreciation rights have been awarded under the Plan. Transactions under the two plans during the three years ended December 31, 1998 were as follows: (In thousands of dollars except per Shares under Weighted Average share data) Option Exercise Price Total - ---------------------------------------------------------------- Outstanding, December 31, 1995 1,656,514 $31.71 $52,528 Increase to reflect 3% stock dividend 48,248 - - Exercised (57,243) $30.22 (1,730) Cancelled (3,182) $32.87 (105) - ---------------------------------------------------------------- Outstanding, December 31, 1996 1,644,337 $30.83 50,693 Increase to reflect 3% stock dividend 47,694 - - Exercised (639,900) $27.06 (17,317) Cancelled (1,620) $33.95 (55) - ---------------------------------------------------------------- Outstanding, December 31, 1997 1,050,511 $31.72 33,321 Increase to reflect 3% stock dividend 30,333 - - Granted 122,500 $51.31 6,285 Exercised (174,571) $31.21 (5,449) - ---------------------------------------------------------------- Outstanding, December 31, 1998 1,028,773 $33.20 $34,157 ================================================================ Of the 1,028,773 shares under option under the above Plan at December 31, 1998, 906,273 are currently exercisable at $30.54 to $34.08 per share and expire from December 13, 1999 through April 27, 2004. The remaining 122,500 at $51.31 (of which none are currently exercisable) expire on June 14, 2003. At December 31, 1998, options for 1,526,290 shares were available for grant under this Plan. Chris-Craft received 7,396 common shares in 1998, 74,867 common shares in 1997 and 18,039 common shares in 1996 as partial payment of exercised options. Under the 1994 Director Stock Option Plan, a fixed number of immediately exercisable options to purchase shares of common stock are granted annually to each nonemployee director of Chris-Craft, at prices equal to fair market value at date of grant. The 1994 Director Stock Option Plan replaced a similar plan which has been terminated with respect to the grant of additional options. Transactions under the two plans during the three years ended December 31, 1998, were as follows: (In thousands of dollars except per Shares under Weighted Average share data) Option Exercise Price Total - ---------------------------------------------------------------- Outstanding, December 31, 1995 114,515 $31.12 $3,563 Increase to reflect 3% stock dividend 3,419 - - Granted 42,432 $43.00 1,825 Exercised (14,736) $26.02 (384) - ---------------------------------------------------------------- Outstanding, December 31, 1996 145,630 $34.36 5,004 Increase to reflect 3% stock dividend 4,358 - - Granted 43,704 $42.88 1,873 Exercised (34,092) $29.10 (992) - ---------------------------------------------------------------- Outstanding, December 31, 1997 159,600 $36.87 5,885 Increase to reflect 3% stock dividend 4,597 - - Granted 45,008 $56.50 2,542 Exercised (23,547) $31.46 (741) - ---------------------------------------------------------------- Outstanding, December 31, 1998 185,658 $41.40 $7,686 ================================================================ Of the 185,658 shares under option under the 1994 Director Stock Option Plan at December 31, 1998, 140,650 are currently exercisable at $30.54 to $41.63 per share and expire from April 27, 1999 through May 5, 2002. The remaining 45,008 are currently exercisable at $56.50 per share and expire on May 2, 2003. At December 31, 1998, options for 112,603 shares were available for grant under this Plan. UTV also maintains stock option plans, and has chosen, like Chris-Craft, to continue to account for stock-based compensation using the intrinsic value method. If Chris-Craft and UTV had elected to recognize compensation expense based upon the fair value at the grant date for awards under their plans using the methodology prescribed by SFAS 123, Chris-Craft net income and earnings per share would have been reduced to the pro forma amounts as follows: (In thousands except per Year ended December 31, share amounts) 1998 1997 1996 - ---------------------------------------------------------------- Net income: As reported $29,470 $93,501 $ 812 Pro forma $28,431 $92,855 $ 239 Earnings (loss) per share: Basic - As reported $ .87 $ 2.78 $ .01 Pro forma $ .84 $ 2.77 $ (.01) Diluted - As reported $ .69 $ 2.20 $ .01 Pro forma $ .67 $ 2.18 $ (.01) ================================================================ These pro forma amounts may not be representative of the pro forma effect on net income in future years, since the estimated fair value of stock options is amortized over the vesting period, pro forma compensation expense related to grants made prior to 1995 is not considered and additional options may be granted in future years. The weighted average fair values of Chris-Craft options granted during 1998, 1997 and 1996 were $12.24, $13.16 and $13.97 per share, respectively, at dates of grant. The fair values of options were estimated