SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended February 28, 1999
[ ] 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 1-9244
KING WORLD PRODUCTIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-2565808
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
12400 Wilshire Boulevard
Suite 1200
Los Angeles, California 90025
- -------------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 310-826-1108
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. Common Stock, $.01 par value,
70,745,131 shares outstanding as of April 4, 1999.
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(Dollars in thousands)
February 28, August 31,
1999 1998
------------ ----------
(Unaudited)
CURRENT ASSETS:
Cash and cash equivalents....................... $ 338,340 $ 188,778
Short-term investments.......................... 26,990 88,016
Accounts receivable (net of
allowance for doubtful accounts of
$3,014 and $3,301 at February 28, 1999
and August 31, 1998, respectively)............ 107,260 75,423
Producer advances and deferred costs............ 89,274 99,965
Other current assets............................ 1,546 1,146
---------- ----------
Total current assets................... 563,410 453,328
---------- ----------
LONG-TERM INVESTMENTS, at cost,
which approximates market value................. 357,753 470,715
---------- ----------
FIXED ASSETS, at cost............................. 34,885 31,353
Less - accumulated depreciation
and amortization.............................. (15,075) (13,613)
---------- ----------
19,810 17,740
---------- ----------
PRODUCER ADVANCES AND OTHER ASSETS................ 95,168 81,815
---------- ----------
$1,036,141 $1,023,598
========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
2
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
LIABILITIES AND STOCKHOLDERS' EQUITY
(Dollars in thousands)
February 28, August 31,
1999 1998
------------ ----------
(Unaudited)
CURRENT LIABILITIES:
Accounts payable and
accrued liabilities....................... $ 16,408 $ 15,913
Payable to producers and others............... 62,337 96,118
Income taxes payable.......................... 36,234 30,356
---------- ----------
Total current liabilities.............. 114,979 142,387
---------- ----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value;
5,000,000 shares authorized,
none issued............................... -- --
Common stock, $.01 par value;
150,000,000 shares authorized,
88,997,325 shares and
88,650,301 shares issued
at February 28, 1999 and
August 31, 1998, respectively............. 890 887
Paid-in capital............................... 146,440 138,219
Retained earnings............................. 1,218,306 1,137,238
Treasury stock, at cost; 18,203,194 shares
and 16,284,794 shares at February 28,
1999 and August 31, 1998, respectively...... (444,474) (395,133)
---------- ----------
921,162 881,211
---------- ----------
$1,036,141 $1,023,598
========== ==========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
3
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three Months Ended Six Months Ended
February 28, February 28,
1999 1998 1999 1998
(Dollars in thousands except per share data)
REVENUES....................... $197,483 $173,916 $391,750 $346,842
-------- -------- -------- -------
EXPENSES:
Producers' fees, programming
and other direct
operating costs............ 120,220 110,694 238,753 217,929
Selling, general and
administrative expenses.... 23,856 19,115 47,545 39,156
-------- -------- -------- -------
144,076 129,809 286,298 257,085
-------- -------- -------- -------
Income from operations..... 53,407 44,107 105,452 89,757
INVESTMENT INCOME.............. 7,345 7,178 19,793 14,072
-------- -------- -------- -------
Income before provision
for income taxes......... 60,752 51,285 125,245 103,829
PROVISION FOR INCOME TAXES..... 21,449 17,707 44,177 35,882
-------- -------- -------- -------
Net income................. $ 39,303 $ 33,578 $ 81,068 $ 67,947
======== ======== ======== ========
BASIC EARNINGS PER SHARE....... $ .55 $ .46 $ 1.13 $ .93
======== ======== ======== ========
DILUTED EARNINGS PER SHARE..... $ .53 $ .44 $ 1.09 $ .89
======== ======== ======== ========
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
4
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
February 28,
1999 1998
(Dollars in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................... $ 81,068 $ 67,947
Items not affecting cash:
Depreciation and amortization .... 1,462 902
Change in assets and liabilities:
Accounts receivable .............. (31,837) (13,292)
Producer advances and
deferred costs ................. 1,857 (74,396)
Accounts payable and accrued
liabilities .................... 495 (984)
Payable to producers and others .. (33,781) (16,449)
Income taxes payable ............. 5,878 (1,689)
Other, net ....................... (4,919) (2,983)
--------- ---------
Net cash provided by (used in)
operating activities ............... 20,223 (40,944)
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales (purchases) of investments ..... 173,988 (57,837)
Additions to fixed assets ............ (3,532) (7,106)
Net cash provided by (used in) --------- ---------
investing activities ............... 170,456 (64,943)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 8,224 7,335
Purchase of treasury stock ........... (49,341) (6,041)
--------- ---------
Net cash (used in) provided
by financing activities ............ (41,117) 1,294
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .......................... 149,562
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD ............................ 188,778 317,782
CASH AND CASH EQUIVALENTS AT END -------- --------
OF PERIOD ............................ $338,340 $213,189
-------- --------
The accompanying Notes to Consolidated Financial Statements
are an integral part of these balance sheets.
