WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The state tax benefit for 2003 is comprised of state and local taxes, net of federal benefits, reduced by the reversal of a tax reserve established in prior year. The tax reserve is no longer necessary due to the conclusion of various state examinations.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities of continuing operations consisted of the following:
The temporary differences described above represent differences between the tax basis of assets or liabilities and amounts reported in the consolidated financial statements that will result in taxable or deductible amounts in future years when the reported amounts of the assets or liabilities are recovered or settled. As of April 30, 2004 and 2003, $7,003 and $11,194, respectively, of the net deferred tax assets are included in prepaid expenses and other current assets and the remaining $3,904 and $4,800, respectively, are included in other non-current assets in our consolidated balance sheets.
As of April 30, 2004, and April 30, 2003 we had valuation allowances of $2,275 and $2,437, respectively to reduce our deferred tax assets to an amount more likely than not to be recovered. The valuation allowance is primarily related to the deferred tax asset arising from losses on investments which are capital in nature for which realization is uncertain. A majority of these capital loss carry forwards expire in 2008.
We have approximately $30,362 in state and local net operating losses which begin to expire in 2023. These net operating losses were incurred in discontinued operations and, as such, the deferred tax asset related to this net operating loss carryforward is included in the assets of discontinued operations on the consolidated balance sheets. A full valuation allowance in the amount of $2,638 is recorded against these net operating loss carryforwards to reduce the asset to zero as management does not believe the tax benefit is more likely than not to be realized.
WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
U.S. income taxes have not been provided on unremitted earnings of our foreign subsidiary, because our intent is to keep such earnings indefinitely reinvested in the foreign subsidiary’s operations.
10. Commitments and Contingencies
We have certain commitments, including various non-cancelable operating leases, performance contracts with various performers, employment agreements with certain executive officers, advertising commitments and an agreement with Viacom which guarantee a minimum payment for advertising during the term.
Future minimum payments as of April 30, 2004 under the agreements described above were as follows:
| | Operating
Lease
Commitments | | Other
Commitments | | Total | |
| |
|
| |
|
| |
|
| |
For the year ending April 30, 2005 | | $ | 1,283 | | $ | 23,678 | | $ | 24,961 | |
For the year ending April 30, 2006 | | | 1,168 | | | 10,947 | | | 12,115 | |
For the year ending April 30, 2007 | | | 723 | | | 4,725 | | | 5,448 | |
For the year ending April 30, 2008 | | | 632 | | | 882 | | | 1,514 | |
For the year ending April 30, 2009 | | | 128 | | | 952 | | | 1,080 | |
Thereafter | | | — | | | 4,549 | | | 4,549 | |
| |
|
| |
|
| |
|
| |
Total | | $ | 3,934 | | $ | 45,733 | | $ | 49,667 | |
| |
|
| |
|
| |
|
| |
Rent expense under operating leases from continuing operations was approximately $1,906, $2,402 and $2,228 for 2004, 2003 and 2002, respectively.
In addition, we have an operating lease for space in New York City that is currently unoccupied which was related to our former entertainment complex, The World. We are currently seeking a sub-tenant. The total payments remaining on the lease are approximately $43,795 as of April 30, 2004, which were accrued as a liability at the shutdown date. However, in accordance with SFAS No. 146, we have reduced this accrual by our current estimate for sub-tenant rental income of approximately 75% of the remaining payments on the lease (see Note 16).
Legal Proceedings
World Wide Fund for Nature
In April 2000, the World Wide Fund for Nature and its American affiliate, the World Wildlife Fund (collectively, the “Fund”) instituted legal proceedings against us in the English High Court seeking injunctive relief and unspecified damages for alleged breaches of a 1994 agreement between the Fund and us regarding the use of the initials “wwf”. In August 2001, the trial judge granted the Fund’s motion for summary judgment, holding that we breached the agreement by using the initials “wwf” in connection with certain of our website addresses and our former scratch logo. The English Court of Appeals subsequently upheld that ruling. Since November 10, 2002, we have been subject to an injunction barring us, either on our own or through our officers, servants, agents, subsidiaries, licensees or sublicensees, our television or other affiliates or otherwise, from most uses of the initials “wwf,” including in connection with the “wwf” website addresses and the use of our former scratch logo.
We have complied with the injunction and have taken a number of significant steps that go beyond the literal requirements of the injunction, including, among other things, changing our corporate name to World Wrestling Entertainment, Inc. and initials to “WWE.” However, the elimination of certain historical uses of our former scratch logo, including, specifically, WWE’s archival video footage containing the scratch logo during the period 1998-May 2002 and the scratch logo embedded in programming code of WWE-licensed video games created during the period 1999-2001 is, as a practical matter, not possible. On an application for relief by our videogame licensee, THQ/Jakks Pacific LLC (“THQ/Jakks”), the English Court of Appeals ruled, overturning the lower court’s decision, that THQ/Jakks’ marketing and sale of games with embedded references to the initials “wwf” would not violate the injunction and would not constitute contempt of court by either THQ/Jakks or us.