using the Black-Scholes option pricing model with the following weighted average assumptions for the years ended December 31, 1998, 1997 and 1996, respectively: dividend yields of zero for all periods; expected volatility of 15.6%, 16.3% and 20.1%, risk free interest rates of 5.4%, 6.4% and 6.3%; and expected option life of 3.9 years for 1998 and five years for 1997 and 1996. Note 7 - ---------------------------------------------------------------- RETIREMENT PLANS: Chris-Craft and UTV maintain noncontributory defined benefit pension plans covering substantially all their employees. Benefits accrue annually based on compensation paid to participants each year. The funding policy is to contribute annually to the plans amounts sufficient to fund current service costs and to amortize any unfunded accrued liability over periods not to exceed 30 years. The estimated funded status of the Chris-Craft and UTV plans, including amounts accrued in the nonqualified plans, was as follows: December 31, (In thousands) 1998 1997 - ---------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $ 49,681 $ 44,338 Service cost 4,187 3,837 Interest cost 3,574 3,122 Actuarial loss/(gain) 2,156 (859) Amendments 471 - Benefits paid (888) (757) - ---------------------------------------------------------------- Benefit obligation at end of year 59,181 49,681 - ---------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 32,633 29,143 Actual return on plan assets 3,649 2,833 Employer contributions 1,825 1,414 Benefits paid (888) (757) - ---------------------------------------------------------------- Fair value of plan assets at end of year 37,219 32,633 - ---------------------------------------------------------------- Plan assets less than projected benefit obligation (21,962) (17,048) Unrecognized initial net asset (84) (134) Unrecognized prior service cost 746 323 Unrecognized net actuarial gain (1,313) (2,363) - ---------------------------------------------------------------- Pension liability $(22,613) $(19,222) ================================================================ Pension expense, including amounts accrued in Chris-craft and UTV nonqualified plans for retirement benefits in excess of statutory limitations, was as follows: Year ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------- Service cost $ 4,187 $ 3,837 $ 3,596 Interest cost 3,574 3,122 2,775 Expected return on plan assets (2,533) (2,264) (1,913) Amortization: Initial unrecognized net asset (50) (50) (50) Prior service cost 47 12 36 Actuarial loss/(gain) (9) 22 20 - ---------------------------------------------------------------- Net periodic pension cost $ 5,216 $ 4,679 $ 4,464 ================================================================ Assumptions used in accounting for pension plans for each year are as follows: 1998 1997 1996 - ---------------------------------------------------------------- Discount rate at end of year 6.75% 7.25% 7.25% Rate of increase in future compensation levels 4.00% 4.50% 4.50% Expected long-term rate of return on assets 7.75% 7.75% 7.75% The accumulated benefit obligation, projected benefit obligation and fair value of plan assets for the above plans that had an accumulated benefit obligation in excess of the fair value of plan assets were $27,464,000, $35,883,000, and $14,973,000, respectively, at December 31, 1998, and $21,709,000, $29,493,000, and $11,847,000, respectively, at December 31, 1997. Chris-Craft and certain of its subsidiaries maintain other retirement plans, primarily stock purchase and profit sharing plans. The aggregate costs of such plans, including related amounts accrued in the nonqualified plans referred to above, were $8,931,000 in 1998, $16,936,000 in 1997 and $5,677,000 in 1996. Note 8 - ---------------------------------------------------------------- INCOME TAXES: Income taxes are provided in the accompanying Consolidated Statements of Income as follows: Year ended December 31, (In thousands) 1998 1997 1996 - --------------------------------------------------------------- Current: Federal $24,300 $63,000 $22,400 State 8,500 18,600 5,800 - --------------------------------------------------------------- 32,800 81,600 28,200 - --------------------------------------------------------------- Deferred: Federal (800) 17,900 (8,900) State 500 100 200 - --------------------------------------------------------------- (300) 18,000 (8,700) - --------------------------------------------------------------- $32,500 $99,600 $19,500 =============================================================== Differences between income taxes at the federal statutory income tax rate and total income taxes provided are as follows: Year ended December 31, (In thousands) 1998 1997 1996 - ---------------------------------------------------------------- Taxes at federal statutory rate $30,244 $84,904 $13,592 State income taxes, net 5,850 12,155 3,933 Amortization of intangible assets 3,250 3,127 3,151 Dividend from BHC 1,260 1,260 - Dividend