5
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Summary of significant accounting policies
Principles of consolidation
The accompanying consolidated financial statements include the
accounts of King World Productions, Inc. ("King World") and its wholly-owned
subsidiaries. All significant intercompany transactions have been eliminated.
Unless the context suggests otherwise, the "Company", as used herein, means King
World and its subsidiaries.
The unaudited consolidated financial statements for the six months and
three months ended February 28, 1999 have been prepared in accordance with the
instructions to Form 10-Q and include, in the opinion of management, all
adjustments (consisting only of normal recurring accruals) necessary for a fair
presentation of the results of operations for such periods. They do not,
however, include all of the information and disclosures required by generally
accepted accounting principles for complete financial statements. For further
information, reference is made to the consolidated financial statements for the
fiscal year ended August 31, 1998 and the footnotes related thereto included in
the Company's Annual Report on Form 10-K from which the August 31, 1998 balances
presented herein have been derived. The results of operations for the six months
and three months ended February 28, 1999 are not necessarily indicative of the
results of operations for the full year.
Revenue recognition
License fees from first-run syndicated television properties are
recognized at the commencement of the license period pursuant to noncancelable
agreements and as each show is made available to the licensee via satellite
transmission. Because transmission to the satellite takes place, on the average,
no more than two to three days prior to the broadcast of the programming,
revenues are recognized on or about the air date.
The Company typically receives a portion of the fees derived from the
licensing of syndicated television programming in the form of retained
advertising time, which is sold to advertisers by King World Media Sales Inc., a
wholly-owned subsidiary of the Company. Such revenues are recognized at the same
time as the cash portion of the license fees derived from such programming is
recognized, in amounts adjusted for expected ratings.
6
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Summary of significant accounting policies (continued)
License fees for non-first-run syndicated properties are recognized at
the gross contract amount (net of discount to present value for license periods
greater than one year) at the commencement of the license period and when
certain other conditions are satisfied.
Principal properties
The Company's principal properties are licenses to distribute The
Oprah Winfrey Show, WHEEL OF FORTUNE and JEOPARDY!. The Company co-produces and
distributes HOLLYWOOD SQUARES, a first-run syndicated game show, and The
Roseanne Show, a first-run syndicated talk show. The Company also produces and
distributes INSIDE EDITION, a first-run syndicated newsmagazine.
The contribution of each program to the Company's total revenues are
as follows:
Six Months
Ended
February 28,
1999 1998
---- ----
THE OPRAH WINFREY SHOW 37% 42%
- ----------------------
WHEEL OF FORTUNE 19% 21%
- ----------------
JEOPARDY! 16% 18%
- ---------
HOLLYWOOD SQUARES(1) 9% --
- -----------------
THE ROSEANNE SHOW(1) 7% --
- -----------------
INSIDE EDITION 6% 7%
- --------------
(1) HOLLYWOOD SQUARES and THE ROSEANNE SHOW premiered in September 1998.
The Company distributes THE OPRAH WINFREY SHOW pursuant to an
agreement with Harpo, Inc., the producer of the series ("Harpo"). Under the
terms of the Company's agreement in effect through August 1998 with Harpo, King
World was engaged as the exclusive distributor of THE OPRAH WINFREY SHOW through
7
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Summary of significant accounting policies (continued)
the 1999-2000 broadcast season. Such agreement was amended in September 1998 to
provide for Harpo and Ms. Winfrey to produce and host the show for the 2000-2001
and 2001-2002 broadcast seasons and to extend the engagement of King World as
the exclusive distributor of the show for those seasons.
