767 Fifth Avenue
New technologies and media create new businesses at breathtaking speed, but uncertainty about their future creates widely disparate valuations, not only for those businesses, but for those of their seemingly mundane competitors. We remain patient during these times, and defer significant capital deployment until trends become less uncertain and we become more comfortable with valuations. We believe this approach to be the most prudent way to promote future growth in shareholder value, and it is completely consistent with our long-held management philosophy. Of course, we will continue to investigate growth and expansion opportunities, and look forward to pursuing those that make good business sense, to increase Chris-Craft's value for our shareholders, our viewers and our affiliates.
Chris-Craft Industries, Inc., is involved primarily with television broadcasting. Through its 79.96 percent ownership of subsidiary BHC Communications, Inc., and the BHC subsidiary United Television, Inc., Chris-Craft operates ten television stations across the United States. The New York-based Chris-Craft also possesses a 50 percent interest in United Paramount Network (UPN), which the company formed in 1994 with Paramount Television Group, a division of media conglomerate Viacom Inc., owner of the remaining 50 percent. Chris-Craft also operates an industrial products division, which is largely involved with the manufacture of plastic flexible film products, including water-soluble hospital laundry bags used by the health care industry. The industrial products division also services the chemical industry. Chairman and president Herbert J. Siegel, who has led the company since 1968, owns about 45 percent of Chris-Craft.
Early History Marked by Measured Growth: 1920s-1950s
The company that eventually became Chris-Craft Industries was founded in 1928 in Detroit as National Automotive Fibers, Inc. It manufactured upholstery, interior trim and carpeting, plastic products, and foam rubber for major Detroit automakers, especially Chrysler, Ford, and Studebaker-Packard. The company was successful but remained a relatively minor supplier to the automotive industry. National Automotive Fibers acquired the Montrose Chemical Company of San Francisco in the 1940s, but it nonetheless remained almost wholly dependent on the automobile, and its revenues often fluctuated wildly, reflecting the fortunes of the auto industry.
National Automotive Fibers operated during and after World War II with moderate success, but in 1956 its fortunes changed dramatically when the company lost more than $1 million on sales of $46 million. The company, however, attracted the attention of Paul V. Shields, senior partner of the Wall Street investment firm Shields & Co., who had determined that its troubles resulted from overdependence on the auto industry. Shields acquired National Automotive Fibers in a bold takeover move, trimmed it of marginally profitable products, and diversified its operations. While the sales revenues of National Automotive dropped to $23 million in 1957, profits rose to a record $1 million, and by 1960 the firm had accumulated assets of $10 million. By then the company had entered into oil and gas operations as well as television and radio broadcasting. In 1959, to emphasize its new identity as a diverse manufacturer, the company's name was changed to NAFI Corp.
Expansion into Boat Manufacturing in the 1960s
NAFI's financial health provided the means in 1960 to acquire the Chris-Craft Company, a boat manufacturer worth $50 million. Chris-Craft was privately owned by the descendants of its founders, Christopher Columbus Smith and his brother Henry. During the 1880s the Smiths were backwoodsmen in St. Clair County, Michigan, who depended on duck hunting for a living. The two brothers supplemented their incomes by acting as guides for wealthy businessmen and professionals from Detroit who vacationed in the unspoiled environment of St. Clair County. To the brothers' surprise, the tourists admired the simple, sturdy lines of the Smiths' homemade vessels, and they soon found themselves selling the boats to eager buyers. In 1884 they built a boathouse, and boatbuilding soon supplanted the hunting business.
Fifteen years later business was booming in the Smith boathouse on the St. Clair River in Algonac. From simple duck boats the brothers had expanded their product line to include canoes, rowboats, and even a few sailboats. So successful were they that their business had become the town's major industry. The first gasoline-powered boat on the Great Lakes was a Smith craft, as were the fastest speedboat and the world's first hydroplane. By 1930 the boatbuilding firm was called Chris-Craft Corporation, and at the time of its acquisition by NAFI in 1960, it was the largest manufacturer of small boats in the world.