exclusion (347) (735) (768) Realization of tax benefit (8,500) - - Other 743 (1,111) (408) - ---------------------------------------------------------------- $32,500 $99,600 $19,500 ================================================================ Deferred tax assets and deferred tax liabilities reflect the tax effect of the following differences between financial statement carrying amounts and tax bases of assets and liabilities: December 31, (In thousands) 1998 1997 - ---------------------------------------------------------------- Accrued liabilities not deductible until paid $32,816 $30,781 Film contract rights 8,325 6,193 Tax credit and loss carryforwards 9,314 8,291 Other 168 279 - ---------------------------------------------------------------- 50,623 45,544 Valuation allowance (8,973) (8,981) - ---------------------------------------------------------------- Deferred tax assets, net 41,650 36,563 - ---------------------------------------------------------------- Investments (14,179) (12,975) Other intangibles (1,589) (573) Property and equipment (2,422) (2,711) SFAS 115 adjustment (12,019) (4,951) - ---------------------------------------------------------------- Deferred tax liabilities (30,209) (21,210) - ---------------------------------------------------------------- Net deferred tax assets $11,441 $15,353 ================================================================ The valuation allowance reflects the uncertainty with respect to the realization of future tax benefits relating to certain tax carryforwards and future dispositions of certain investments having tax bases greater than related financial statement carrying amounts. At December 31, 1998, net operating loss carryforwards of approximately $20,000,000 are available for tax purposes and expire in various years through 2018. Tax benefits of $1,189,000, $3,612,000 and $270,000 arising from the exercise of employee stock options were credited to capital surplus in 1998, 1997 and 1996, respectively. Note 9 - ---------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES: In 1997, UTV signed a definitive agreement to purchase the assets of UHF television station WRBW in Orlando, Florida, for $60,000,000 and possible future consideration. The acquisition is subject to Federal Communications Commission approval and other conditions in the agreement. The aggregate amount payable by Chris-Craft's television stations under contracts for programming not currently available for telecasting and, accordingly, not included in film contracts payable and the related contract rights in the accompanying Consolidated Balance Sheets totalled $337,800,000 at December 31, 1998 (including $91,200,000 applicable to UTV). BHC expects to make significant expenditures developing UPN. See Note 2. Montrose Chemical Corporation of California, whose stock is 50% owned by Chris-Craft and 50% by a subsidiary of Zeneca Inc., discontinued its manufacturing operations in 1983 and has since been defending claims for costs and damages relating to environmental matters. Chris-Craft is a defendant in one of these actions. After insurance reimbursements totalling $3,611,000 in 1998, $558,000 in 1997 and $327,000 in 1996, Montrose-related net expenses of $1,279,000 in 1998, $3,383,000 in 1997 and $1,666,000 in 1996 are included in the accompanying Consolidated Statements of Income under the caption Interest and other income, net. Montrose is one of numerous defendants in a suit relating to alleged environmental impairment at the Stringfellow Hazardous Waste Disposal Site in California, brought in 1983 by the Federal Government and the State of California, which claim Montrose generated approximately 19% of the waste placed at the site. In 1990, the U.S. Environmental Protection Agency issued a Record of Decision for the site, which selected some of the interim remedial measures preferred by the EPA and the State, the present value of which was estimated by them to be $169 million, although the estimate is subject to potential variations of up to 50%. A ruling issued in 1995 allocated at least 65% of the liability (under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ["CERCLA"]) at the site to the State of California and approximately 25% of the liability to the generator defendants (including Montrose). A separate ruling under California law allocated 100% of the liability to the State. The State's appeal of the allocation rulings is pending. In December 1998, the State and the defendants, including Montrose, preliminarily agreed to a structure that, if certain conditions are satisfied, would resolve the Stringfellow suit. Chris-Craft is not a defendant. In May 1998, a group of approximately 750 current or former residents of the vicinity of the Stringfellow Site filed suit against Montrose, Chris-Craft and approximately 160 other defendants alleging personal injury and property damage from exposure to the site. The defendants have moved to dismiss the complaint as to the