The Company's agreements with Columbia TriStar Television provide that
King World will be the exclusive distributor for WHEEL OF FORTUNE and JEOPARDY!
so long as the Company has obtained sufficient broadcast commitments to cover
such series' respective production and distribution costs and that the Company
may not, unless otherwise agreed by Columbia TriStar Television, distribute
other game shows for strip first-run syndication so long as the Company is
distributing WHEEL OF FORTUNE or JEOPARDY!.
In September 1997, the Company and Columbia TriStar Television
announced their agreement to co-produce a new version of the game show Hollywood
Squares, which is distributed by the Company in strip first-run syndication and
premiered in September 1998.
The Company has entered into an agreement with Full Moon & High Tide
Productions, Inc., a company controlled by Roseanne, to co-produce The Roseanne
Show, an hour-long talk show hosted by Roseanne and distributed by the Company
in strip first-run syndication. The series premiered in September 1998. Under
the terms of the agreement, the Company will have the exclusive right to
distribute the show through the 2003-2004 broadcast season.
Producers' fees, programming and other direct operating costs
Producers' fees, programming and other direct operating costs
primarily include the producers' share of both cash license fees from the sale
of programming to television stations and revenues derived from the sale of
retained advertising time to advertisers with respect to programming distributed
by the Company; participation fees payable by the Company to producers and
talent; production and distribution costs for first-run syndicated programming;
and the direct operating costs of King World Direct, the Company's direct
response marketing subsidiary. That portion of any recognized revenue that is to
8
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) Summary of significant accounting policies (continued)
be paid to producers and owners of programming is accrued as such revenues are
earned. The share of revenues payable by the Company to such producers and
others is generally paid as cash license fees and revenues derived from the sale
of retained advertising time are received from television stations and
advertisers.
Stockholders' equity
Basic earnings per share has been computed using the weighted average
shares of Common Stock outstanding of 71,267,000 and 73,478,000 for the three
months ended February 28, 1999 and 1998, respectively, and 71,438,000 and
73,366,000 for the six months ended February 28, 1999 and 1998, respectively.
Diluted earnings per share, which includes the dilutive effect of the assumed
exercise of vested and unvested stock options outstanding as of the end of each
period reported, has been computed using the weighted average shares of Common
Stock outstanding of 74,455,000 and 77,171,000 for the three months ended
February 28, 1999 and 1998, respectively, and 74,465,000 and 76,477,000 for the
six months ended February 28, 1999 and 1998, respectively.
Comprehensive income
In the first quarter of fiscal 1999 the Company adopted Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), Reporting Comprehensive
Income. SFAS 130 establishes new rules for the reporting and presentation of
comprehensive income and its components. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. The components of
comprehensive income include, but are not limited to, foreign currency
translation adjustments and unrealized gains and losses on certain investment
securities. The Company has no material items required to be reported in the
presentation of comprehensive income.
(2) Proposed Merger with CBS Corporation
The Company has entered into an Agreement and Plan of Merger, dated as
of March 31, 1999 (the "Merger Agreement"), by and among the Company, CBS
Corporation, a Pennsylvania corporation ("CBS"), and K Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of CBS ("Merger Sub"),
9
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(2) Proposed Merger with CBS Corporation (continued)
pursuant to which (a) Merger Sub will be merged with and into the Company and
the Company will become a wholly-owned subsidiary of CBS and (b) each
outstanding share of the Company (other than shares owned by CBS or Merger Sub)
will be converted into the right to receive .81 shares of common stock, par
value $1.00 per share, of CBS. Concurrently with the execution of the Merger
Agreement, Michael King, Roger King, Richard King and Diana King (the "Principal
Stockholders" of the Company) entered into a Stockholders Agreement with CBS
whereby the Principal Stockholders agreed, among other things, that, while the
Merger Agreement was in effect, they would vote their shares of Common Stock,
which represent approximately 18% of the total outstanding shares of Common
Stock of the Company, in favor of the merger and against any alternative
proposal that may be brought before the stockholders of the Company for a vote.
The consummation of the merger is subject to certain conditions,
including approval by the stockholders of the Company and the expiration or
early termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. Pursuant to the Merger Agreement, the
Company will prepare and file a proxy statement/prospectus to be mailed to
stockholders in connection with calling a meeting of the stockholders of the
Company to vote on the merger. The transaction is expected to close in mid-1999.
