-----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, JTNWWSolR7EM8grkZdV33q0sAOxDKubWg+kJIAUJLyQSZfOWqPXhSHX0MZCqFTHd t2PNr45MYF3I23k8k4UYkw== 0000895759-00-000029.txt : 20000331 0000895759-00-000029.hdr.sgml : 20000331 ACCESSION NUMBER: 0000895759-00-000029 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BHC COMMUNICATIONS INC CENTRAL INDEX KEY: 0000855433 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 592104168 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-10342 FILM NUMBER: 586906 BUSINESS ADDRESS: STREET 1: 767 FIFTH AVE 46TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10153 BUSINESS PHONE: 2124210200 MAIL ADDRESS: STREET 1: 767 FIFTH AVE STREET 2: 46TH FLOOR CITY: NEW YORK STATE: NY ZIP: 10153 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, 1999 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 1-10342 BHC COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) DELAWARE 59-2104168 (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 - ------------------- --------------------- CLASS A COMMON STOCK AMERICAN STOCK EXCHANGE $0.01 PAR VALUE Securities registered pursuant to Section 12(g) of the Act: NONE 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 29, 2000, was approximately $718,000,000. As of February 29, 2000, there were 4,511,605 shares of the registrant's Class A Common Stock and 18,000,000 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 II report to stockholders for the fiscal year ended December 31, 1999 (the "Annual Report") that are specifically identified herein as incorporated by reference into this Form 10-K. Those portions of the registrant's proxy III statement for the registrant's 2000 Annual Meeting (the "Proxy Statement") that are specifically identified herein as incorporated by reference into this Form 10-K. 3 PART I ITEM 1. BUSINESS. GENERAL BHC Communications, Inc. ("BHC"), the majority owned (80% at February 29, 2000) television broadcasting subsidiary of Chris-Craft Industries, Inc. ("Chris-Craft"), was organized in Delaware in 1977 under the name "BHC, Inc." and changed its name to BHC Communications, Inc. in 1989. BHC's principal business is television broadcasting, conducted through its wholly owned subsidiaries, Chris-Craft Television, Inc. ("CCTV") and Pinelands, Inc. ("Pinelands"), and its majority owned (58% at February 29, 2000) subsidiary, United Television, Inc. ("UTV"). At February 29, 2000, BHC, solely through subsidiaries, had 1,135 full-time employees and 134 part-time employees. TELEVISION BROADCASTING BHC operates six very high frequency ("VHF") television stations and four 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 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. On March 20, 2000, BHC elected to sell its 50% interest in UPN for $5,000,000 to Viacom, Inc., UPN's other 50% owner, under the "buy-sell" provisions of the UPN Joint Venture Agreement, which Viacom had triggered. On March 16, 2000, a New York Supreme Court upheld Viacom's exercise of the buy-sell in a lawsuit brought by BHC that sought to enjoin the Viacom-CBS merger as a violation of the non-compete provision of the Joint Venture Agreement. The sale is expected to close by March 31, 2000. As a result of the sale, BHC will have no further ownership interest in the network or obligation to fund UPN's operations. BHC's eight television stations that are currently affiliated with UPN will remain affiliates after the sale. BHC expects to record a loss of approximately $10,000,000 in connection with the sale, to be reflected in results of operations for the three months ended March 31, 2000. The following table sets forth certain information with respect to BHC stations and their respective markets: 4 Total Commercial Network Af- DMA TV Stations DMA Station and filiation/ House- DMA Operating in Cable TV Location(1) Channel holds(2) Rank(2) Market(3) Penetration(4) - ----------- ----------- ---------- -------- ------------ -------------- WWOR(5) UPN 9 6,874,990 1st 6VHF 74% Secaucus 14UHF KCOP UPN 13 5,234,690 2nd 7VHF 65% Los Angeles 10UHF KPTV UPN 12 1,004,140 23rd 4VHF 62% Portland 2UHF KMSP UPN 9 1,481,050 14th 4 VHF 54% Minne- 3 UHF apolis/ St. Paul KTVX ABC 4 720,860 36th 4 VHF 53% Salt 2 UHF Lake City KMOL NBC 4 684,730 37th 3 VHF 66% San 3 UHF Antonio KBHK UPN 44 2,423,120 5th 4 VHF 72% San 10 UHF Francisco KUTP UPN 45 1,390,750 17th 4 VHF 59% Phoenix 4 UHF WRBW UPN 65 1,101,920 22nd 3 VHF 76% Orlando 9 UHF WUTB UPN 24 999,200 24th 3 VHF 68% Baltimore 3 UHF - ------------ (1) KCOP and KPTV are owned by CCTV; WWOR is owned by Pinelands; the remaining stations are owned by UTV. (2) 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. (3) 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 UTV stations but outside the greater metropolitan television markets in which UTV stations operate. (4) Cable penetration refers to the percentage of DMA television viewing households receiving cable television service, as estimated by Nielsen Media Research. (5) 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 invests directly in the development of original programming. The aggregate amount invested in original programming through December 31, 1999 was not significant to BHC'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. 6 Programs obtained from independent sources consist principally of syndicated television shows, many of which have been shown previously on a major network, and syndicated feature films, which were either made for network television or have been exhibited previously in motion picture theaters (most of which films have been shown previously on network or cable television). Syndicated programs are sold to individual stations to be broadcast one or more times. Television stations not affiliated with a major network generally have large numbers of syndication contracts; each contract is a license for a particular series or program that usually prohibits licensing the same programming to other television stations in the same market. A single syndication source may provide a number of different series or programs. Licenses for syndicated programs are often offered for cash sale (i.e., without any barter element) to stations; however, some are offered on a barter or cash plus barter basis. In the case of a cash sale, the station purchases the right to broadcast the program, or a series of programs, and sells advertising time during the broadcast. The cash price of such programming varies, depending on the perceived desirability of the program and whether it comes with commercials that must be broadcast (i.e., on a cash plus barter basis). Barter programming is offered to stations for no cash consideration, but comes with a greater number of commercials that must be broadcast and, therefore, with less inventory. Barter and cash plus barter programming reduce both the amount of cash required for program purchases and the amount of time available for sale. Although the direct impact on broadcasters' operating income generally is believed to be neutral, program distributors that acquire barter air time compete with television stations and broadcasting networks for sales of air time. BHC believes that the effect of barter on its 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 $151,369,000 as of December 31, 1999. The stations were committed for film and sports rights contracts aggregating $278,000,000 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 7 of Notes to Consolidated Financial Statements. KTVX and KMOL are primary affiliates of their respective networks. 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. 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. 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. 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. 7 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. 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. Most advertising contracts are short-term. The relative contributions of national and local advertising to BHC's gross cash advertising revenues vary from time to time. 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"), which represents nine of the ten 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 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 February 11, 2000 and is due to expire on April 1, 2006. 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 April 20, 1999 and is due to expire on October 1, 2006. 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 on July 7, 1999 and is due to expire on June 1, 2007. WUTB UPN 24's license was assigned to UTV of 8 Baltimore, Inc., a subsidiary of UTV, on January 20, 1998 and is due to expire on October 1, 2001. WRBW UPN 65's license was assigned to UTV of Orlando, Inc., a subsidiary of UTV, on July 7, 1999 and is due to expire on February 1, 2005. On August 5, 1999, the FCC adopted changes in several of its broadcast ownership rules (collectively, the "FCC Ownership Rules"). These rule changes became effective on November 16, 1999; however, several petitions have been filed with the FCC seeking reconsideration of the new rules, so the rules may change. Among other changes, the FCC relaxed its "television duopoly" rule, which barred any entity from having an attributable interest in more than one television station with overlapping service areas. Under the new rules, one entity may have attributable interests in two television stations in the same DMA, provided that (1) one of the two stations is not among the top four in audience share, and (2) at least eight independently owned and operated commercial and noncommercial television stations will remain in the DMA, if the proposed transaction is consummated. The new rules also permit common ownership of television stations in the same DMA, if one of the stations to be commonly owned has failed, is failing or is unbuilt, or if extraordinary public interest factors are present. To transfer ownership in two commonly owned television stations in the same DMA, it will be necessary to again demonstrate compliance with the new rules. Lastly, the new rules authorize the common ownership of television stations with overlapping signal contours as long as the stations to be commonly owned are located in different DMAs. Similarly, the FCC relaxed its "one-to-a-market" rule, which restricts the common ownership of television and radio stations in the same market. One entity now may own up to two television stations and six radio stations or one television station and seven radio stations in the same market, provided that (1) 20 independent media voices (including certain newspapers and a single cable system) will remain in the relevant market following consummation of the proposed transaction, and (2) the proposed combination is consistent with the television duopoly and local radio ownership rules. If fewer than 20 but more than 9 independent voices will remain in a market following a proposed transaction, and the proposed combination is otherwise consistent with the FCC's rules, a single entity may have attributable interests in up to two television stations and four radio stations. If these various "independent voices" tests are not met, a party generally may have an attributable interest in no more than one television station and one radio station in a market. The FCC