As part of its original complaint, the Fund included a damages claim associated with our use of the initials
F-17
WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
“wwf.” Although the Fund has never initiated any proceedings or presented any evidence before the court in this regard, the Fund has claimed in correspondence that at least $360 million would be required to fund a multi-year media advertising campaign to remedy the Fund’s alleged loss of recognition/exclusivity as a result of our use of the initials “wwf.” In that correspondence, the Fund, through its Legal Advisor, demanded a payment of $90 million prior to the injunction compliance date to settle its alleged damages claims and resolve all remaining issues. We vigorously rejected the Fund’s demand and contend that the Fund’s tactics were a bad faith attempt to coerce us into an unwarranted cash payment. We strongly dispute that the Fund has suffered any such damages and indeed despite repeated requests, the Fund has never provided us with any documentation or evidence in support of its alleged damages claim. No hearings have been scheduled on the Fund’s damages claim. We cannot quantify the potential impact that an unfavorable outcome of the Fund’s damages claim, if such a claim ever were to be presented, could have on our financial condition, results of operations or liquidity; however based solely on the Fund’s unsubstantiated out-of-court assertions, it could be material.
Shenker & Associates
On November 14, 2000, Stanley Shenker & Associates, Inc. (“SSAI”) filed a complaint against us in Superior Court, Judicial District of Stamford/Norwalk, Connecticut, relating to the termination of an agency agreement between us and plaintiff. Plaintiff sought compensatory damages and punitive damages in an unspecified amount, attorneys’ fees, an accounting and a declaratory judgment.
In May 2003, we filed a motion for sanctions asserting significant litigation misconduct by the plaintiff, including giving perjured testimony and fabricating evidence, and seeking, among other things, dismissal of all claims against us and a default judgment on our counterclaims for tortious interference with business relations, conversion, fraud and conspiracy in connection with the Plaintiff’s solicitation and receipt of improper payments from various of our licensees. In October 2003, the court issued a comprehensive opinion and order, dismissing plaintiff’s case against us with prejudice and entering a default judgment in our favor on all of our counterclaims. In November 2003, the plaintiff filed a motion to reconsider the court’s order, which was denied. SSAI filed a renewed motion for reconsideration which was also denied. As a result of, among other things, these developments, in the fourth quarter of fiscal 2004 we reversed an expense accrued for commissions in the amount of approximately $7.9 million. A damages hearing on our counterclaims has been scheduled for September 2004. Pursuant to the court’s request, we have filed a report on the discovery we need to prove the damages associated with our counterclaims.
On February 14, 2003, we filed a complaint against one of our former officers, and certain entities related to him, with respect to irregularities in the licensing program during his tenure with us, which came to light as a result of discovery in the Shenker litigation. That lawsuit has been consolidated with the Shenker litigation. In March 2004, we filed a motion for summary judgment on all of our claims, which is pending before the court. We also have filed a motion for sanctions based on the former officer’s discovery misconduct, seeking a default judgment on our claims.
In December 2003, the parties entered into a stipulation regarding our application for prejudgment remedies, permitting us to attach assets up to $5.0 million against SSAI and up to $850,000 against the former officer and certain related entities (this latter amount was subsequently raised to $4.0 million). In January 2004, we began attaching assets. Based on the violation of the consent order regarding prejudgment remedies, we moved for contempt against the former officer and his associate.
We believe that the decision against SSAI was correct and that this litigation will have no material adverse effect on our financial condition or results of operations. However, the decision is subject to appeal and as a result, no assurances can be given in this regard.
Marvel Enterprises
In October 2001, we were served with a complaint by Marvel Enterprises, Inc. in the Superior Court of Fulton County, Georgia alleging that we breached the terms of a license agreement regarding the rights to manufacture and distribute toy action figures of various wrestling characters, assumed in the acquisition of certain assets of World Championship Wrestling, Inc. (“WCW”) by one of our subsidiary corporations. The plaintiff seeks damages and a declaration that the agreement is in force and effect. Universal Wrestling Corp. (“Universal”), the successor-in-interest to WCW, was sued in a separate lawsuit, which has been consolidated with the lawsuit against us for discovery and trial. We are defending Universal in connection with these claims. In May 2003, we filed a
F-18
WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
motion for summary judgment on all claims. Universal similarly filed a motion for summary judgment on all claims. In July 2003, the court granted our summary judgment motion in its entirety and dismissed all claims against the Company, and the court granted in part and denied in part Universal’s summary judgment motion. Marvel has appealed the decisions, and Universal has appealed the denial in part of its summary judgment motion. While we believe the court’s decision to dismiss the claims against us was correct, we are unable to predict the likelihood of success of Marvel’s appeal. In light of the summary judgment rulings, we do not believe that an unfavorable outcome of the remaining claims against Universal would have a material adverse effect on our financial condition or results of operations; however, no assurances can be given in this regard.