(3) Producer advances
In September 1997, the Company made advances to Harpo in the aggregate
amount of $130 million against Harpo's guaranteed share of gross revenues for
the 1998-1999 and 1999-2000 broadcast seasons. As of February 28, 1999, the
entire $65 million advance associated with the 1998-1999 broadcast season had
been recouped by the Company. None of the $65 million advance related to the
1999-2000 broadcast season was recouped as of February 28, 1999. As part of the
most recent amendment to its agreement with Harpo, the Company paid an advance
to Harpo of $75 million against Harpo's guaranteed share of gross revenues for
the 2000-2001 broadcast season. Also, the Company agreed to pay, in June 2000,
an additional $75 million against Harpo's guaranteed share of gross revenues for
the 2001-2002 broadcast season. Based on the license agreements in place for
such broadcast seasons, the Company believes that revenues from the series will
10
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(3) Producer Advances (continued)
be sufficient to enable the Company to recoup such advances for such seasons.
All of the advances paid to Harpo are refundable to the Company by Harpo and Ms.
Winfrey if King World terminates its agreement with Harpo due to Harpo's failure
to deliver episodes of THE OPRAH WINFREY SHOW.
11
KING WORLD PRODUCTIONS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition
The discussion herein contains certain forward-looking statements
covering the Company's objectives, planned or expected activities and
anticipated financial performance. These forward-looking statements may
generally be identified by words such as "expects", "anticipates", "believes",
"plans", "should", "will" "may", "projects" (or variants of these words or
phrases), or similar language indicating the expression of an opinion or view
concerning the future with respect to the Company's financial position, results
of operations, prospects or business. The Company's actual results may differ
significantly from the results described in or suggested by such forward-looking
statements.
RESULTS OF OPERATIONS
Comparison of Six Months and Three Months Ended February 28, 1999 and 1998
Revenues
Revenues for the first six months of fiscal 1999 increased by
approximately 13% over revenues for the first six months of the prior fiscal
year, primarily due to the introduction of HOLLYWOOD SQUARES, a strip first-run
syndicated game show co-produced and distributed by the Company, and The
Roseanne Show, a strip first-run syndicated talk show co-produced and
distributed by the Company, each of which premiered in September 1998. The
additional revenues generated by such programs were partially offset by the
discontinuation of AMERICAN JOURNAL (which was cancelled following the 1997-1998
broadcast season) and, to a lesser extent, lower revenues from INSIDE EDITION, a
strip first-run syndicated newsmagazine produced and distributed by the Company.
The Company's revenues for the three months ended February 28,
1999 increased by approximately 14% over revenues for the three months ended
February 28, 1998, primarily due to the same factors discussed above with
respect to the six month period.
12
The principal components of the Company's revenues for the six months
and three months ended February 28, 1999 and 1998 are as follows:
Six Months Ended Three Months Ended
February 28, February 28,
------------- ------------
1999 1998 1999 1998
---- ---- ---- ----
THE OPRAH WINFREY SHOW 37% 42% 37% 42%
- ----------------------
WHEEL OF FORTUNE 19% 21% 19% 21%
- ----------------
JEOPARDY! 16% 18% 16% 18%
- --------
HOLLYWOOD SQUARES (1) 9% -- 9% --
- -----------------
THE ROSEANNE SHOW (1) 7% -- 7% --
- -----------------
INSIDE EDITION 6% 7% 6% 7%
- --------------
AMERICAN JOURNAL (2) -- 4% -- 4%
- ----------------
(1) HOLLYWOOD SQUARES and THE ROSEANNE SHOW premiered in September 1998.
(2) The production of AMERICAN JOURNAL was discontinued after the 1997-1998
broadcast season.
Producers' fees, programming and other direct operating costs
Producers' fees, programming and other direct operating costs
increased by approximately 10% in the first six months of fiscal 1999 compared
to the first six months of fiscal 1998. The increase was primarily attributable
to the production and participation costs associated with HOLLYWOOD SQUARES and
THE ROSEANNE SHOW, partially offset by a decrease in production costs due to the
discontinuation of AMERICAN JOURNAL. For the three months ended February 28,
1999, producers' fees, programming and other direct operating costs increased by
approximately 9% due primarily to the same factors as those discussed above for
the six month period.