made other changes to its rules that determine what constitutes an "attributable interest" in applying the FCC Ownership Rules. Under the new rules, a party will be deemed to have an attributable interest in a television or radio station, cable system, or daily newspaper that triggers the FCC's cross-ownership restrictions, if (1) it is a non-passive investor, and it owns 5% or more of the voting stock in the media outlet or its controlling parent; (2) it is a passive investor (i.e., bank trust department, insurance company or mutual fund) and it owns 20% or more of the voting stock; or (3) its interests (which may be in the form of debt or equity (even if non-voting), or both) exceeds 33% of the total asset value of the media outlet, and it either (i) supplies at least 15% of a station's weekly broadcast hours or (ii) has an attributable interest in another media outlet in the same market. The FCC also declared that local marketing agreements, or "LMAs", now will be attributable interests for purposes of the FCC Ownership Rules. The FCC will grandfather LMAs that were in effect prior to November 5, 1996, until it has completed the review of its attribution regulations in 2004. Parties may seek the permanent grandfathering of such an LMA, on a non-transferable basis, by demonstrating that the LMA is in the public interest and that it otherwise complies with FCC Ownership Rules. Finally, the FCC eliminated its "cross interest" policy, which had prohibited common ownership of a cognizable interest in one media outlet and a "meaningful" non-cognizable interest in another media outlet serving essentially the same market. It is difficult to assess how these changes in the FCC ownership restrictions will affect BHC's broadcast business. 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, 9 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 four UHF stations, the 10 BHC stations are deemed to reach approximately 19% of the nation's television households. The FCC is considering whether to eliminate the 50% attribution reduction under this rule for UHF stations. FCC regulations also prohibit common ownership or control between two of ABC, NBC, CBS, and Fox, or any one of those four networks and, under current interpretation, either UPN or WB. The FCC is considering whether to modify or eliminate this rule. 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. BHC cannot predict how changes in the implementation of the ratings system and "V-Chip" technology will affect BHC's business. The FCC recently adopted regulations requiring increased closed-captioning of video programming. 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 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. 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 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; WUTB, channel 41; and WRBW, channel 41. Implementation of DTV is expected to improve the technical quality of television. Furthermore, the implementing rules permit broadcasters to use their assigned digital spectrum flexibly to provide either standard or 10 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 that have not been subjected to extensive field testing and that, 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 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. 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. Some of BHC's television stations began broadcasting on their DTV channels, in addition to their analog broadcasts, in 1999. BHC has filed applications with the FCC for permits to construct DTV facilities for each of its other stations, except WRBW, for which an extension of time has been granted. Future capital expenditures by BHC will be compatible with the new technology whenever possible. 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 relaxing its rule prohibiting network affiliated stations from preventing other stations from broadcasting the programming of their network. BHC 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. BHC believes the ownership by aliens of its stock and that of UTV to be below the applicable limit. On January 20, 2000, the FCC approved new equal employment opportunity and outreach requirements that will apply to all broadcast licensees (and cable operators). Although the FCC has not yet released the text of these rules, the key elements are: (1) licensees will be required to implement a minority outreach program; (2) licensees with five or more full-time employees must place a report regarding their outreach efforts in their public inspection file annually, and, if they have more than 10 full-time employees, they must submit the last four years of these reports to the FCC at the halfway point and endpoint of their license terms, which will be subject to FCC review; (3) licensees with five or more full-time employees also must file with the FCC a "Statement of Compliance" with regard to their outreach efforts every two years; and (4) licensees with five or more full-time employees also must file annual employment reports, of the sort filed prior to 1998, which the FCC will use only to monitor minority employment. 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. 11 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. BHC 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. BHC 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. BHC believes that, in Minneapolis/St. Paul, KMSP UPN 9 generally attracts a smaller viewing audience than the three major network-affiliated VHF stations, has a viewing audience the same size as the Fox UHF affiliate, and has a larger viewing audience than the other two stations, both 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. WRBW UPN 65 generally ranks sixth in terms of audience share, of the twelve commercial stations in the Orlando market. In Baltimore, WUTB UPN 24 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 (3) to the table under Television Broadcasting. Cable television is a major competitor of television broadcasting stations. Because cable television systems operate in each market served by a BHC station, the stations are affected by rules governing cable operations. If a station is not widely accessible by cable in those markets having strong cable penetration, it may lose effective access to a significant portion of the local audience. Even if a television station is carried on a local cable system, an unfavorable channel or service tier position on the cable system may adversely affect the station's audience ratings and, in some circumstances, a television set's ability to receive the station being carried on an unfavorable channel position. Some cable system operators may be inclined to place broadcast stations in unfavorable channel locations. 12 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. BHC is unable to predict the outcome or effect of these developments. As of June 1999, there were approximately 60,000 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. BHC 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 five years, to approximately 13.1 million, as of December 1999. On November 29, 1999, the President signed the Satellite Home Viewer Improvement Act ("SHVIA"). Among other things, SHVIA provides for a statutory copyright license to enable satellite carriers to retransmit local television broadcast stations' programming into the stations' respective local markets. After May 27, 2000, satellite carriers will be prohibited from delivering a local signal into their local markets - so called "local-into-local" service - without the consent or must-carry election of such stations, but stations will be obligated to engage in good faith retransmission consent negotiations with the carriers. SHVIA does not require satellite carriers to, but provides that carriers that choose to do so must, comply with certain mandatory signal carriage requirements by a date certain, as defined by the Act, or as-yet to be drafted FCC regulations. Further, the Act authorizes satellite carriers to continue to provide certain network signals to unserved households, as defined in SHVIA and FCC rules, except that carriers may not provide more than two same-network stations to a household in a single day. Also, households that do not receive a signal of Grade A intensity from any of a particular network's affiliates may continue to receive distant station signals for that network until December 31, 2004, under certain conditions. The FCC has initiated several rule making proceedings, as required by SHVIA, to implement certain aspects of the Act, such as standards for good faith retransmission consent negotiations, must-carry procedures, exclusivity protection for local stations against certain distant signals, and enforcement. 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 1999, wireless cable systems served about 1.5 million subscribers. 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 BHC. 13 ITEM 2. PROPERTIES. 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. Physical facilities consisting of offices and studio facilities are owned by UTV in Minneapolis, San Antonio and Phoenix and are leased in Baltimore, Orlando, Salt Lake City and San Francisco. The Baltimore lease expires in April 2005 and is renewable, at increased rental, for two five-year periods. The Orlando lease expires in March 2004. The Salt Lake City lease expired in August 1999, but has been extended on a month-to-month basis through April 2000. UTV has acquired a 6.03 acre site in Salt Lake City, on which UTV is completing construction of a new, approximately 48,000 square foot, 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 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. The Orlando facility is approximately 8,750 square feet and is located at Universal Studios in Orlando. The Baltimore facility is approximately 11,700 square feet and is located in an office park in a suburb of Baltimore. 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. WRBW's transmitter facilities are located on a site near Orlando. The building containing the transmitter and the tower on which the antenna is mounted are shared with another television station as well as several FM radio stations. The lease for the tower and building expires in September 2001, and is renewable for two five-year periods. 14 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 2004 and is renewable for a five-year period. BHC believes its properties are adequate for their present uses. ITEM 3. LEGAL PROCEEDINGS. Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. Not applicable. EXECUTIVE OFFICERS OF THE REGISTRANT. The executive officers of BHC, as of February 29, 2000, are as follows: POSITIONS WITH BHC; HAS SERVED PRINCIPAL OCCUPATION; AS OFFICER NAME AND AGE AS OF FEBRUARY 29, 2000 SINCE ---- ------------------------------- ---------- Herbert J. Siegel Chairman of the Board; Chairman 1977 of the Board and President, Chris-Craft; 71 William D. Siegel President; Executive Vice 1981 President, Chris-Craft; 45 Joelen K. Merkel Senior Vice President and 1980 Treasurer; Senior Vice President and Treasurer, Chris-Craft; 48 Brian C. Kelly Senior Vice President and General 1992 Counsel and Secretary; Senior Vice President and General Counsel and Secretary, Chris-Craft; 48 Chris-Craft, through its majority ownership of BHC, is principally engaged in television broadcasting. All officers hold office until the meeting of the Board following the next annual meeting of stockholders or until removed by the Board. Evan C Thompson, age 58, is Executive Vice President of Chris-Craft. Although not an officer of BHC, as President of UTV and Chris-Craft's Television Division for more than the past five years, Mr. Thompson may be considered an executive officer of BHC within the Securities and Exchange Commission definition of the term. 15 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 information appearing in the MD&A under the caption QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK is 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. 