Profit contribution margin was approximately 47% for the nine months ended January 23, 2004 as compared to 39% for the nine months ended January 23, 2003, the increase due to higher licensing margins. The increase in our licensing margin was due to the mix of products sold during the quarter that resulted in a higher percentage of non-royalty bearing revenues in the current period as compared to the prior year period. In addition, licensing revenues have high margins relative to our other branded merchandise businesses and during the current quarter accounted for a higher percentage of branded merchandise revenues as compared to the prior year period.
The following chart reflects the amounts and percent change of certain significant overhead items:
The increase in staff related expenses primarily reflects an accrual related to incentive compensation. No accrual was made in the prior year as the incentive compensation is tied to the Company’s performance as compared to the budget. The current period reflects a $5.9 million favorable settlement of litigation and the prior year period reflects the net impact of a $3.5 million favorable settlement of litigation offset partially by a $2.4 million unfavorable settlement of litigation. The decrease in advertising and promotion expenses was primarily a result of costs incurred in the prior year period related to our advertising campaign associated with our new company name and logo. The decrease in bad debt expense was a result of a payment received from a pay-per-view service in the current year that was fully reserved for in the prior year.
Stock compensation costs were $1.3 million for the first nine months of fiscal 2004. During the third quarter, we completed an exchange offer that gave all active employees and independent contractors who held options with a grant price of $17 or higher the ability to exchange options, at a 6 to 1 ratio, for restricted stock units, or, for holders with fewer than 25,000 options, for cash at a 75% of the average price of $13.28 per share, during the offering period. Overall, 4.2 million options were eligible for the offer, of which 4.1 million were exchanged for either cash or restricted stock units. In exchange for the options tendered, we granted an aggregate of 591,416 restricted stock units and made cash payments in the aggregate amount of approximately $0.9 million, which will result in a total compensation charge of approximately $6.7 million, of which the cash payment of $0.8 million to employees was recorded in our third fiscal quarter ended January 23, 2004, and the portion related to the grant of the restricted stock units to employees will be recorded over the 24 month vesting period. As a result, the compensation charge related to the grant of restricted stock units will be recorded as follows: $0.1 million was recorded in the third quarter ended January 23, 2004, approximately $1.9 million in our fourth quarter of fiscal
2004, approximately $3.6 million in fiscal 2005, and approximately $1.1 million in fiscal 2006.
In June 2003, we granted 792,500 options at an exercise price of $9.60 per share and granted 178,000 restricted stock units at an average price per share of $9.60. Such issuances were granted to officers and employees under our 1999 Long-Term Incentive Plan. Total compensation costs related to the grant of restricted stock units, based on the estimated value of the units on the grant date, is $1.7 million and will be amortized over the vesting period, which is seven years, unless EBITDA of $65.0 million is met for any fiscal year during the vesting period. In that event, the unvested restricted stock units immediately vest and accordingly, the unamortized balance at that date would be expensed.
| | January 23,
2004 | | January 24,
2003 | | better
(worse) | |
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Depreciation and amortization | | $ | 8.5 | | $ | 6.7 | | | (27 | )% |
The increase reflects amortization related to our recently acquired film libraries and depreciation associated with our new WWEshopzone.com commerce engine. In January 2004, we paid $20.1 million to pay off a lease on our corporate aircraft from cash on hand. The purchase price of the aircraft, net of a $9.5 million estimated residual value, will be depreciated on a straight-line basis over a 10 year period. As a result of this purchase, annual depreciation expense will increase by $1.1 million. This transaction should result in a reduction in our net financing costs.
| | January 23,
2004 | | January 24,
2003 | | better
(worse) | |
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Interest income and other, net | | $ | 4.9 | | $ | 0.7 | | | 600 | % |
The increase reflects a higher overall rate of return on our investments in the current quarter, and to a lesser extent, a $0.4 million unrealized holding gain resulting from the revaluation of warrants received from two of our licensees using the Black Sholes model, taking into account the most current market assumptions.
| | January 23,
2004 | | January 24,
2003 | |
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Provision for income taxes | | | | | | | |
Provision for income taxes | | $ | 17.4 | | $ | 5.9 | |
Effective tax rate | | | 38 | % | | 38 | % |
Discontinued operations — The World.In fiscal 2003, we closed the operations of our entertainment complex, The World. As a result, the operations of The World have been reflected in discontinued operations. Income from discontinued operations of The World, net of taxes, was approximately $0.1 million for the nine months ended January 23, 2004, as compared to a loss from discontinued operations, net of taxes, of $25.2 million for the nine months ended January 24, 2003. Included in income from discontinued operations for the nine months ended January 23, 2004 was $0.7 million of expense recoveries. Included in the loss from discontinued operations for the nine months ended January 24, 2003 was an impairment charge of $32.9 ($20.4 million, net of tax). The shutdown charge of $8.9 million recorded in our fiscal year ended April 30, 2003 in accordance with SFAS No. 146 assumed no sub-let income for fiscal 2004 and assumed 75% sub-rental income for fiscal years 2005 through the end of the lease term, which is October 31, 2017. Although we are actively seeking to sub-let the property, we have not found a tenant as of March 4, 2004. In accordance with paragraph 6 of SFAS No. 146, our assumptions relating to the sub-rental income and the related rent accrual will continue to be monitored and adjusted accordingly. Rental payments for fiscal 2005, assuming no sub-let rental income, would be approximately $2.7 million.