adult plaintiffs on statute of limitations grounds. A similar action filed in 1984 by approximately 3,000 plaintiffs was resolved by means of a settlement to which Montrose, but not Chris-Craft, contributed monetarily. In June 1990, the Federal Government and the State of California commenced an action against Montrose, Chris-Craft, and other defendants, alleging that Montrose and others released hazardous substances into Los Angeles Harbor and adjacent waters, and seeking to recover damages resulting from alleged injury to natural resources. In 1997, the Federal and State Governments stated they estimate the alleged damages at approximately $482 million. The action also seeks recovery for costs related to alleged hazardous substance contamination of the Montrose plant site in Torrance, California. Chris-Craft intends vigorously to defend itself in this 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 proceeding, and the applicable legal and accounting standards, Chris-Craft, in reliance among other things on 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." Accordingly, under Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies," no amount has been reserved for this action in Chris- Craft's financial statements. In September 1994, the EPA designated Chris-Craft 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 Chris-Craft predecessor company. The facility was located near the Diamond Alkali property, but not on the river front, and was sold by Chris-Craft in 1972. Chris-craft disputes that it is a responsible party. The former owner of the Diamond Alkali property is currently performing a 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 could 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 for possible liability would be appropriate. Chris-Craft is a party to various other pending legal proceedings arising in the ordinary course of business. In the opinion of management, after taking into account the opinion of counsel with respect thereto, the ultimate resolution of these other matters will not have a material effect on Chris-Craft's consolidated financial position or results of operations. Note 10 - ---------------------------------------------------------------- INDUSTRY SEGMENT INFORMATION: In 1998, Chris-Craft adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." This table presents Chris-Craft's two reportable segments, the Television Division and the Industrial Division. UPN, which is accounted for on the equity method, is also considered a reportable segment under SFAS 131. However, all required segment information is included in Note 2. The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." See Note 1.
Deprec- Deferred iation Tax Operating and Capital Investment Assets (In thousands Operating Income Amort- Expend- Segment in (Liabil- of dollars) Revenues (Loss) ization itures Assets UPN ities) - --------------------------------------------------------------------------------------- Year Ended December 31, 1998 Television Division $445,850 $109,299 $21,278 $11,347 $2,199,687(b) $ 615 $(8,305) Industrial Division 21,243 3,642 424 1,119 8,738 - 234 Reconciling items (a) - (18,271) 386 67 36,998 - 19,512 - --------------------------------------------------------------------------------------- $467,093 $ 94,670 $22,088 $12,533 $2,245,423 $ 615 $11,441 ======================================================================================= Year Ended December 31, 1997 Television Division $443,499 $113,908 $19,187 $ 7,040 $2,177,679(b) $1,112 $(4,330) Industrial Division 21,147 2,889 359 747 9,174 - 377 Reconciling items (a) - (21,272) 22 1 39,576 - 19,306 - --------------------------------------------------------------------------------------- $464,646 $ 95,525 $19,568 $ 7,788 $2,226,429 $1,112 $15,353 ======================================================================================= Year Ended December 31, 1996 Television Division $446,292 $115,718 $19,451 $10,144 $2,106,234(b) $1,394 $20,220 Industrial Division 19,403 2,058 305 534 9,269 - 176 Reconciling items (a) - (14,508) 31 105 21,756 - 15,117 - --------------------------------------------------------------------------------------- $465,695 $103,268 $19,787 $10,783 $2,137,259 $1,394 $35,513 ======================================================================================= (a) Consists of Corporate Office and subsidiaries not included in Television Division or Industrial Division. Related operating loss consists solely of general and administrative expenses and, accordingly, excludes nonoperating income. Related assets consist primarily of cash and marketable securities. (b) Includes marketable securities having an aggregate carrying value of $1,202,070 at December 31, 1998, $1,204,776 at December 31, 1997 and $1,245,241 at December 31, 1996.
QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (In thousands of dollars except First Second Third Fourth per share data) Quarter Quarter Quarter Quarter Year - -------------------------------------------------------------------- Year Ended December 31, 1998 Operating revenues $104,974 $125,685 $107,352 $129,082 $467,093 Operating income 9,340 34,488 24,639 26,203 94,670 Interest and other income, net 19,711 20,013 19,983 20,630 80,337 Equity in United Paramount Network loss (19,910) (22,471) (10,438) (35,778) (88,597) Income before income taxes and minority interest 9,141 32,030 34,184 11,055 86,410 Net income 1,770 12,122 14,505 1,073 29,470 Earnings per share - Basic .05 .36 .43 .03 .87 Diluted $ .04 $ .28 $ .34 $ .02 $ .69 Year Ended December 31, 1997 Operating revenues $106,472 $123,959 $110,907 $123,308 $464,646 Operating income 17,525 29,746 18,809 29,445 95,525 Interest and other income, net 19,285 20,374 20,558 20,339 80,556 Equity in United Paramount Network loss (17,898) (16,404) (19,579) (33,549) (87,430) Gain on change of ownership in United Paramount Network 152,224 - - 1,709 153,933 Income before income taxes and minority interest 171,136 33,716 19,788 17,944 242,584 Net income 75,159 10,031 4,524 3,787 93,501 Earnings per share - Basic 2.25 .30 .13 .11 2.78 Diluted $ 1.77 $ .24 $ .11 $ .09 $ 2.20 - -------------------------------------------------------------------- SELECTED FINANCIAL DATA As of and for the year ended December 31, (In thousands of dollars except per share data) 1998 1997 1996 1995 1994 - ----------------------------------------------------------------------------- Operating revenues $ 467,093 $ 464,646 $ 465,695 $ 472,081 $ 481,364 ============================================================================= Operating income $ 94,670 $ 95,525 $ 103,268 $ 110,633 $ 107,832 Interest and other income, net 80,337 80,556 81,879 83,949 59,928 Equity in United Paramount Network loss (88,597) (87,430) (146,313) (129,303) (3,977) Gain on change of ownership in United Paramount Network - 153,933 - - - Income taxes (32,500) (99,600) (19,500) (17,600) (57,300) Minority interest (24,440) (49,483) (18,522) (25,714) (41,742) - ----------------------------------------------------------------------------- Net income $ 29,470 $ 93,501 $ 812 $ 21,965 $ 64,741 ============================================================================= Earnings per share- Basic $ .87 $ 2.78 $ .01 $ .66 $ 1.94 Diluted .69 2.20 .01 .51 1.49 Cash and marketable securities 1,415,543 1,501,929 1,395,179 1,523,438 1,520,461 Working capital 1,387,978 1,486,556 1,418,085 1,531,416 1,532,579 Film contract rights 123,502 121,977 144,034 145,902 148,473 Investments 69,881 50,130 48,194 10,065 2,838 Total assets 2,245,423 2,226,429 2,137,259 2,203,853 2,232,217 Long-term debt - - - - - Minority interest 479,820 484,268 506,260 560,326 584,202 Shareholders' investment $1,408,469 $1,383,180 $1,288,918 $1,319,020 $1,306,218 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Chris-Craft's financial position continues to be strong and highly liquid. Consolidated cash and marketable securities totalled $1.42 billion at December 31, 1998, and Chris-Craft has no debt outstanding. Chris-Craft's 79.96% owned television broadcasting subsidiary, BHC Communications, Inc., has expended significant funds developing United Paramount Network since UPN's inception in 1994, but cash flow provided from BHC's operating activities has exceeded such BHC funding of UPN. Chris-Craft's operating cash flow is generated primarily by its Television Division's core television station group. Broadcast cash flow reflects station operating income plus depreciation and film contract amortization less film contract payments. The relationship between film contract payments and related amortization may vary greatly between periods (payments exceeded amortization by $12.3 million in 1998 and by $4.3 million in 1997), and is dependent upon the mix of programs aired and payment terms of the stations' contracts. Reflecting such amounts, broadcast cash flow in 1998 declined 8%, while station earnings declined only 2%, as explained below. Although broadcast cash flow is often used in the broadcast television industry as an ancillary measure, it is not synonymous with operating cash flow computed in accordance with generally accepted accounting principles, and should not be considered alone or as a substitute for measures of performance computed in accordance with generally accepted accounting principles. Chris-Craft's operating cash flow additionally reflects earnings associated with its cash and marketable securities, most of which are held by BHC. Consolidated cash and marketable securities declined to $1.42 billion at December 31, 1998, from $1.50 billion at December 31, 1997. Such decline occurred despite an increase in operating cash flow, primarily due to the $80.2 million television station acquisition, described below, UPN funding and treasury stock purchases by Chris-Craft and BHC. Operating cash flow in 1998 rose to $167.9 million from $147.4 million in 1997, despite the decline in broadcast cash flow, primarily because