16 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 BHC'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. 17 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 the compensatory plans or arrangements listed below: * Chris-Craft's Benefit Equalization Plan o Employment Agreement dated January 1, 1994 between Herbert J. Siegel and Chris-Craft. * Employment Agreement dated January 1, 1994 between Evan C Thompson and Chris-Craft, as amended September 28, 1999. (b) No reports on Form 8-K were filed by the registrant during the last quarter of the period covered by this report. 18 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 29, 2000 BHC COMMUNICATIONS, INC. -------------------------------- (Registrant) By: WILLIAM D. SIEGEL ---------------------------- William D. Siegel 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 29, 2000 - ------------------------------------------- Herbert J. Siegel Chairman and Director (principal executive officer) WILLIAM D. SIEGEL March 29, 2000 - ------------------------------------------- William D. Siegel President and Director (principal financial officer) JOELEN K. MERKEL March 29, 2000 - ------------------------------------------- Joelen K. Merkel Senior Vice President, Treasurer and Director (principal accounting officer) JOHN L. EASTMAN March 29, 2000 - ------------------------------------------- John L. Eastman Director BARRY S. GREENE March 29, 2000 - ------------------------------------------- Barry S. Greene Director LAURENCE M. KASHDIN March 29, 2000 - ------------------------------------------- Laurence M. Kashdin Director 19 MORGAN L. MILLER March 29, 2000 - ------------------------------------------- Morgan L. Miller Director JOHN C. SIEGEL March 29, 2000 - ------------------------------------------- John C. Siegel Director 20 BHC COMMUNICATIONS, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES CONSOLIDATED FINANCIAL STATEMENTS: Report of Independent Accountants Consolidated Balance Sheets - December 31, 1999 and 1998 Consolidated Statements of Income - For the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Cash Flows - For the Years Ended December 31, 1999, 1998 and 1997 Consolidated Statements of Shareholders' Investment - For the Years Ended December 31, 1999, 1998 and 1997 Notes to Consolidated Financial Statements SCHEDULES: UPN Financial Statements -- Report of Independent Accountants Balance Sheets - December 31, 1999 and 1998 Statements of Operations - For the Years Ended December 31, 1999, 1998 and 1997 Statements of Changes in Partners' Capital (Deficit) - For the Years Ended December 31, 1999, 1998 and 1997 Statements of Cash Flows - For the Years Ended December 31, 1999, 1998 and 1997 Notes to Financial Statements United Paramount Network (a partnership between BHC Network Partner, Inc., BHC Network Partner II, Inc., BHC Network Partner III, Inc., BHC Network Partner IV, PCI Network Partner Inc. and PCI Network Partner II Inc.) Report and Financial Statements December 31, 1999, 1998 and 1997 Report of Independent Accountants 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 ("UPN", a partnership between BHC Network Partner, Inc., BHC Network Partner II, Inc., BHC Network Partner III, Inc., BHC Network Partner IV, PCI Network Partner Inc., and PCI Network Partner II Inc.) at December 31, 1999 and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, 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. As discussed in Note 2 to the financial statements, UPN changed its method of accounting for start-up costs to comply with Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities". The accompanying financial statements have been prepared assuming that UPN will continue as a going concern. As discussed in Note 7 to the financial statements, on March 20, 2000 the partners of UPN entered into a transaction which will result in UPN being owned by two of the partners, which are under common ownership. As a result of this transaction, the resulting owner of UPN may be in violation of certain Federal Communication Commission ("FCC") rules and may not be able to operate UPN in its present form. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ PricewaterhouseCoopers LLP PricewaterhouseCoopers LLP Century City, California January 31, 2000 except as to Note 7, which is as of March 20, 2000 United Paramount Network Balance Sheets December 31, 1999 and 1998 - -------------------------------------------------------------------- (in thousands) 1999 1998 ----------- ----------- ASSETS Current assets: Cash and cash equivalents $ 9,699 $ 24,704 Accounts receivable (net of allowance for doubtful accounts of $430 and $430, respectively) 33,748 18,787 Program rights and development costs (net of reserve for abandonment of $4,215 and $5,055, respectively) 37,080 46,893 Other current assets 5,004 2,550 ----------- ----------- Total current assets 85,531 92,934 ----------- ----------- Restricted investments 3,769 5,340 Furniture, fixtures, computer equipment, at cost (net of accumulated depreciation of $2,194 and $1,454, respectively) 1,650 1,949 Intangible assets (net of accumulated amortization of $7,166 and $2,972, respectively) - 4,194 Other assets 25,407 15,822 ----------- ----------- $ 116,357 $ 120,239 =========== =========== LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) Current liabilities: Accounts payable $ 12,470 $ 11,654 Accrued program costs 58,274 73,130 Accrued expenses and other liabilities 25,971 34,224 ----------- ----------- Total current liabilities 96,715 119,008 ----------- ----------- Commitments and contingencies (Note 6) Partners' capital (deficit): BHC Network Partner (3,961) (4,192) BHC Network Partner II - (4,072) BHC Network Partner III - 8,879 BHC Network Partner IV 13,782 - PCI Network Partner 7,857 492 PCI Network Partner II 1,964 124 ----------- ----------- Total partners' capital 19,642 1,231 ----------- ----------- $ 116,357 $ 120,239 =========== =========== United Paramount Network Statements of Operations For the Years Ended December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------- (in thousands) 1999 1998 1997 ----------- ----------- ----------- Net revenues $ 134,127 $ 96,401 $ 89,997 Operating costs and expenses: Operating expenses 229,499 182,225 177,874 Selling, general and administrative expenses 95,595 90,871 82,294 Depreciation and amortization 751 2,069 1,794 ----------- ----------- ----------- 325,845 275,165 261,962 ----------- ----------- ----------- Operating loss (191,718) (178,764) (171,965) ----------- ----------- ----------- Other income (expense): Other expense (188) - - Interest and other income 1,412 1,571 1,736 Net income on investment in joint venture - - 32 1,224 1,571 1,768 ----------- ----------- ----------- Loss before cumulative effect of change in accounting principle (190,494) (177,193) (170,197) Cumulative effect of change in accounting principle (4,194) - - ----------- ----------- ----------- Net loss $ (194,688) $ (177,193) $ (170,197) =========== =========== =========== United Paramount Network Statements of Changes in Partners' Capital For the Years Ended December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------- (in thousands)
BHC BHC BHC BHC PCI PCI Network Network Network Network Network Network Partner Partner II Partner III Partner IV Partner Partner II Total ----------- ----------- ----------- ----------- ----------- ----------- --------- Balance at December 31, 1996 $ (4,172) $ (3,703) $ 9,269 $ - $ - $ - $ 1,394 Exercise of options 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 Capital contributions 2,664 40,114 42,225 21,547 85,240 21,309 213,099 Transfer of interest - 3,979 (8,978) 4,999 - - - Allocation of 1999 net loss (2,433) (40,021) (42,126) (12,764) (77,875) (19,469) (194,688) ----------- ----------- ----------- ----------- ----------- ----------- --------- Balance at December 31, 1999 $ (3,961) $ - $ - $ 13,782 $ 7,857 $ 1,964 $ 19,642 =========== =========== =========== =========== =========== =========== ============
United Paramount Network Notes to Financial Statements For the Years Ended December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------- (in thousands) 1999 1998 1997 ---------- ---------- ---------- Cash flows from operating activities: Net loss $ (194,688) $ (177,193) $ (170,197) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of program costs 221,866 177,771 169,771 Payments for programming (229,897) (195,580) (118,912) Depreciation and amortization 751 2,069 1,794 Abandonment reserve (840) (2,666) 2,108 Cumulative effect of change in accounting principle 4,194 - - Changes in assets and liabilities: (Increase) decrease in accounts receivable (14,961) 20,500 (14,230) Increase (decrease) in accounts payable, accrued expenses and other current liabilities (3,609) 1,468 8,470 Increase in other assets (5,737) (3,329) (12,110) ---------- ---------- ---------- Net cash used in operating activities (222,921) (176,960) (133,306) ---------- ---------- ---------- Cash flows from investing activities: Additions to property and equipment (454) (1,565) (467) Cash removed from (placed in) restricted account 1,571 3,415 (7,598) Loans to network affiliates (6,300) - - Net investment in joint venture - (8) 304 ---------- ---------- ---------- Net cash provided by (used in) investing activities (5,183) 1,842 (7,761) ---------- ---------- ---------- Cash flows from financing activities: Exercise of option by PCI Partners - - 186,873 Capital contributions 213,099 176,200 93,520 Distributions to partners - - (116,261) ---------- ---------- ---------- Net cash provided by financing activities 213,099 176,200 164,132 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents (15,005) 1,082 23,065 Cash and cash equivalents: Beginning of year 24,704 23,622 557 ---------- ---------- ---------- End of year $ 9,699 $ 24,704 $ 23,622 ========== ========== ========== Supplemental schedule of non-cash items: Non-cash additions to program costs $ - $ 9,822 $ 51,748 ========== ========== ========== Start-up costs incurred by PCI Partners and contributed to the partnership $ - $ - $ 6,895 ========== ========== ========== United Paramount Network Notes to Financial Statements For the Years Ended December 31, 1999, 1998 and 1997 - -------------------------------------------------------------------- 1. Organization In July 1994, BHC Network Partner, Inc. ("BHC/NP"), a then wholly owned subsidiary of Chris-Craft Industries, Inc.'s ("Chris-Craft") 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. In November 1999, BHC/NP II and BHC/NP III transferred all of their respective partnership interests to BHC Network Partner IV ("BHC/NP IV"), a wholly owned partnership. (See also Note 7) UPN began providing programming for broadcast in January 1995. At December 31, 1999, 1998 and 1997, the Network had 181 affiliates in markets covering approximately 97%, 185 affiliates in markets covering approximately 95%, and 187 affiliates in markets covering approximately 97% 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, including BHC/NP IV, 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. 