The acquisition of Chris-Craft involved a great deal of negotiation because the company's president, Harsen Smith, was opposed to the sale. Harsen's objections were rooted in his strong loyalty to the company and the desire to maintain its dynastic heritage. Harsen controlled only about 25 percent of the company, however, and the rest of the Smith family was in favor of selling. The company's valuation at approximately $50 million came as a huge surprise to the family and afforded them the opportunity to be selective in choosing a buyer.
On January 18, 1960, Joseph Flannery, who was the assistant to NAFI's Shields, happened to encounter Owen Smith, Chris-Craft's majority stockholder, at a boat show in New York. Owen indicated that he was amenable to the sale of Chris-Craft, and a series of high-level negotiations began, with the reluctant Harsen Smith the recipient of competing offers between NAFI and a rival bidder, Brunswick Corporation. Within a month of the meeting between Owen Smith and Flannery, NAFI had arranged a complicated buyout of Chris-Craft, with the sale price being $40 million. The sale was predicated on Shields's willingness to agree to a hands-off management style with Chris-Craft. The 1960s proved to be the most successful period in the boat manufacturing company's history, so successful, in fact, that in 1962 NAFI's stockholders agreed to change the company's name to Chris-Craft Industries, Inc., in order to capitalize on the division's success.
While the success of Chris-Craft's marine operations would eventually decline, the stimulus it injected into the parent company was enormous. Except for the manufacture of carpet fibers, insulation, and chemical products, virtually all identification with the old National Automotive Fibers company had disappeared. Thanks to Shields's diversification strategy, NAFI's annual revenues had long since been stabilized.
Diversification and Growth under New Leadership: 1970s and 1980s
Throughout the 1960s the Baldwin-Montrose Chemical Co., Inc., a chemical manufacturing company, had invested increasingly in Chris-Craft, and it eventually became the biggest stockholder. Herbert J. Siegel, chairman of Baldwin-Montrose, led a takeover of Chris-Craft, which was completed in 1968. Siegel then assumed the chairmanship of Chris-Craft.
In 1968 the Chris-Craft headquarters were moved from Oakland, California, where they had been since 1962, to New York. Siegel set about streamlining and reorganizing the company, which consisted of three main operations: the boat division; the fast-growing television broadcasting division, with stations in Los Angeles, Minneapolis-St. Paul, and Portland, Oregon; and the small industrial division, consisting of Montrose Chemical of California, the world's largest producer of DDT until the federal government banned it in 1972, and Chris-Craft Industrial Products, Inc. The combined sales for 1968 were $89 million.
The 1970s and 1980s saw Chris-Craft's continued expansion into television broadcasting. During the 1970s Chris-Craft invested in the Twentieth Century-Fox Film Corp., building its holdings to 19 percent of the outstanding common stock by 1980. In 1981 Chris-Craft obtained a 19.5 percent ownership of United Television, Inc. Siegel then formed BHC Communications, Inc., as a holding company for United Television. BHC owned and operated all eight of Chris-Craft's television stations and was the parent company of United Television, Inc. To further focus on expansion in broadcasting, the company sold its boat division in 1981, leasing the Chris-Craft name to the buyer.
In 1984 Warner Communications, Inc., in an attempt to avert a hostile takeover by Australian investor Rupert Murdoch, welcomed Chris-Craft's investment in the company. Siegel traded 42.5 percent of BHC for 19 percent of Warner Communications. In 1989, when Time Inc. merged with Warner Communications to form Time-Warner Inc., Chris-Craft's investment garnered $2.3 billion.
Continued Expansion into Television Broadcasting in the 1990s
In the early 1990s Chris-Craft continued to expand into television broadcasting, acquiring Pinelands, Inc., in August 1992 for $313 million. Pinelands owned WWOR-TV, an independent station that broadcast in a tristate area that included New York City, the second most important television market in the country. By 1992 the company owned and operated six independent and two network-affiliated television stations, and it had become the nation's sixth largest television broadcaster and the second largest independent television producer in the country. In addition, Chris-Craft's stations reached approximately 20 percent of the households in the United States.