the 1997 amount includes income tax payments related to the UPN distribution described below (the distribution is reported as a cash flow from investing activities). BHC generates most of Chris-Craft's consolidated cash flow. Parent company obligations consist solely of corporate office expenditures, current and accrued. Most parent company cash flow in recent years has been provided from the receipt by Chris-Craft of its share of special dividends paid by BHC. Special $1.00 per share cash dividends were paid by BHC in February 1999, aggregating $22.5 million, in February 1998, aggregating $22.7 million, and in February 1997, aggregating $23.6 million, with Chris-Craft receiving $18 million of each such amount. BHC plans to consider annually the payment of a special dividend. Since April 1990, BHC's Board of Directors has authorized the purchase of up to 7,081,087 Class A common shares. Through December 31, 1998, 6,895,590 shares were purchased, including 226,503 shares in 1998 from United Television, Inc., BHC's 58.5% owned subsidiary, for a total cost of $516.5 million, including $63.0 million in 1998. From January 1, 1996 through December 31, 1998, UTV purchased 462,600 of its common shares at an aggregate cost of $42.6 million, of which $7.0 million was expended in 1998, and, at December 31, 1998, 729,649 UTV shares remained authorized for purchase. In January 1998, UTV purchased the assets of UHF television station WHSW, Channel 24, in Baltimore, Maryland for $80.2 million in cash. The station's call letters were changed to WUTB and the station became a UPN affiliate. In 1997, UTV signed a definitive agreement to purchase the assets of WRBW in Orlando, Florida, for approximately $60 million and possible future consideration. UTV expects to use a portion of available cash and marketable securities balances to complete this transaction, which is subject to Federal Communications Commission approval, as well as satisfaction of certain conditions. Chris-Craft intends to further expand its operations in the media, entertainment and communications industries and to explore business opportunities in other industries. Chris-Craft believes it is capable of raising significant additional capital to augment its already substantial financial resources, if desired, to fund such additional expansion. In July 1994, BHC, along with Viacom Inc.'s Paramount Television Group, formed UPN, a broadcast television network which premiered in January 1995. BHC owned 100% of UPN from its inception through January 15, 1997, when Viacom completed the exercise of its option to acquire a 50% interest in UPN. The option price included $155 million in cash (an amount equal to one-half of BHC's aggregate cash contributions to UPN through the exercise date, plus interest), additional cash available for ongoing UPN expenditures, as well as a non-cash contribution of UPN development costs previously incurred by Viacom. UPN distributed $116.3 million to BHC following the closing and BHC recorded a 1997 pretax gain of $153.9 million on the transaction. BHC and Viacom now share equally in UPN losses and funding requirements. UPN, still in its development, incurred start-up losses of $177.2 million in 1998, $170.2 million in 1997, $146.3 million in 1996 and $129.3 million in 1995, and is expected for the next several years to continue to incur substantial start-up losses and to require significant funding. BHC funding of UPN totalled $88.1 million in 1998. Chris-Craft's television stations make commitments for programming that will not be available for telecasting until future dates. At December 31, 1998, commitments for such programming totalled approximately $337.8 million, including $91.2 million applicable to UTV. BHC also has a remaining commitment to invest over time up to $24.6 million, of which $14.8 million is to be invested in management buyout limited partnerships, including $11.0 million applicable to UTV. Chris-Craft capital expenditures generally have not been material in relation to its financial position, and the related capital expenditure commitments at December 31, 1998 (including any related to UPN) were not material. During 1998, Chris- Craft stations began converting to digital television (DTV). The conversion will require the purchase of digital transmitting equipment to telecast over newly assigned frequencies. This conversion is expected to take a number of years and will be subject to competitive market conditions. Chris-Craft expects that its expenditures for UPN, future film contract commitments and capital requirements for its present business, including the cost to convert to DTV, will be satisfied primarily from operations, marketable securities or cash balances. As set forth in Note 9, Chris-Craft has been named as a defendant (or a "potentially responsible party") in certain actions seeking recovery for environmental damage allegedly related to (i) the activities (discontinued since 1983) of 50% owned Montrose