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 Standard 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. 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 requires costs of start-up activities and organization costs to be expensed as incurred. The Network adopted SOP 98-5 during the first quarter of 1999 and wrote-off unamortized start-up costs of $4,194,000 as a cumulative change in accounting principle. Other Assets Other assets include primarily an investment in a joint venture with Saban Entertainment, deferred network costs, and loans to network affiliates. 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. Interest rates on loans to network affiliates are generally current market rates. Accordingly, the carrying value and fair value of the loans approximate one another. Long-Lived Assets The carrying value of long-lived assets, primarily consisting of investments, loans to affiliates, deferred network costs, and property and equipment, is periodically reviewed by management. The Network reviews the carrying value of long-lived assets for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. Measurement of any impairment would include a comparison of estimated future cash flows anticipated to be generated during the remaining life of the long-lived asset to the net carrying value of the long-lived asset. Revenue Recognition Revenues are recognized at contractual rates as advertisements are aired. 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. Stock Appreciation Rights Stock appreciation rights entitle an employee to receive, at a specified future date or dates, the excess of the quoted market price of a specified number of shares of a company's stock over the quoted market price at the date of grant. On February 16, 1999, the Network granted stock appreciation rights in 30,000 shares of both Viacom and Chris-Craft stock, at a grant price of $83.50 and $42.81, respectively. Due to a Viacom 2 for 1 stock split and a Chris-Craft 3% stock dividend, the adjusted granted appreciation rights in shares of Viacom and Chris-Craft stock are 60,000 and 30,900, respectively, and the adjusted grant prices are $41.75 and $41.57, respectively. The stock appreciation rights vest equally over a three-year period. The Network recognized $1,080,000 in compensation expense relating to these stock appreciation rights during 1999. 3. Other Assets At December 31, 1999 and 1998, other assets are comprised of deferred network costs of $15,912,000 and $12,966,000, respectively, loans to network affiliates of $6,964,000 and $325,000, respectively, and investment in joint venture of $2,531,000 and $2,531,000, respectively. The investment in joint venture is presented net of reserves of $2,119,000 at December 31, 1999 and 1998. Included in loans to network affiliates is a $6,000,000 note receivable and $248,000 interest receivable from WOWL, UPN's affiliate in Florence/Huntsville, Alabama. The loan bears a rate of interest equal to the greater of 8% or the prime rate. WOWL is required to begin making semi-annual payments to UPN on November 1, 2000 through the maturity date of October 28, 2004 and is secured by the station's assets. WOWL's current ownership group includes UPN's parents. 4. Accrued Expenses and Other Liabilities Accrued expenses and other liabilities consist of the following: (in thousands) December 31, 1999 1998 --------- --------- Accrued advertising and marketing costs $ 13,701 $ 24,123 Accrued compensation 7,561 5,135 Other accrued expenses 4,709 4,966 --------- --------- $ 25,971 $ 34,224 ========= ========= 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. 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 1999 and 1998, additions to capitalized programming costs from related parties totaled $115,073,000 and $120,335,000, 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 1999 and 1998, payments for these services totaled approximately $3,237,000 and $3,240,000, respectively. 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. In 1999, UPN extended the lease for an additional three years. The lease calls for certain penalty payments upon cancellation after three years. Rental expense was $729,000, $802,000 and $766,000 for the years ended December 31, 1999, 1998 and 1997, 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 $371,000 and $354,000 for the years ended December 31, 1999 and 1998, respectively. 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, 1999, the future minimum rental payments under operating leases are as follows: 2000 $ 1,241,000 2001 1,380,000 2002 1,406,000 2003 1,028,000 2004 444,000 Thereafter 1,469,000 --------------- Total $ 6,968,000 =============== During the normal course of business, the Network enters into contracts for programming, which are not currently available for telecasting. The aggregate amounts of the payments required under these agreements totaled approximately $112,310,000 and $87,083,000 at December 31, 1999 and 1998, respectively. During the normal course of business, the Network enters into various affiliate agreements, which will require the Network to make future promotional payments to its affiliate stations. The aggregate amounts of the payments required under these agreements totaled approximately $22,823,000 and $30,838,000 at December 31, 1999 and 1998, respectively. During the normal course of business, the Network enters into various co-op advertising agreements with its affiliate stations, which will require the Network to make payments to these affiliates for its share of future advertising costs. The aggregate amounts of the payments required under these agreements totaled approximately $2,657,000 and $3,635,000 at December 31, 1999 and 1998, respectively. The Network has contractual agreements with several key employees. As of December 31, 1999, estimated future payments relating to these agreements are as follows: 2000 $ 11,961,000 2001 6,179,000 2002 2,705,000 Thereafter - ---------------- Total $ 20,845,000 ================ 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. 7. Subsequent Events On September 7, 1999, Viacom announced its intent to merge with the CBS Corporation. The combined company would then own the CBS television broadcast network as well as its interest in UPN via its ownership of The Paramount Television Group. The Viacom/CBS merger awaits clearance from the Federal Communications Commission ("FCC"). Viacom's and CBS's shareholders have already voted to approve the merger. On February 3, 2000, Viacom initiated a buy-sell offer to BHC for $5.0 million, offering to either sell its 50% interest or to buy BHC's 50% interest in UPN. On March 20, 2000, BHC elected to sell its 50% interest in UPN to Viacom per the terms of the "buy-sell" provision of the UPN Joint Venture Agreement. The sale is expected to close by March 31, 2000. As a result of the sale, BHC will have no further ownership interest in the Network or obligations to fund UPN's operations. Under the current FCC "dual network rule" the major broadcast networks (ABC, CBS, NBC, FOX) are prohibited from merging and/or acquiring another network (including UPN and the WB). Therefore, Viacom's ownership of CBS and UPN will require that the FCC waive and/or modify the existing rule. If the FCC will not allow Viacom to own two networks, the future of the Network is uncertain. The financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result should UPN be unable to continue as a going concern. 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 Restated By-laws Exhibit 10(c) [1] 10.1 Management Agreement between registrant and Chris-Craft dated July 21, 1989 Exhibit 19 [4] 10.2 Amendment No. 1 thereto dated October 31, 1991 Exhibit 10.(H) (2)[5] 10.3 Amendment No. 2 thereto dated March 24, 1994 Exhibit 10(E) [2] 10.4 Form of Agreement under Chris-Craft's Executive Deferred Income Plan Exhibit 10(B) [5] 10.5 Employment Agreement dated January 1, 1994 between Chris-Craft and Herbert J. Siegel Exhibit 10(C) [5] 10.6 Split-Dollar Agreement dated January 6, 1994 between Chris-Craft and William D. Siegel Exhibit 10(D) [5] 10.7 Split-Dollar Agreement dated January 6, 1994 between Chris-Craft and John D. Siegel Exhibit 10(F) [5] 10.8 Employment Agreement dated January 1, 1994 between Chris-Craft and Evan C Thompson Exhibit 10.9 [9] 10.9 Amendment thereto dated September 28, 1999 Exhibit 11(H) [3] 10.10 Chris-Craft's Benefit Equalization Exhibit 10(B)(1)[6] Plan, as amended Exhibit 10.3 [8] Exhibit 10.10[7]] 10.11 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 registrant * 27 Financial Data Schedule - ------------------------- * Filed herewith. [1] Registrant's Registration Statement on Form S-1 (Regis. No. 33-31091). [2] Chris-Craft's Annual Report on Form 10-K for the year ended August 31, 1983 (File No. 1-2999). [3] Chris-Craft's Registration Statement on Form S-1 (Regis. No. 2-65906). [4] Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1991. [5] Chris-Craft's Annual Report on Form 10-K for the year ended December 31, 1993. [6] Chris-Craft's Annual Report on Form 10-K for the year ended December 31, 1989. [7] Registrant's Annual Report on Form 10-K for the year ended December 31, 1994. [8] Chris-Craft's Annual Report on Form 10-K for the year ended December 31, 1994. [9] Chris-Craft's Annual Report on Form 10-K for the year ended December 31, 1999. EX-13 2 CONSOLIDATED STATEMENTS OF INCOME Year ended December 31, ---------------------------- (In Thousands Except per Share Data) 1999 1998 1997 - --------------------------------------------------------------------- Operating Revenues $469,347 $445,850 $443,499 ===================================================================== Operating Expenses: Television expenses 219,936 210,947 212,183 Selling, general and administrative 147,255 138,174 129,978 - --------------------------------------------------------------------- 367,191 349,121 342,161 - --------------------------------------------------------------------- Operating income 102,156 96,729 101,338 - --------------------------------------------------------------------- Other Income (Expense): Interest and other income 105,805 79,366 82,809 Equity in United Paramount Network loss (97,344) (88,597) (87,430) Gain on change of ownership in United Paramount Network - - 153,933 - --------------------------------------------------------------------- 8,461 (9,231) 149,312 - --------------------------------------------------------------------- Income before provision for income taxes and minority interest 110,617 87,498 250,650 Provision for Income Taxes 41,900 31,500 101,000 - --------------------------------------------------------------------- Income before minority interest 68,717 55,998 