Liquidity and Capital Resources
Cash flows from operating activities for the nine months ended January 23, 2004 and January 24, 2003 were $49.3 million and $16.2 million, respectively. Cash flows provided by operating activities from continuing operations were $51.7 million and $24.0 million for the nine months ended January 23, 2004 and January 24, 2003, respectively. The increase was due primarily to increased operating results in the current period as well as higher interest income earned. Working capital, consisting of current assets less current liabilities, was $259.5 million as of January 23, 2004 and $275.1 million as of April 30, 2003.
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Cash flows used for investing activities were $85.7 million cash flows provided by investing activities were $81.9 million for the nine months ended January 23, 2004 and January 24, 2003, respectively. Capital expenditures for the nine months ended January 23, 2004 were $3.5 million, as compared to $8.9 million for the nine months ended January 24, 2003. For fiscal 2004, we estimate capital expenditures to be approximately $6.0 million, which includes a conversion of our critical business and financial systems, television equipment and building improvements. During the nine months ended January 23, 2004, we acquired film libraries and certain other assets for approximately $1.6 million. In January 2004, the Company paid $20.1 million to pay off a lease on our corporate aircraft from cash on hand. The jet was acquired under an operating lease in 2000. The transaction will be accounted for as a capital acquisition in the current period. As of February 18, 2004, we had approximately $218.7 million invested in fixed-income mutual funds, which primarily held AAA and AA debt rated instruments and $46.2 million in United States Treasury Notes. Our investment policy is designed to assume a minimum of credit, interest rate and market risk.
Cash flows used in financing activities for the nine months ended January 23, 2004 were $27.9 million as compared to $29.2 million for the nine months ended January 24, 2003. In June 2003, we purchased, using our available cash on hand, approximately 2.0 million shares of our common stock from Viacom, Inc. for approximately $19.2 million, which was a slight discount to the then market value of our common stock. This transaction did not affect other aspects of our strategic alliance with Viacom. We made this repurchase as we believed that it was a sound economic decision and was beneficial to the Company and our stockholders. In addition, we began paying quarterly dividends during fiscal 2004, which totaled $8.2 million through the third quarter.
We have not entered into any contracts that would require us to make significant guaranteed payments other than those that previously were disclosed in the Liquidity and Capital Resource section of our Annual Report on Form 10-K for our fiscal year ended April 30, 2003.
We believe that cash generated from operations and from existing cash and short-term investments will be sufficient to meet our cash needs over the next twelve months for working capital, capital expenditures and the payment of dividends.
Application of Critical Accounting Policies
There have been no changes to our accounting policies that previously were disclosed in our Annual Report on Form 10-K for our fiscal year ended April 30, 2003 or in the methodology used in formulating the significant judgments and estimates that affect the application of these policies. Amounts included in our consolidated balance sheet in accounts that we have identified as being subject to significant judgments and estimates were as follows:
| | As of | |
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| | January 23, 2004 | | April 30, 2003 | |
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Pay-per-view accounts receivable | | $ | 9.8 million | | $ | 24.3 million | |
Advertising reserve for underdelivery | | $ | 5.0 million | | $ | 6.9 million | |
Home video reserve for returns | | $ | 3.5 million | | $ | 1.5 million | |
Publishing newsstand reserve for returns | | $ | 4.2 million | | $ | 5.0 million | |
Allowance for doubtful accounts | | $ | 2.9 million | | $ | 5.3 million | |
Accrued commisions that may be reversed pending the outcome of litigation | | | | | | | |
– see Note 8 of Notes to Consolidated Financial Statements | | $ | 7.8 million | | $ | 6.4 million | |
The decrease in our pay-per-view accounts receivable balance was due to the timing of certain of our pay-per-view events. As of April 30, 2003, the accounts receivable balance included approximately $10.0 million related to our premier event, Wrestlemania, which took place in March 2003. In addition, the accounts receivable balance included approximately $5.0 million related to our April 2003 pay-per-view event. In the current period, our January pay-per-event event did not air during this period and our most recent event in the current period was our December 2003 pay-per-view event.
The decrease in our allowance for doubtful accounts reflects the payment of a previously fully reserved balance from a pay-per-view service during fiscal 2004.