Chemical Corporation of California ("Montrose California") and (ii) the activities of Montrose Chemical Co., a predecessor company to Chris- Craft. As further set forth in Note 9, Chris-Craft does not presently consider liability to be "probable" in any of the Montrose California related matters and believes it has been erroneously identified as a potentially responsible party and is unable to determine at this stage if it could have any liability regarding Montrose Chemical Co. Accordingly, no amount has been reserved in Chris-Craft's financial statements relating to these matters. Chris-Craft has assessed year 2000 issues and believes that such issues will not have a material effect on its business, results of operations, or financial condition and that the estimated compliance cost is immaterial. Chris-Craft is subject to certain market risk relating to its marketable securities holdings, which are all held for other than trading purposes. The table below provides information as of December 31, 1998 about the U.S. Government securities which are subject to interest rate sensitivity and the equity securities which are subject to equity market sensitivity. (In thousands) Cost Fair Value - ------------------------------------------------------------------- U.S. Government securities $1,093,744 $1,095,373 Equity securities $ 83,881 $ 115,873 All of Chris-Craft's marketable securities have been categorized as available for sale and are comprised substantially of U.S. Government securities, 98% of which mature in one year all within 15 months. See Note 1(B). RESULTS OF OPERATIONS - 1998 VERSUS 1997 Chris-Craft net income in 1998 declined to $29,470,000, or $.87 per share ($.69 per share diluted), from net income in 1997 of $93,501,000, or $2.78 per share ($2.20 per share diluted). The decline in net income primarily reflects BHC's pretax gain of $153,933,000 recorded on the transaction described above through which BHC reduced its UPN ownership interest to its current 50% from 100%. Consolidated operating income declined just slightly, to $94,670,000 from $95,525,000, as a decline in Television Division operating income was nearly offset by a reduction in Chris-Craft corporate office expense and an increase in Industrial Division operating income. Television station earnings, after a small loss at recently acquired station WUTB, were $123,123,000, down 2% from 1997 earnings of $125,966,000. Station group earnings in 1998 reflect increased current year and retroactive revenue resulting from a new long-term affiliation agreement at our NBC affiliate. In addition, 1998 station earnings reflect a reduction of approximately $3,300,000 in expense associated with stock price based retirement plans. Total station operating revenues rose slightly, to $436,664,000 from $434,729,000, while same station revenues, reflecting disappointing ratings in several key markets, declined less than 2%, after adjusting for the prior years' network affiliation fees. The decline in station earnings was fully offset by an increase, to $10,202,000 from $7,098,000, in earnings at BHC's television production subsidiaries. However, after WUTB goodwill amortization and a non-recurring severance expense, Television Division operating income in 1998 declined 4%, to $109,299,000 from $113,908,000 in 1997. Industrial Division operating income rose 26%, to $3,642,000 from $2,889,000 in 1997. The earnings growth is primarily attributable to significant improvements in profit margins, as operating revenues rose just very slightly, to $21,243,000 from $21,147,000 in 1997. Margins were positively impacted by improvements in manufacturing efficiencies, product quality and mix, and offshore sourcing. Chris-Craft corporate office expense declined to $18,271,000 from $21,272,000 in 1997, primarily reflecting a reduction of approximately $4,400,000 in corporate office stock price based retirement plan expense. UPN incurred a loss of $177,193,000 in 1998, compared to a loss of $170,197,000 in 1997. The network's cost structure increased due to the expansion of its prime time schedule to five nights a week from three. BHC's 50% share of the loss totalled $88,597,000, compared to its 1997 share of $87,430,000. UPN is still in its development and is expected for the next several years to continue to record substantial start-up losses. Interest and other income, which consists mostly of amounts earned on Chris-Craft's consolidated cash and marketable securities holdings, totalled $80,337,000 in 1998, about the same as the $80,556,000 recorded in 1997. The impact of lower interest rates was offset by an increase of approximately $4,200,000 in gains on dispositions of marketable securities, and a decline, to $1,279,000 from $3,383,000 in expense associated with Montrose matters. Chris-Craft's effective income tax rate declined to 37.6% in 1998 from 41.1% in 1997, primarily reflecting the realization in 1998 of certain income tax benefits. Minority interest reflects the