149,650 Minority Interest 18,184 16,425 18,473 - --------------------------------------------------------------------- Net income $ 50,533 $ 39,573 $131,177 ===================================================================== Weighted Average Common Shares Outstanding 22,512 22,614 23,333 ===================================================================== Earnings per share - Basic $ 2.24 $ 1.75 $ 5.62 Diluted $ 2.24 $ 1.75 $ 5.61 ===================================================================== The accompanying notes to consolidated financial statements are an integral part of these statements. CONSOLIDATED BALANCE SHEETS December 31, (In Thousands of Dollars) ----------------------------- 1999 1998 Assets - ------ Current Assets: Cash and cash equivalents $ 117,184 $ 201,175 Marketable securities (substantially all U.S. Government securities) 1,219,144 1,202,070 Accounts receivable, less allowance for doubtful accounts of $4,466 and $4,751 99,264 85,252 Film contract rights 111,819 99,883 Prepaid expenses and other current assets 49,429 37,952 - -------------------------------------------------------------------- Total current assets 1,596,840 1,626,332 - -------------------------------------------------------------------- Investments 101,371 67,299 - -------------------------------------------------------------------- Film Contract Rights, including deposits, less estimated portion to be used within one year 39,550 23,619 - -------------------------------------------------------------------- Property and Equipment, at cost: Land, buildings and improvements 48,247 43,090 Equipment 126,862 110,358 - -------------------------------------------------------------------- 175,109 153,448 Less - Accumulated depreciation 113,231 104,601 - -------------------------------------------------------------------- 61,878 48,847 - -------------------------------------------------------------------- Intangible Assets 417,420 370,394 - -------------------------------------------------------------------- Other Assets 7,389 6,110 - -------------------------------------------------------------------- $2,224,448 $2,142,601 ==================================================================== December 31, ----------------------------- 1999 1998 Liabilities and Shareholders' Investment - ---------------------------------------- Current Liabilities: Film contracts payable within one year $ 102,737 $ 96,595 Accounts payable and accrued expenses 108,435 93,253 Income taxes payable 38,696 36,955 - -------------------------------------------------------------------- Total current liabilities 249,868 226,803 - -------------------------------------------------------------------- Film Contracts Payable after One Year 84,372 62,050 - -------------------------------------------------------------------- Other Long-Term Liabilities 15,176 17,545 - -------------------------------------------------------------------- Minority Interest 160,550 139,876 - -------------------------------------------------------------------- Commitments and Contingencies (Note 7) Shareholders' Investment: Class A common stock-par value $.01 per share; authorized 200,000,000 shares; outstanding 4,511,605 shares 45 45 Class B common stock-par value $.01 per share; authorized 200,000,000 shares; outstanding 18,000,000 shares 180 180 Retained earnings 1,705,841 1,675,976 Accumulated other comprehensive income 8,416 20,126 - -------------------------------------------------------------------- 1,714,482 1,696,327 - -------------------------------------------------------------------- $2,224,448 $2,142,601 ==================================================================== The accompanying notes to consolidated financial statements are an integral part of these statements. CONSOLIDATED STATEMENTS OF CASH FLOWS Year ended December 31, ----------------------------- (In Thousands of Dollars) 1999 1998 1997 - ---------------------------------------------------------------------- Cash Flows from Operating Activities: Net income $ 50,533 $ 39,573 $ 131,177 Adjustments to reconcile net income to net cash provided from operating activities: Film contract amortization 99,735 88,507 95,244 Film contract payments (100,834) (100,824) (99,513) Prepaid broadcast rights - - 21,114 Depreciation and other amortization 22,393 21,278 19,187 Equity in United Paramount Network loss 97,344 88,597 87,430 Gain on sale of marketable securities (33,123) (5,316) (1,079) Gain on change of ownership in United Paramount Network - - (153,933) Minority interest 18,184 16,425 18,473 Other (4,891) 1,207 2,661 Changes in assets and liabilities: Accounts receivable (12,715) 946 1,261 Other assets (2,651) 6,559 (7,738) Accounts payable and other liabilities 14,609 5,953 4,640 Income taxes 5,739 7,503 22,238 - --------------------------------------------------------------------- Net cash provided from operating activities 154,323 170,408 141,162 - --------------------------------------------------------------------- Cash Flows from Investing Activities: Disposition of marketable securities 463,317 414,133 1,002,103 Purchase of marketable securities (472,472) (389,720) (944,113) Station acquisitions (includes $58,903 and $77,646 of intangible assets) (61,269) (80,214) - Distribution from United Paramount Network - - 116,261 Investment in United Paramount Network (106,550) (88,100) (48,185) Other investments (21,247) (22,107) (3,345) Capital expenditures, net (19,633) (11,298) (7,040) Other (15) (23) (1,334) - --------------------------------------------------------------------- Net cash (used in) provided from investing activities (217,869) (177,329) 114,347 - --------------------------------------------------------------------- Cash Flows from Financing Activities: Payment of special dividend (22,512) (22,738) (23,599) Purchase of treasury stock - (46,305) (95,408) Capital transactions of subsidiary 2,067 (5,365) (749) - --------------------------------------------------------------------- Net cash used in financing activities (20,445) (74,408) (119,756) - --------------------------------------------------------------------- Net (Decrease) Increase in Cash and Cash Equivalents (83,991) (81,329) 135,753 Cash and Cash Equivalents at Beginning of Year 201,175 282,504 146,751 - --------------------------------------------------------------------- Cash and Cash Equivalents at End of Year $ 117,184 $ 201,175 $ 282,504 ===================================================================== The accompanying notes to consolidated financial statements are an integral part of these statements. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
Treasury Outstanding Shares Shares Dollar Amount (In Thousands) Accumulated Other Class A Class B Class A Class A Class B Retained Treasury Comprehensive Comprehensive Common Common Common Common Common Earnings Stock Income Income Balance at December 31, 1996 5,839,508 18,000,000 (133,636) $58 $180 $1,710,323 $(6,677) $1,649 Comprehensive income: Net income - - - - - 131,177 - - $131,177 Other comprehensive -------- income: Unrealized net gain on securities (net of tax of $4,619) - - - - - - - - 6,870 Reclassification adjustment (net of tax of $397) - - - - - - - - (570) Other comprehensive -------- income, net of tax - - - - - - - 6,300 6,300 Total comprehensive -------- income - - - - - - - - $137,477 Dividend on common ======== stock - $1.00 per share - - - - - (23,693) - - Acquisition of treasury stock - - (813,400) - - - (95,306) - Retirement of treasury stock (813,400) - 813,400 (8) - (95,298) 95,306 - Capital transactions of subsidiary - - 1,132 - - 893 50 - - ------------------------------------------------------------------------------------------------------------ Balance at December 31, 1997 5,026,108 18,000,000 (132,504) 50 180 1,723,402 (6,627) 7,949 Comprehensive income: Net income - - - - - 39,573 - - $ 39,573 Other comprehensive -------- income: Unrealized net gain on securities (net of tax of $9,028) - - - - - - - - 15,296 Reclassification adjustment (net of tax of $1,887) - - - - - - - - (3,119) Other comprehensive -------- income, net of tax - - - - - - - 12,177 12,177 -------- Total comprehensive income - - - - - - - - $ 51,750 ======== Dividend on common stock - $1.00 per share - - - - - (22,831) - - Acquisition of treasury stock - - (514,503) - - - (62,984) - Retirement of treasury stock (514,503) - 514,503 (5) - (62,979) 62,984 - Capital transactions of subsidiary - - 132,504 - - (1,189) 6,627 - - ------------------------------------------------------------------------------------------------------------ Balance at December 31, 1998 4,511,605 18,000,000 - 45 180 1,675,976 - 20,126 Comprehensive income: Net income - - - - - 50,533 - - $ 50,533 Other comprehensive -------- income: Unrealized net gain on securities (net of tax of $4,840) - - - - - - - - 9,044 Reclassification adjustment (net of tax of $11,020) - - - - - - - - (20,754) Other comprehensive -------- loss, net of tax - - - - - - (11,710) (11,710) -------- Total comprehensive income - - - - - - - - $ 38,823 Dividend on common ======== stock - $1.00 per share - - - - - (22,511) - - Capital transactions of subsidiary - - - - - 1,843 - - - ------------------------------------------------------------------------------------------------------------ Balance at December 31, 1999 4,511,605 18,000,000 - $45 $180 $1,705,841 $ - $8,416 ============================================================================================================ The accompanying notes to consolidated financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 - ------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (A) BUSINESS AND BASIS OF PRESENTATION BHC Communications, Inc. is a majority owned (80.0% at December 31, 1999 and 79.96% at December 31, 1998) subsidiary of Chris-Craft Industries, Inc. BHC's primary business is television broadcasting, conducted through wholly owned subsidiaries, which operate three television stations, and through majority owned (58.1% at December 31, 1999 and 58.5% at December 31, 1998) United Television, Inc. (UTV), which operates seven television stations, one of which was acquired in July 1999. 