13
Selling, general and administrative expenses.
The Company has entered into employment agreements with its Chairman
of the Board, its Vice Chairman and Chief Executive Officer and certain other
executive officers. Such agreements provide, among other things, for
performance-based bonuses, including bonuses payable upon the introduction of
new shows and bonuses which vary depending on the Company's net income and
Common Stock price during pre-established measurement periods. As a result, the
Company's compensation expense will increase if the Company introduces a new
series in syndication, if the Company's net income increases or if the Common
Stock price exceeds the specified levels during the applicable measurement
periods. The Company has recognized the impact of certain of these bonuses in
its operating results for the first and second quarters of fiscal 1999, which
include all amounts payable in accordance with the terms of such employment
agreements.
Selling, general and administrative expenses for the first six months
of fiscal 1999 increased by approximately 21% from the comparable period of
fiscal 1998 as a result of advertising and promotion costs incurred in
connection with the introduction of HOLLYWOOD SQUARES and THE ROSEANNE SHOW, and
certain performance-based bonuses incurred in connection with the launch of
these shows as described above. Such increase was partially offset by the
elimination of marketing costs for AMERICAN JOURNAL. Selling, general and
administrative expenses for the three months ended February 28, 1999 increased
by 25% compared to the corresponding period of fiscal 1998, primarily due to the
same factors as those discussed above for the six month period.
Net income and earnings per share
Due to the factors discussed above, the Company's operating income for
the six months and three months ended February 28, 1999 increased by
approximately 17% and 21%, respectively, compared to the corresponding period of
the prior year.
Net income increased by approximately $13.1 million, or 19%, for the
six months ended February 28, 1999 in comparison to the six months ended
February 28, 1998, reflecting the increase in operating income and the
realization, in the first quarter of fiscal 1999 of nonrecurring capital gains
on the sale of various investment securities, partially offset by a slightly
higher effective tax rate for the first six months of fiscal 1999, as compared
to the same period of fiscal 1998. Basic earnings per share increased by 22%
from $.93 per share in the first six months of fiscal 1998 to $1.13 per share in
the first six months of the current fiscal year as a result of the increase in
net income and a decrease in the number of shares outstanding resulting from the
Company's ongoing stock repurchase program. Diluted earnings per share increased
by 22% from $.89 per share in the first six months of the prior fiscal year to
$1.09 in the first six months of fiscal 1999, due to the same factors as basic
earnings per share. Absent the nonrecurring capital gains, basic and diluted
earnings per share would have been $1.10 and $1.06, respectively, in the first
six months of fiscal 1999.
14
For the three months ended February 28, 1999, net income increased by
17%, compared to the same period of the prior year, from $33.6 million to $39.3
million; basic earnings per share increased by 20% from $.46 per share to $.55
per share; and diluted earnings per share increased by 20% from $.44 per share
to $.53 per share, all for the same reasons discussed above for the six month
period.
Due to the success of the shows distributed by the Company and in
order to mitigate the influence of some of the factors referred to above, the
Company has been obtaining multi-year licenses and license renewals from
television stations for its principal distribution properties, extending as far
into the future as the 2004-2005 broadcast season. In general, these licenses
and renewals have been at rates as favorable or more favorable to the Company
than the rates applicable to the 1998-1999 broadcast season. All such licenses
and renewals are contingent upon the continued production of the series by their
respective producers through the broadcast seasons for which the licenses run.
The Company believes that the impact of inflation on its operations
has not been significant.
Year 2000
The year 2000 ("Y2K") problem, which confronts the business community
generally, is a result of computer programs that use two digits (rather than
four) to define the applicable year. Information technology ("IT") systems that
have time-sensitive software may recognize a date using "00" as the year 1900
rather than the year 2000, which could result in system malfunctions and various
systems failures. This problem may also be significant in non-IT systems
(operating systems and equipment that rely on embedded chip systems). Also, as
with other business enterprises, the Company must rely on the Y2K readiness of
its customers' and vendors' IT and non-IT systems, the failure of which is
beyond the Company's control.