Chris-Craft took a significant step in the broadcasting market in 1994 when the company announced the formation of a fifth national network--United Paramount Network--in cooperation with Viacom Inc.'s Paramount Television Group. As part of the agreement, Chris-Craft owned 100 percent of UPN, with Paramount having the option to acquire an equal share through January 15, 1997. The network, targeted toward the young male demographic group, premiered in early 1995 and offered four hours of original prime-time programming per week. The following year original programming was increased to six hours per week.
The new network severely affected Chris-Craft's revenues, and during 1995 and 1996 losses due to the costs of UPN totaled $275.6 million. Although Viacom began to share Chris-Craft's burden in early 1997, when it acquired a 50 percent interest in UPN for $160 million, losses continued to rise. In 1997 UPN losses for Chris-Craft equaled $87.4 million, and the following year the company lost $88.6 million. Despite such dismal figures, Chris-Craft's Siegel continued to support UPN and remained optimistic about the network's potential. Siegel stated in the company's 1998 annual report, 'UPN's importance to Chris-Craft as a strategic asset remains undiminished. Now in its fifth year, UPN's development, as expected, has been both expensive and uneven. Nonetheless, our commitment to the network's success is unwavering.'
UPN continued to drain Chris-Craft's resources in the late 1990s. During the 1997 season the network's ratings were so poor that UPN dropped to sixth place among the major networks. Although the network increased its original programming from three to five nights, UPN's 1998 ratings fell 39 percent from 1997. One new program that debuted in October 1998 set a record for achieving the lowest first-run broadcast rating during prime time. In early 1999 UPN rallied by introducing a new animated comedy based on the popular cartoon series 'Dilbert.' Still, ratings for the 1998 season fell by 30 percent. Between 1995 and 1999 UPN racked up losses of more than $500 million. The network shifted its target audience from season to season, beginning with family-oriented programming, switching to programming designed to appeal to urban viewers, and then aiming for young males.
While Chris-Craft focused on its broadcast division, the industrial division carried on. With a series of improvements, including the upgrading of manufacturing equipment, the introduction of new processing control systems, and strategic capital investments, the industrial division flourished in the late 1990s. Operating income increased 77 percent over 1997 and 1998, and the division enjoyed record earnings in 1998. Increased earnings were also attributed to the streamlining of the division, as unprofitable product lines were discontinued, increasing numbers of international alliances were established, and products with lower margins were de-emphasized.
UPN's declines were somewhat offset by earnings from television stations, and Chris-Craft continued to acquire additional stations. In 1998 Chris-Craft acquired television station WHSW in Baltimore and changed its call letters to WUTB. In 1999 the company completed the acquisition of WRBW in Orlando, bringing the total number of Chris-Craft's television stations to ten. Also that year, Viacom announced plans to purchase CBS Corp. for $37 billion. Because the Federal Communications Commission (FCC) prohibited companies from owning two broadcast networks, Viacom's announcement raised questions regarding the future of Chris-Craft and Viacom's joint ownership of UPN. In Viacom and Chris-Craft's original agreement, two options for exiting the partnership had been determined--buying out the other partner or paying for what the partner had invested up to that date and providing funds for the future operation of UPN. Either option would cost Viacom substantial sums of money. Industry analysts agreed that Chris-Craft could emerge the winner and offered other possible scenarios--that Viacom might offer Chris-Craft some of its stations in exchange for severing the partnership or that Chris-Craft might sell Viacom's share to another company.
During the first half of 1999 Chris-Craft's net income dropped by nearly half compared to the same period in 1998, from $13.89 million to $7.47 million. The decline was due in large part to increased UPN losses. Undeterred, Chris-Craft continued to back UPN, expanding its prime-time schedule and developing new programs geared toward young males. A week and a half into the new 1999 season, UPN's ratings were up 20 percent from 1998 ratings, a promising start, and the network was reaching 95 percent of all U.S. households through 186 affiliates. Indeed, Chris-Craft could afford to ride out UPN's shaky and costly beginnings, for the company remained debt-free, with consolidated cash and marketable securities holdings of $1.39 billion as of mid-1999.
Principal Subsidiaries: BHC Communications, Inc. (79.96%); Chris-Craft Industrial Products, Inc.
Principal Competitors: E.I. du Pont de Nemours and Company; National Broadcasting Company, Inc.; Time Warner Inc.