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. On March 20, 2000, BHC elected to sell its 50% interest in UPN to Viacom, and expects to close the transaction by March 31, 2000. As a result of the sale, BHC will have no further ownership interest in the network or obligation to fund UPN's operations. See Note 10. The accompanying consolidated financial statements include the accounts of BHC and its subsidiaries, after elimination of all significant intercompany accounts and transactions. The interest of UTV shareholders other than BHC in the net income and net assets of UTV is set forth as Minority Interest in the Consolidated Statements of Income and Consolidated Balance Sheets, respectively. BHC has elected to present Comprehensive Income in the Consolidated Statements of Shareholders' Investment. Such amounts have been presented net of income taxes and minority interest. Preparation of financial statements in accordance with generally accepted accounting principles requires the use of management estimates and assumptions. Actual results could differ. Certain prior year amounts have been restated to conform with the 1999 presentation. (B) FINANCIAL INSTRUMENTS 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 BHC'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) Cost Gains Losses Fair Value - --------------------------------------------------------------------- December 31, 1999: U.S. Government securities $1,149,089 $ 35 $2,520 $1,146,604 Other 54,126 21,089 2,675 72,540 - --------------------------------------------------------------------- $1,203,215 $21,124 $5,195 $1,219,144 ===================================================================== December 31, 1998: U.S. Government securities $1,093,744 $ 1,656 $ 27 $1,095,373 Other 74,670 33,034 1,007 106,697 - ----------------------------------------------------------------- $1,168,414 $34,690 $1,034 $1,202,070 ===================================================================== Of the U.S. Government securities held at December 31, 1999, 98% mature within one year and all within 16 months. Certain additional information related to BHC's marketable securities as of and for the years ended December 31, 1999, 1998 and 1997 is as follows: (In Thousands) 1999 1998 1997 - ---------------------------------------------------------------------- Sales proceeds $463,317 $414,133 $1,002,103 Realized gains 33,153 6,018 1,256 Realized losses 30 702 177 Net unrealized gain 15,929 33,656 13,603 Adjustment for unrealized gain, net of deferred income taxes and minority interest $ 8,416 $ 20,126 $ 7,949 ====================================================================== For purposes of computing realized gains and losses, cost was determined using the specific identification method. (C) FILM CONTRACTS BHC'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, 1999. 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, 1999 are $45,997,000, $26,548,000, $11,331,000 and $496,000 in 2001, 2002, 2003 and thereafter, respectively. The net present value at December 31, 1999 of such payments, based on an 8.5% discount rate, was approximately $68,400,000. See Note 7. (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. Amounts primarily relate to television station WWOR, which was acquired in 1992, and television stations WRBW and WUTB, the assets of which were acquired in 1999 and 1998, respectively, and are being amortized on a straight-line basis over 40-year periods. Accumulated amortization of intangible assets totalled $88,861,000 at December 31, 1999 and $76,984,000 at December 31, 1998. (F) REVENUE RECOGNITION AND BARTER TRANSACTIONS Revenue is recognized upon broadcast of television advertising. The estimated fair value of goods or services received 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 $44,222,000 in 1999, $47,654,000 in 1998 and $43,944,000 in 1997. Barter expense in each year approximated barter revenue. (G) EARNINGS PER SHARE Basic per share amounts have been computed by dividing net income by the weighted average number of common shares outstanding during each year. Diluted per share amounts have been computed by dividing net income, less the adjustment for dilution of UTV net income ($94,000 in 1999, $103,000 in 1998 and $179,000 in 1997) resulting from the assumed exercise of UTV stock options, by the weighted average number of common shares outstanding each year. BHC has no securities outstanding other than its common shares. (H) STOCK-BASED COMPENSATION BHC itself has no stock-based employee compensation plan, but UTV has stock option plans under which options to purchase shares of UTV common stock may be granted to UTV and BHC employees and to UTV directors. UTV 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." If UTV had elected to recognize compensation expense based upon the fair value at the grant date for awards under its plans using the methodology prescribed by Statement of Financial Accounting Standards (SFAS) 123, BHC net income would have decreased by $545,000, or $.02 per share ($.02 per share diluted), in 1999, increased by $290,000, or $.01 per share ($.01 per share diluted), in 1998 and decreased by $398,000, or $.02 per share ($.01 per share diluted), in 1997. Such pro forma amounts are based on fair value estimates using the Black- Scholes option pricing model, and 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 dditional options may be granted in future years. (I) SUPPLEMENTAL CASH FLOW INFORMATION AND DISCLOSURE OF NONCASH INVESTING ACTIVITIES Cash paid for income taxes totalled $35,900,000 in 1999, $31,000,000 in 1998 and $79,500,000 in 1997. The 1997 distribution from UPN to BHC was net of approximately $38,800,000, representing additional BHC Capital contributions. 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. On March 20, 2000, BHC elected to sell its 50% interest in UPN to Viacom, and expects to close the transaction by March 31, 2000. As a result of the sale, BHC will have no further ownership interest in the network or obligation to fund UPN's operations. See Note 10. UPN has been organized as a partnership, and BHC accounts for its partnership interest under the equity method. The carrying value of such interest, which reflects BHC funding of $106,550,000 in 1999 and $88,100,000 in 1998, and BHC's pro rata share of UPN losses in those years, totalled $9,821,000 at December 31, 1999 and $615,000 at December 31, 1998, and is included in Investments on the accompanying Consolidated Balance Sheets. Condensed consolidated financial statements of UPN are as follows: Balance Sheets December 31, ------------------------- (In Thousands) 1999 1998 - ------------------------------------------------------------------- Current assets $ 85,531 $ 92,934 Other assets 30,826 27,305 - ------------------------------------------------------------------- $116,357 $120,239 =================================================================== Current liabilities $ 96,715 $119,008 Partners capital 19,642 1,231 - ------------------------------------------------------------------- $116,357 $120,239 =================================================================== Statements of Operations Year ended December 31, ------------------------------------ (In Thousands) 1999 1998 1997 - -------------------------------------------------------------------- Operating revenues* $134,127 $ 96,401 $ 89,997 Operating expenses* 325,845 275,165 261,962 - -------------------------------------------------------------------- Operating loss (191,718) (178,764) (171,965) Other income (expense), net (2,970) 1,571 1,768 - -------------------------------------------------------------------- Net loss $(194,688) $(177,193) $(170,197) ==================================================================== * 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 9. Year ended December 31, ----------------------------- (In Thousands) 1999 1998 1997 - --------------------------------------------------------------------- Depreciation and amortization $751 $2,069 $1,794 Capital expenditures $454 $1,565 $ 467 NOTE 3 - ---------------------------------------------------------------------- ACCOUNTS PAYABLE AND ACCRUED EXPENSES: Accounts payable and accrued expenses consist of the following: December 31, ------------------------- (In Thousands) 1999 1998 - ------------------------------------------------------- Accounts payable $ 6,485 $ 6,490 Accrued expenses - Deferred barter revenue 39,754 38,824 Payroll and compensation 34,931 27,584 Other 27,265 20,355 - ------------------------------------------------------- $ 108,435 $ 93,253 ======================================================= NOTE 4 - ---------------------------------------------------------------------- SHAREHOLDERS' INVESTMENT: Each share of Class B common stock, all of which is held by Chris-Craft, entitles the holder to ten votes (Class A common stock entitles the holder to one vote per share), is convertible at all times into Class A common stock on a share-for-share basis, is not transferable except to specified persons and, in general, carries the same per share dividend and liquidation rights as Class A common stock, except that the Board of Directors may in its discretion declare greater cash dividends per share on the Class A common stock than on the Class B common stock. From 1990, when BHC became a public company, 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. Chris-Craft's ownership interest in BHC during that period increased to 80% (representing 97.6% of BHC's voting power) from 60%. No additional shares were acquired by BHC during 1999. At December 31, 1999, 185,497 Class A common shares remained authorized for purchase. Capital transactions of subsidiary, as set forth in the accompanying Consolidated Statements of Cash Flows and Consolidated Statements of Shareholders' Investment, reflect purchases by UTV of its common shares totalling $828,000 in 1999, $7,010,000 in 1998 and $2,755,000 in 1997, proceeds to UTV of $4,849,000 in 1999, $3,579,000 in 1998 and $3,939,000 in 1997 from the exercise of stock options, and UTV dividend payments of $4,708,000 in 1999, $4,688,000 in 1998 and $4,687,000 in 1997, adjusted for intercompany eliminations and minority interest. NOTE 5 - ---------------------------------------------------------------------- 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. BHC pension expense, including amounts accrued in Chris-Craft and UTV nonqualified plans for retirement benefits in excess of statutory limitations, totalled $3,999,000 in 1999, $3,888,000 in 1998 and $3,434,000 in 1997. It is not practical to determine which assets of the Chris-Craft pension plan relate to BHC. The estimated funded status of the Chris- Craft and UTV plans in which BHC participates, including amounts accrued in the nonqualified plans, was as follows: December 31, ---------------------- (In Thousands) 1999 1998 - ----------------------------------------------------------------- Change in benefit obligation: Benefit obligation at beginning of year $ 59,181 $ 49,681 Service cost 4,065 4,187 Interest cost 3,931 3,574 Actuarial (gain)/loss (7,825) 2,156 Amendments - 471 Benefits paid (2,430) (888) - ----------------------------------------------------------------- Benefit obligation at end of year 56,922 59,181 - ----------------------------------------------------------------- Change in plan assets: Fair value of plan assets at beginning of year 37,219 32,633 Actual return on plan assets 3,082 3,649 Employer contributions 4,139 1,825 Benefits paid (2,430) (888) - ----------------------------------------------------------------- Fair value of plan assets at end of year 42,010 37,219 - ----------------------------------------------------------------- Plan assets less than projected benefit obligation (14,912) (21,962) Unrecognized initial net asset (34) (84) Unrecognized prior service cost 699 746 Unrecognized net actuarial gain (9,308) (1,313) - ----------------------------------------------------------------- Pension liability $(23,555) $(22,613) ================================================================= Assumptions used in accounting for pension plans for each year are as follows: 1999 1998 1997 Discount rate at end of year 7.50% 6.75% 7.25% Rate of increase in future compensation levels 4.00% 4.00% 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 $10,456,000, $13,972,000, and $0, respectively, at December 31, 1999, and $27,464,000, $35,883,000, and $14,973,000, respectively, at December 31, 1998. The aggregate BHC expense of other retirement plans in which its employees participate, primarily stock purchase and profit sharing plans of Chris-Craft and UTV and related accruals in the nonqualified retirement plans mentioned above, totalled $10,959,000 in 1999, $5,212,000 in 1998 and $8,811,000 in 1997. NOTE 6 - ---------------------------------------------------------------------- INCOME TAXES: Income taxes are provided in the accompanying Consolidated Statements of Income as follows: Year ended December 31, --------------------------------- (In Thousands) 1999 1998 1997 - -------------------------------------------------------------------- Current: Federal $ 34,300 $ 24,700 $ 61,900 State 9,700 8,300 18,400 - -------------------------------------------------------------------- 44,000 33,000 80,300 - -------------------------------------------------------------------- Deferred: Federal (2,300) (2,000) 20,600 State 200 500 100 - -------------------------------------------------------------------- (2,100) (1,500) 20,700 - -------------------------------------------------------------------- $ 41,900 $ 31,500 $101,000 ==================================================================== 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) 1999 1998 1997 - ---------------------------------------------------------------------- Taxes at federal statutory rate $ 38,716 $ 30,625 $ 87,727 State income taxes, net 6,435 5,720 12,025 Amortization of intangible assets 3,125 3,125 3,127 Realization of tax benefit (6,500) (8,500) - Other 124 530 (1,879) - ---------------------------------------------------------------------- $ 41,900 $ 31,500 $101,000 ====================================================================== 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) 1999 1998 - --------------------------------------------------------------------- Accrued liabilities not deductible until paid $19,664 $18,142 Film contract rights 8,254 8,325 - ---------------------------------------------------------------------- Deferred tax assets 27,918 26,467 - ---------------------------------------------------------------------- Investments (16,919) (18,772) Other intangibles (3,324) (1,589) Property and equipment (2,158) (2,380) SFAS 115 adjustment (5,851) (12,031) - ---------------------------------------------------------------------- Deferred tax liabilities (28,252) (34,772) - ---------------------------------------------------------------------- Net deferred tax liabilities $ (334) $(8,305) ====================================================================== During 1999, BHC became a member of the Chris-Craft affiliated group and, accordingly, will be included in Chris-Craft's consolidated federal income tax return. Pursuant to the terms of a tax sharing agreement with Chris-Craft, BHC's federal income tax provision continues to be computed on a separate company basis. The related benefits or liabilities which are ultimately realized through Chris- Craft are included in the income tax accounts set forth in the accompanying Consolidated Balance Sheets. As of December 31, 1999, the federal obligation payable to Chris-Craft was approximately $10.6 million. NOTE 7 - ---------------------------------------------------------------------- COMMITMENTS AND CONTINGENCIES: The aggregate amount payable by BHC 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 $278,000,000 at December 31, 1999 (including $78,300,000 applicable to UTV). At December 31, 1999, UTV remains obligated for possible future consideration relating to the purchase of WRBW of up to $25,000,000. In April 1999, a jury awarded damages totalling $7.3 million (approximately $8.4 million including legal fees and interest through March 2000) to a former WWOR employee who filed suit alleging discrimination by the station. The station and its counsel believe the award to be unjustified and have filed an appeal which is expected to be heard in late 2000. It is not possible to reasonably estimate the amount, if any, which ultimately will be paid. Accordingly, no amount has been reserved in BHC's financial statements relating to this matter. BHC is a party to various 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 matters will not have a material effect on BHC's consolidated financial position or results of operations. NOTE 8 - ---------------------------------------------------------------------- RELATED PARTY TRANSACTIONS: Included in selling, general and administrative expenses are management fees BHC considered reasonable and paid Chris-Craft of $12,000,000 in 1999, 1998 and 1997, and management and directors' fees UTV paid Chris-Craft totalling $570,000 in each of the three years. NOTE 9 - ---------------------------------------------------------------------- SEGMENT REPORTING: In 1998, BHC adopted SFAS 131, "Disclosures about Segments of an Enterprise and Related Information." BHC has one reportable segment, its television business, which is reported in the consolidated financial statements. 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. NOTE 10 - ---------------------------------------------------------------------- SUBSEQUENT EVENT: On March 20, 2000, BHC elected to sell its 50% interest in UPN to Viacom for a $5,000,000 cash payment, under the "buy-sell" provisions of the UPN Joint Venture Agreement, which Viacom had triggered. On March 16, 2000, a New York State Supreme Court upheld Viaco's exercise of the buy-sell in a lawsuit brought by BHC that sought to enjoin the Viacom- CBS merger as a violation of the non-compete provision of the Joint Venture Agreement. The sale is expected to close by March 31, 2000. As a result of the sale, BHC will have no further ownership interest in the network or obligation to fund UPN's operations. BHC's eight television stations that are currently affiliated with UPN will remain affiliates after the sale. BHC expects to record a loss of approximately $10,000,000 in connection with the sale, to be reflected in results of operations for the three months ended March 31, 2000. REPORT OF INDEPENDENT ACCOUNTANTS 1301 Avenue of the Americas New York, NY 10019 To the Board of Directors and Shareholders of BHC Communications, 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 BHC Communications, Inc. and its subsidiaries at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. 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 auditing standards generally accepted in the United States 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. February 14, 2000, except as to Note 10 which is as of March 20, 2000 /s/ PricewaterhouseCoopers SELECTED FINANCIAL DATA
(In Thousands of Dollars Except As of and for the Year ended December 31, per Share Data) 1999 1998 1997 1996 1995 Operating revenues $ 469,347 $ 445,850 $ 443,499 $ 446,292 $ 454,702 ================================================================================ Operating income $ 102,156 $ 96,729 $ 101,338 $ 107,148 $ 118,579 Interest and other income 105,805 79,366 82,809 81,849 82,483 Equity in United Paramount Network loss (97,344) (88,597) (87,430) (146,313) (129,303) Gain on change of ownership in United Paramount Network - - 153,933 - - Income taxes (41,900) (31,500) (101,000) (21,000) (18,800) Minority interest (18,184) (16,425) (18,473) (17,448) (15,902) - -------------------------------------------------------------------------------- Net income $ 50,533 $ 39,573 $ 131,177 $ 4,236 $ 37,057 ================================================================================ Earnings per share - Basic $ 2.24 $ 1.75 $ 5.62 $ .18 $ 1.51 Diluted 2.24 1.75 5.61 .17 1.50 Cash dividends declared per share 1.00 1.00 1.00 - 1.00 Cash and marketable securities 1,336,328 1,403,245 1,487,280 1,391,992 1,499,365 Film contract rights 151,369 123,502 121,977 144,034 145,902 Investments 101,371 67,299 47,594 46,944 10,065 Total assets 2,224,448 2,142,601 2,142,488 2,097,263 2,159,010 Long-term debt - - - - - Minority interest 160,550 139,876 115,473 95,227 95,252 Shareholders' investment 1,714,482 1,696,327 1,724,954 1,705,533 1,781,893 Book value per share $ 76.16 $ 75.35 $ 75.35 $ 71.95 $ 73.14
STOCK PRICE, DIVIDEND AND RELATED INFORMATION BHC Class A common stock is traded on the American Stock Exchange. The high and low sales prices of these shares are shown below for the periods indicated. At February 29, 2000, there were 6,118 holders of record of Class A common stock. All BHC Class B common shares, which in general are nontransferable, are held by Chris-Craft Industries, Inc., and, accordingly, there is no trading market for such shares. First Second Third Fourth Quarter Quarter Quarter Quarter - ---------------------------------------------------------------------- 1999 High 129 132 1/8 139 5/8 169 Low 107 111 1/2 123 1/4 138 - ---------------------------------------------------------------------- 1998 High 142 145 5/16 140 3/4 122 Low 125 3/8 135 1/8 108 102 9/16 - ---------------------------------------------------------------------- BHC paid special cash dividends of $2.00 per share in February 2000 and $1.00 per share in February 1999. BHC plans to consider annually the payment of a special dividend. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In Thousands of Dollars First Second Third Fourth Except per Share Data) Quarter Quarter Quarter Quarter Year - -------------------------------------------------------------------------------- Year Ended December 31, 1999 Operating revenues $106,495 $118,369 $114,293 $130,190 $469,347 Operating income 20,231 30,026 25,611 26,288 102,156 Interest and other income 18,746 24,173 18,357 44,529 105,805 Equity in United Paramount Network loss (30,150) (27,188) (16,900) (23,106) (97,344) Income before income taxes and minority interest 8,827 27,011 27,068 47,711 110,617 Net income 1,980 10,718 11,742 26,093 50,533 Earnings per share - Basic .09 .48 .52 1.16 2.24 Diluted $ .09 $ .47 $ .52 $ 1.16 $ 2.24 Year Ended December 31, 1998 Operating revenues $ 99,575 $120,500 $102,794 $122,981 $445,850 Operating income 13,387 34,369 20,683 28,290 96,729 Interest and other income 20,054 18,742 20,168 20,402 79,366 Equity in United Paramount Network loss (19,910) (22,471) (10,438) (35,778) (88,597) Income before income taxes and minority interest 13,531 30,640 30,413 12,914 87,498 Net income 5,998 14,597 15,812 3,166 39,573 Earnings per share - Basic .26 .65 .70 .14 1.75 Diluted $ .26 $ .64 $ .70 $ .14 $ 1.75