During fiscal 1997 the Company began to address the issues and
concerns surrounding the Y2K problem. A task force, consisting of executive and
operating personnel, was assembled to develop a Y2K compliance plan which
included assessing the effectiveness of the Company's present information
systems and identifying critical financial and operating systems that may be
vulnerable to the Y2K problem. This task force was also responsible for
understanding the Company's significant customers' and vendors' Y2K issues and
for developing a contingency plan should the systems currently in place fail.
15
The Company recently replaced the majority of its IT systems (software
and hardware) as a result of the above systems review and modernization
assessment. The Company has been testing, and will continue to test, such
systems to obtain reasonable assurance of their Y2K compliance. To date, no
significant system uncertainties related to the Y2K problem have been
identified. The Company does not anticipate that the remaining third-party costs
related to Y2K compliance by its IT systems and non-IT systems will be greater
than $500,000. The Company plans to have all critical systems tested and
compliant by the end of fiscal 1999.
The Company is currently communicating with its significant customers
and vendors to determine and assess their state of Y2K readiness, and
anticipates continuing this process for the next several months. To date, no
significant customers or vendors have informed the Company of the existence of a
material Y2K issue that can be expected to affect the Company. The Company is
placing great emphasis on understanding the Y2K compliance of its primary
satellite distribution providers. Although the Company has received assurances
that such satellite distribution providers are addressing the Y2K problem and
anticipate being Y2K compliant, the Company is actively working on a contingency
plan should such systems fail. This plan includes, but is not limited to,
utilizing alternative vendors in the event of a Y2K-related problem with its
primary satellite distribution providers. Based on its current plan, the Company
believes it will have adequate time to prepare for such contingency measures if
the need arises.
The Company believes that it has adequately addressed the Y2K issues
affecting its internal systems and believes that any material Y2K risks that the
Company faces arise from its significant customers' and vendors' Y2K compliance.
The inability of the Company or its significant customers and vendors to
adequately address the Y2K problem on a timely basis could have a material
adverse effect on the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires capital resources to fund development, production
and promotion costs of independently produced programming, including, in some
instances, advances to producers and talent, to produce its own programs and to
acquire distribution rights to new programming. In acquiring distribution rights
from independent producers, King World has tried to avoid making significant
capital commitments to such producers until it has obtained broadcast
commitments from a substantial number of television stations. As a result of
this strategy and the success of its existing syndication properties, to date,
King World has funded substantially all programming acquisition, development,
production and promotion costs and advances from its operations.
16
The distribution of television programming is highly competitive and
the Company may be obliged to offer, among other things, guarantees and cash
advances to acquire, renew or extend distribution rights. Under the terms of the
Company's agreement in effect through August 1998 with Harpo, Inc. ("Harpo"),
the producer of THE OPRAH WINFREY SHOW, the Company was engaged as the exclusive
distributor of THE OPRAH WINFREY SHOW through the 1999-2000 broadcast season.
Such agreement was amended in September 1998 to provide for a commitment by
Harpo and Ms. Winfrey to produce and host the show for the 2000-2001 and
2001-2002 broadcast seasons and to extend the engagement of King World as the
exclusive distributor of the show for those seasons.
Under the amended agreement, King World will continue to receive
distribution fees based on a percentage of the gross revenues generated by the
show. Such distribution fees are significantly less than those applicable to
seasons through the 1999-2000 broadcast season, and, as a result, the
contribution of THE OPRAH WINFREY SHOW to King World's net profits and cash flow
will decline.
In September 1997, the Company made advances to Harpo in the aggregate
amount of $130 million against Harpo's guaranteed share of gross revenues for
the 1998-1999 and 1999-2000 broadcast seasons. As of February 28, 1999, the
entire $65 million advance associated with the 1998-1999 broadcast season had
been recouped by the Company. None of the $65 million related to the 1999-2000
broadcast season was recouped as of February 28, 1999. As part of the most
recent amendment to its agreement with Harpo, the Company paid, an advance to
Harpo of $75 million against Harpo's guaranteed share of gross revenues for the
2000-2001 broadcast season. Also, the Company agreed to pay, in June 2000, an
additional $75 million against Harpo's guaranteed share of gross revenues for
the 2001-2002 broadcast season. Based on the license agreements in place for
such broadcast seasons, the Company believes that revenues from the series will
be sufficient to enable the Company to recoup the advances for such seasons. All
of the advances paid to Harpo are refundable to the Company by Harpo and Ms.