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Reform Act of 1995
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain statements that are forward-looking and are not based on historical facts. When used in this Quarterly Report, the words
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“may,” “will,” “could,” “anticipate,” “plan,” “continue,” “project,” “intend”, “estimate”, “believe”, “expect” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such words. These statements relate to our future plans, objectives, expectations and intentions and are not historical facts and accordingly involve known and unknown risks and uncertainties and other factors that may cause the actual results or the performance by us to be materially different from future results or performance expressed or implied by such forward-looking statements. The following factors, among others, could cause actual results to differ materially from those contained in forward-looking statements made in this Quarterly Report, in press releases and in oral statements made by our authorized officers: (i) our failure to continue to develop creative and entertaining programs and events would likely lead to a decline in the popularity of our brand of entertainment; (ii) our failure to retain or continue to recruit key performers could lead to a decline in the appeal of our story lines and the popularity of our brand of entertainment; (iii) the loss of the creative services of Vincent McMahon could adversely affect our ability to create popular characters and story lines; (iv) our failure to maintain or renew key agreements could adversely affect our ability to distribute our television and pay-per-view programming, and in this regard, we are currently in negotiations with our two largest domestic pay-per-view distributors, iN DEMAND and DIRECTV, and, if new agreements are not entered into, the agreement with iN DEMAND continues from event to event after March 2004 unless terminated by either party on thirty days notice and the agreement with DIRECTV terminates at the end of March 2004; our primary domestic television distribution agreement with Viacom runs until Fall 2006 for its UPN network and Fall 2005 for its Spike TV network; and our primary television distribution in the UK runs through December 31, 2004; (v) we may not be able to compete effectively with companies providing other forms of entertainment and programming, and many of these competitors have greater financial resources than we; (vi) we may not be able to protect our intellectual property rights which could negatively impact our ability to compete in the sports entertainment market; (vii) general economic conditions or a change in the popularity of our brand of sports entertainment could adversely impact our business; (viii) risks associated with producing live events, both domestically and internationally, including without limitation risks that our insurance may not cover liabilities resulting from accidents or injuries and that we may be prohibited from promoting and conducting live events if we do not comply with applicable regulations; (ix) uncertainties associated with international markets; (x) we could incur substantial liabilities, or be required to conduct certain aspects of our business differently, if pending or future material litigation is resolved unfavorably; (xi) any new or complementary businesses into which we may expand in the future could adversely affect our existing businesses; (xii) through his beneficial ownership of a substantial majority of our Class B common stock, our controlling stockholder can effectively exercise control over our affairs, and his interests could conflict with the holders of our Class A common stock; and (xiii) a substantial number of shares will be eligible for future sale by our current majority stockholder, and the sale of those shares could lower our stock price. The forward-looking statements speak only as of the date of this Quarterly Report and undue reliance should not be placed on these statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
In the normal course of business, we are exposed to foreign currency exchange rate, interest rate and equity price risks that could impact our results of operations. Our foreign currency exchange rate risk is minimized by maintaining minimal net assets and liabilities in currencies other than our functional currency.
The only derivative instruments that we currently hold are warrants received from certain publicly traded companies with whom we have licensing agreements. These warrants are included in our financial statements at their net estimated fair value. Accordingly, we are exposed to market value fluctuations relative to the stock underlying these warrants. For the three months ended January 23, 2004, the estimated fair value of these warrants increased by $0.4 million to approximately $2.0 million. We do not utilize derivative instruments for specific purposes or to hedge our exposure to interest rate or foreign currency risks.
Interest Rate Risk
Our investment portfolio currently consists primarily of fixed-income mutual funds and treasury notes, with a strong emphasis placed on preservation of capital. The market value of those securities can fluctuate with market interest rates. In an effort to minimize our exposure to interest rate risk, our investment portfolio’s dollar weighted duration is less than two years. Due to the nature of our investments and our strategy to minimize market and interest rate risk, our portfolio would not be materially impacted by an adverse movement of interest rates of 1%.
Item 4. Controls and Procedures
Based on their most recent review, as of January 23, 2004, our Chairman and Chief Executive Officer, as co-principal executive officers, and our Chief Financial Officer have concluded that our disclosure controls and procedures are effective to ensure that information
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required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our Chairman, Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure and are effective to ensure that such information is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. While we are in the process of formalizing certain of our control procedures, there were no significant changes in our internal controls or in other factors that could significantly affect those controls subsequent to the date of this evaluation.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 8 to Notes to Consolidated Financial Statements, which is incorporated herein by reference.
Item 6. Exhibits and Reports on Form 8-K
(a.) Exhibits
10.2B Second Amendment, dated February 23, 2004, to Employment Agreement with Vincent K. McMahon (filed herewith). *
10.4A Amendment, dated February 23, 2004, to Employment Agreement with Linda E. McMahon (filed herewith). *
31.1 Certification by Vincent K. McMahon pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification by Linda E. McMahon pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31.3 Certification by Philip B. Livingston pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification by Vincent K. McMahon, Linda E. McMahon and Philip B. Livingston pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (filed herewith).
(b.) Reports on Form 8-K
The registrant filed a report on Form 8-K dated November 17, 2003 under Item 7, Financial Statements and Exhibits.
* Indicates management contract or compensatory plan or arrangement.
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SIGNATURE
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, thereto duly authorized.
| WORLD WRESTLING ENTERTAINMENT, Inc.
(Registrant) |
| |
Dated: March 5, 2004 | By: | /s/ PHILIP B. LIVINGSTON |
| |
|
| | Philip B. Livingston
Chief Financial Officer |
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