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity and Capital Resources BHC's financial position continues to be strong and highly liquid. Cash and marketable securities totaled $1.34 billion at December 31, 1999, and BHC has no debt outstanding. BHC 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. BHC's operating cash flow is generated primarily by its 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 $1.1 million in 1999 and by $12.3 million in 1998), and is dependent upon the mix of programs aired and payment terms of the stations' contracts. Reflecting such amounts, broadcast cash flow in 1999 increased 17%, while station earnings increased 7%, 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. BHC's cash flow additionally reflects earnings associated with its cash and marketable securities, which balances declined slightly, to $1.34 billion at December 31, 1999 from $1.40 billion at December 31, 1998. Such $66.9 million decline was incurred despite 1999 operating cash flow of $154.3 million, primarily due to the $61.3 million cash acquisition of television station WRBR, UPN funding totalling $106.6 million, capital expenditures totalling $19.6 million and the payment by BHC of a special dividend totalling $22.5 million. A special $2.00 per share cash dividend, aggregating $45.0 million, was paid in February 2000. Special cash dividends of $1.00 per share were paid in February 1999, aggregating $22.5 million, February 1998, aggregating $22.7 million, and February 1997, aggregating $23.6 million. BHC plans to consider annually the payment of a special dividend. During the period from April 1990 through December 31, 1998, BHC expended $516.5 million to purchase 6,895,590 of its Class A common shares, including 226,503 shares in 1998 from United Television, Inc., BHC's 58% owned subsidiary. No additional shares have been purchased by BHC in 1999, and 185,497 Class A shares remained authorized for purchase at December 31, 1999. During the four year period ended December 31, 1999, UTV expended $43.4 million acquiring its own common shares, of which $0.8 million was expended in 1999, and, at December 31, 1999, 721,249 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 July 1999, UTV purchased the assets of UHF television station WRBW, Channel 65, a UPN affiliate in Orlando, Florida, for $61.3 million in cash and possible future consideration. BHC intends to further expand its operations in the media, entertainment and communications industries and to explore business opportunities in other industries. BHC 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. Since then, BHC and Viacom have shared equally UPN's losses and funding requirements. On March 20, 2000, BHC elected to sell its 50% interest in UPN to Viacom, and expects to close the transaction by March 31, 2000. As a result of the sale, BHC will have no further ownership interest in the network or obligation to fund UPN's operations. See Note 10. UPN incurred start-up losses of $194.7 million in 1999, $177.2 million in 1998, $170.2 million in 1997, $146.3 million in 1996 and $129.3 million in 1995. BHC funding of UPN totalled $106.6 million in 1999, $88.1 million in 1998 and $48.2 million in 1997. BHC's television stations make commitments for programming that will not be available for telecasting until future dates. At December 31, 1999, commitments for such programming totalled approximately $278.0 million, including $78.3 million applicable to UTV. BHC capital expenditures generally have not been material in relation to its financial position, and the related capital expenditure commitments at December 31, 1999 (including any related to UPN) were not material. During 1999, BHC stations continued the process of converting to digital television (DTV). This conversion requires the purchase of digital transmitting equipment to telecast over newly assigned frequencies. KCOP in Los Angeles, KBHK in San Francisco and KTVX in Salt Lake City made the initial conversion to DTV signal transmission during 1999. This conversion rollout is expected to take a number of years and will be subject to competitive market conditions. BHC expects that its expenditures for 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. Year 2000 issues did not have a material effect on BHC business, results of operations, or financial condition, and the compliance cost was immaterial. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK BHC 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, 1999 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 $1,149,089 $1,146,604 Equity securities $ 54,126 $ 72,540 All of BHC'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 and all of which mature in 16 months. RESULTS OF OPERATIONS - 1999 VERSUS 1998 BHC net income in 1999 rose to $50,533,000, or $2.24 per share ($2.24 per share diluted), from net income in 1998 of $39,573,000, or $1.75 per share ($1.75 per share diluted). The 28% increase in net income is mostly attributable to marketable securities gains. Television station earnings in 1999 increased 7%, to $131,808,000 from $123,123,000, and rose 10% excluding expense associated with stock price based retirement plans. The increase in station earnings primarily reflects growth in station operating revenues, which more than offset modest increases in station operating expenses. Station operating revenues rose 5%, to $459,938,000 from $436,664,000, and same station operating revenues rose 4%. Station operating revenues were positively affected by generally strong demand for television advertising time, as well as the generally positive impact of UPN's improved competitive position on the prime time results of BHC's eight UPN affiliates. Nonetheless, several BHC stations recorded lower operating revenues in 1999. Station operating revenues in 1998 include retroactive network compensation recorded by our NBC affiliate upon finalization of a long-term affiliation agreement. Such compensation was offset by certain copyright royalty revenues recorded in 1999. The increase in station earnings was partially offset by a decline, to $8,777,000 from $10,202,000, in earnings at BHC's television production subsidiaries, and a $1.1 million increase in corporate office expense. Operating income in 1999 accordingly rose 6%, to $102,156,000 from $96,729,000. Excluding stock price based retirement plan expense, operating income increased 10% in 1999. UPN's loss in 1999 widened to $194,688,000 from $177,193,000, reflecting the expansion of the network's prime time schedule to five weekday evenings from three during most of 1998, as well as ratings shortfalls and expenses related to cancelled programs earlier in 1999. BHC's 50% share of UPN's loss accordingly rose to $97,344,000 from $88,597,000 in 1998. On March 20, 2000, BHC elected to sell its 50% interest in UPN to Viacom, and expects to close the transaction by March 31, 2000. As a result of the sale, BHC will have no further ownership interest in the network or obligation to fund UPN's operations. See Note 10. Interest and other income, which consists mostly of amounts earned on cash and marketable securities holdings, rose significantly in 1999, to $105,805,000 from $79,366,000. The increase reflects a $27.8 million increase, to approximately $33.1 million from approximately $5.3 million, in marketable securities gains. Interest income declined slightly in 1999, due to a modest decline in the average amount of funds invested. BHC's effective income tax rate reflects in both years the realization of certain income tax benefits. Minority interest reflects the interest of shareholders other than BHC in the net income of UTV, 58.1% owned by BHC at December 31, 1999 and 58.5% owned by BHC at December 31, 1998 and December 31, 1997. Earnings per share amounts prior to 1999 reflect reductions in weighted average common shares outstanding resulting from purchases by BHC of its Class A common shares. RESULTS OF OPERATIONS - 1998 VERSUS 1997 BHC net income in 1998 declined to $39,573,000, or $1.75 per share ($1.75 per share diluted), from net income in 1997 of $131,177,000, or $5.62 per share ($5.61 per share diluted). The decline in net income primarily reflects the 1997 pretax gain of $153,933,000 recorded on the transaction through which BHC reduced its UPN ownership interest to 50% from 100%. See Note 10. Earnings at BHC's core broadcast television business declined slightly, as did income earned on BHC's cash and marketable securities holdings. Television station earnings, after a small loss at 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, operating income in 1998 declined 5%, to $96,729,000 from $101,338,000 in 1997. UPN incurred a loss of $177,193,000 in 1998, compared to a loss of $170,197,000 in 1997. The network's costs 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. Interest and other income, which consists mostly of amounts earned on BHC's cash and marketable securities holdings, declined to $79,366,000 in 1998 from $82,809,000 in 1997. The impact of lower interest rates was only partially offset by an increase in gains on dispositions of marketable securities. BHC's effective income tax rate declined to 36.0% in 1998 from 40.3% in 1997, primarily reflecting the realization in 1998 of certain income tax benefits. Quarterly Financial Information (Unaudited) First Second Third Fourth (In thousands of dollars Quarter Quarter Quarter Quarter Year except per share data) Year Ended December 31, 1999 - ---------------------------- Operating revenues $111,460 $123,825 $119,804 $136,458 $491,547 Operating income 19,566 27,687 24,351 22,593 94,197 Interest and other income, net 18,676 24,464 18,190 44,853 106,183 Equity in United Paramount Network loss (30,150) (27,188) (16,900) (23,106) (97,344) Income before income taxes and minority interest 8,092 24,963 25,641 44,340 103,036 Net income 748 6,722 7,761 27,202 42,433 Earnings per share - Basic .02 .19 .27 .78 1.21 Diluted $ .02 $ .15 $ .18 $ .62 $ .97 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 .35 .42 .03 .84 Diluted $ .04 $ .28 $ .33 $ .02 $ .67 Selected Financial Data
(In thousands of dollars except per As of and for the year ended December 31, share data) ---------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Operating revenues $ 491,547 $ 467,093 $ 464,646 $ 465,695 $ 472,081 Operating income $ 94,197 $ 94,670 $ 95,525 $ 103,268 $ 110,633 Interest and other income, net 106,183 80,337 80,556 81,879 83,949 Equity in United Paramount Network loss (97,344) (88,597) (87,430) (146,313) (129,303) Gain on change of ownership in United Paramount Network - - 153,933 - - Income taxes (32,300) (32,500) (99,600) (19,500) (17,600) Minority interest (28,303) (24,440) (49,483) (18,522) (25,714) Net income $ 42,433 $ 29,470 $ 93,501 $ 812 $ 21,965 Earnings per share - Basic $ 1.25 $ .87 $ 2.78 $ .01 $ .66 Diluted 1.00 .69 2.20 .01 .51 Cash and marketable securities 1,359,668 1,415,543 1,501,929 1,395,179 1,523,438 Working capital 1,353,942 1,387,978 1,486,556 1,418,085 1,531,416 Film contract rights 151,369 123,502 121,977 144,034 145,902 Investments 104,176 69,881 50,130 48,194 10,065 Total assets 2,345,985 2,245,423 2,226,429 2,137,259 2,203,853 Long-term debt - - - - - Minority interest 503,447 479,820 484,268 506,260 560,326 Shareholders' investment $1,441,803 $1,408,469 $1,383,180 $1,288,918 $1,319,020
EX-21 3 EXHIBIT 21 The following are the registrant's subsidiaries, other than subsidiaries that, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary: NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION Chris-Craft Television, 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 UTV of Orlando, Inc. Delaware United Television Sales, Inc. Delaware EX-27 4
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S FORM 10K FOR THE YEAR ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS 1000 12-MOS DEC-31-1999 DEC-31-1999 117184 1219144 103730 4466 0 1596840 175109 113231 2224448 249868 0 0 0 225 1714257 2224448 0 469347 0 367191 0 0 0 110617 41900 50533 0 0 0 50533 2.24 2.24
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