Winfrey if King World terminates its agreement with Harpo due to Harpo's failure
to deliver episodes of THE OPRAH WINFREY SHOW.
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The Company has entered into an Agreement and Plan of Merger, dated as
of March 31, 1999 (the "Merger Agreement"), by and among the Company, CBS
Corporation, a Pennsylvania corporation ("CBS"), and K Acquisition Corp., a
Delaware corporation and a wholly-owned subsidiary of CBS ("Merger Sub"),
pursuant to which (a) Merger Sub will be merged with and into the Company and
the Company will become a wholly-owned subsidiary of CBS and (b) each
outstanding share of the Company (other than shares owned by CBS or Merger Sub)
will be converted into the right to receive .81 shares of common stock, par
value $1.00 per share, of CBS. Concurrently with the execution of the Merger
Agreement, Michael King, Roger King, Richard King and Diana King (the "Principal
Stockholders") entered into a Stockholders Agreement with CBS whereby the
Principal Stockholders agreed, among other things, that, while the Merger
Agreement was in effect, they would vote their shares of Common Stock, which
represent approximately 18% of total outstanding shares of Common Stock of the
Company, in favor of the merger and against any alternative proposal that may be
brought before the stockholders of the Company for a vote.
The consummation of the merger is subject to certain conditions,
including approval by the stockholders of the Company and the expiration or
early termination of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. Pursuant to the Merger Agreement, the
Company will prepare and file a proxy statement/prospectus to be mailed to
stockholders in connection with calling a meeting of the stockholders of the
Company to vote on the merger. The transaction is expected to close in mid-1999.
In April 1997, the Company announced that the Board of Directors had
approved a program to repurchase up to 10,000,000 shares of its Common Stock
from time to time in the open market and in privately negotiated transactions.
Through April 4, 1999, 5,894,100 shares of Common Stock had been repurchased for
aggregate consideration of approximately $139.7 million or approximately $23.70
per share. Purchases under the share repurchase program have been financed out
of the Company's available cash and liquid investments. The Company is not
permitted to repurchase shares of its Common Stock pursuant to the Merger
Agreement with CBS.
PART II - OTHER INFORMATION
Item 5. Other Information
At the Company's 1999 annual meeting of stockholders, held on January
28, 1999, an aggregate 65,017,860 shares of Common Stock were present in person
or by proxy. Votes cast for and against and abstentions for the matters
submitted to a vote of security-holders were as follows:
1. Election of Directors:
For Authority Withheld
Diana King 64,511,545 506,315
Joel Chaseman 64,511,917 505,943
Avram Miller 64,511,659 506,201
2. Approval of the amendment to the Company's Restated Certificate of
Incorporation to provide for the annual election of directors:
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For Against Abstain
57,801,535 46,223 102,648
3. Resolution to approve the Company's 1998 Stock Option and
Restricted Stock Purchase Plan:
For Against Abstain
37,035,774 27,751,507 230,579
4. Appointment of Arthur Andersen LLP as the Company's auditors for
the current fiscal year:
For Against Abstain
64,902,161 11,855 103,844
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3.1 Certificate of Amendment, dated February 24, 1999, to the Restated
Certificate of Incorporation of the Company
3.2 Restated By-laws of the Company, dated February 24, 1999
10.1 Company's 1998 Stock Option and Restricted Stock Purchase Plan
10.2 Second Amendment to Employment Agreement dated as of July 10,
1998, between the Company and Don Prijatel.
10.3 Second Amendment to Employment Agreement, dated as of July 21,
1998, between the Company and Andrew Friendly.
10.4 Sixth Amendment to Employment Agreement, dated as of July 22,
1998, between the Company and Stuart Stringfellow.
10.5 Amendment to Employment Agreement, dated as of March 2, 1999,
between the Company and Jonathan Birkhahn.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
On April 1, 1999, the Company report on Form 8-K announcing its
proposed merger with CBS Corporation.
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SIGNATURES
Pursuant to the requirements 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.
KING WORLD PRODUCTIONS, INC.
By: /s/ Steven A. LoCascio
Steven A. LoCascio
Senior Vice President and
Chief Financial Officer
and on behalf of the Registrant
April 13, 1999
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