interest of shareholders other than Chris-Craft in the net income of BHC, 79.96% owned by Chris-Craft at December 31,1998, 78.6% owned by Chris-Craft at December 31, 1997 and 75.9% owned by Chris-Craft at December 31, 1996, and the interest of shareholders other than BHC in the net income of UTV, 58.5% owned by BHC at December 31, 1998 and December 31, 1997 and 59.0% owned by BHC at December 31, 1996. RESULTS OF OPERATIONS - 1997 versus 1996 Chris-Craft 1997 net income rose to $93,501,000, or $2.78 per share ($2.20 per share diluted), from $812,000, or $.01 per share ($.01 per share diluted), in 1996. The substantial increase in net income was primarily due to the pretax gain of $153,933,000 realized by BHC on Viacom's acquisition of its UPN interest. In addition, the amount of UPN start-up losses included in Chris-Craft's operating results was reduced significantly in 1997, reflecting the reduction, to 50% from 100%, in BHC s ownership interest in UPN. Varying economic and competitive factors in the markets served by the Television Division's station group produced uneven station results in 1997. Station operating revenues declined to $434,729,000 from $437,287,000, less than 1%. Station programming expenses declined slightly, but total station operating expenses rose about 1%, due to a $3.5 million increase in expense associated with stock price based retirement plans. As a result, station group operating income declined 3% in 1997, to $125,966,000 from $130,450,000 in 1996. That decline was almost fully offset by the increase in earnings at the Division's television production subsidiaries, to $7,098,000 in 1997 from $3,267,000 in 1996. Television Division operating income accordingly declined less than 2%, to $113,908,000 from $115,718,000. Industrial Division operating income increased 40%, to $2,889,000 from $2,058,000 in 1996, and the Division's operating revenues increased 9%, to $21,147,000 from $19,403,000. The Division's improved results reflect strength throughout its major product lines and higher profit margins. Margin improvement was realized through cost reductions, effective outsourcing and elimination of certain less profitable products. Chris-Craft corporate office expense increased $6.8 million in 1997. Such expense associated with stock price based retirement plans rose $6.9 million, as the market price of Chris-Craft common stock rose 27% in 1997. Consolidated operating income accordingly declined 7%, to $95,525,000 from $103,268,000 in 1996. UPN's start-up loss widened in 1997, to $170,197,000 from $146,313,000 in 1996, mainly due to expenses associated with the expansion of UPN's schedule and with the ongoing development of the network's programming strategy. The UPN loss recorded in Chris- Craft's financial statements nonetheless declined significantly, to $87,430,000 from $146,313,000 in 1996, reflecting the 1997 reduction in BHC's ownership interest. Interest and other income declined slightly to $80,556,000 from $81,879,000 in 1996. An increase in interest income was offset by a decline in marketable securities gains and an increase, to $3,383,000 from $1,666,000 in expense related to Montrose matters. Chris-Craft's effective income tax rate declined to 41.1% in 1997 from 50.2% in 1996. Nondeductible goodwill amortization had an abnormal impact on Chris-Craft's effective tax rate in 1996 because of the low level of Chris-Craft's pretax earnings. EX-21 3 The following were the registrant's subsidiaries as of December 31, 1998, other than subsidiaries that, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary at such date: Name of Subsidiary Jurisdiction of Incorporation BHC Communications, Inc. Delaware Chris-Craft Television, Inc. Delaware BHC Network Partner, Inc. Delaware BHC Network Partner II, Inc. Delaware BHC Network Partner III, Inc. Delaware KCOP Television, Inc. California Oregon Television, Inc. Oregon Pinelands, Inc. Delaware United Television, Inc. Delaware UTV of San Francisco, Inc. California UTV of San Antonio, Inc. Texas UTV of Baltimore, Inc. Delaware United Television Sales, Inc. Delaware Chris-Craft Industrial Products, Inc. Delaware EX-23 4 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-69875 and 33-54817) of Chris-Craft Industries, Inc. of our report dated February 10, 1999 appearing on page 13 of the Annual Report to Shareholders, which is incorporated in this Annual Report on Form 10-K, and our report dated January 29, 1999 on the financial statements of United Paramount Network appearing in this Annual Report on Form 10-K. PRICEWATERHOUSECOOPERS LLP New York, New York March 26, 1999 EX-27 5
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K DATED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 12-MOS DEC-31-1998 DEC-31-1998 204297 1211246 93338 4956 2055 1656741 159619 108040 2245423 268763 0 0 5707 17133 1385629 2245423 21243 467093 13754 372423 0 0 0 86410 32500 29470 0 0 0 29470 .87 .69
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