IPO Class Action
In December 2001, a purported class action complaint was filed against us asserting claims for alleged violations of the federal securities laws relating to our initial public offering in 1999. Also named as defendants in this suit were Vincent K. McMahon, Linda E. McMahon and August J. Liguori (collectively, the “Individual Defendants”) and the underwriters of our initial public offering. According to the allegations of the Complaint, the Underwriter Defendants allegedly engaged in manipulative practices by, among other things, pre-selling allotments of shares of the Company’s stock in return for undisclosed, excessive commissions from the purchasers and/or entering into after-market tie-in arrangements which allegedly artificially inflated the Company’s stock price. The plaintiff further alleges that the Company knew or should have known of such unlawful practices. This litigation has been consolidated in the United States District Court for the Southern District of New York with claims against approximately 300 other companies that had initial public offerings during the same general time period.
The class plaintiffs and the issuer defendants, including the Individual Defendants and the Company, have reached an agreement in principle for the settlement of all claims. This settlement, if consummated, is not anticipated to have a material adverse effect on our financial condition or results of operation. While the Company strongly denies all allegations, in June 2004, the Company and the Individual Defendants executed the settlement agreement, subject to approval of the settlement by the Company’s primary insurer. It is the Company’s understanding that the significant majority of issuer defendants have executed the settlement agreement as well. The Company expects the settlement process will move forward; however, no assurances can be given in this regard.
We are not currently a party to any other material legal proceedings. However, we are involved in several other suits and claims in the ordinary course of business, and we may from time to time become a party to other legal proceedings. The ultimate outcome of these other matters is not expected to have a material adverse effect on our financial condition or results of operations.
11. Stockholders’ Equity
Our Class B common stock is fully convertible into Class A common stock, on a one for one basis, at any time at the option of the holder. The two classes are entitled to equal per share dividends and distributions and vote together as a class with each share of Class B entitled to ten votes and each share of Class A entitled to one vote, except when separate class voting is required by applicable law. If, at any time, any shares of Class B common stock are beneficially owned by any person other than Vincent McMahon, Linda McMahon, any descendant of either of them, any entity which is wholly owned and is controlled by any combination of such persons or any trust, all the beneficiaries of which are any combination of such persons, each of those shares will automatically convert into shares of Class A common stock. Through his beneficial ownership of a substantial majority of our Class B common stock, our controlling stockholder, Vincent McMahon, can effectively exercise control over our affairs, and his interests could conflict with the holders of our Class A common stock.
In June 2003, we purchased approximately 2.0 million shares of our common stock from Viacom, Inc. for approximately $19,246, which was a slight discount to the then market value of our common stock. This transaction did not affect other aspects of our business relationship with Viacom.
We provide a stock purchase plan for our employees. Under the plan, any regular full-time employee may contribute up to 10% of their base compensation (subject to certain income limits) to the semi-annual purchase of shares of our common stock. The purchase price is 85% of the fair market value at certain plan-defined dates. At April 30, 2004, approximately 76 employees were participants in the plan. In fiscal 2004, employee participants purchased approximately 21,402 shares of our common stock under the plan at an average per share of $7.74.
F-19
WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
The 1999 Long-Term Incentive Plan (“LTIP”) provides for grants of options as incentives and rewards to encourage employees, directors, consultants and performers in our long-term success. The LTIP provides for grants of options to purchase shares at a purchase price equal to the fair market value on the date of the grant. The options expire 10 years after the date of the grant and are generally exercisable in installments beginning one year from the date of the grant. The LTIP also provides for the grant of other forms of equity-based incentive awards as determined by the compensation committee of the board of directors.
In June 2003, we granted 178,000 restricted stock units at $9.60 per share. 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. Although originally scheduled to be amortized over the seven year vesting period, a provision of the grant stipulated that if EBITDA of $65.0 million was achieved in any fiscal year during the vesting period, the unvested restricted stock units would immediately vest and, accordingly, the unamortized balance at that date would be expensed. Because our EBITDA exceeded $65.0 million in fiscal 2004, we recorded the entire $1.7 million charge in fiscal 2004. EBITDA is a measure of our operating performance, and is defined in the LTIP as earnings from continuing operations before interest, taxes, depreciation, and amortization.
In January 2004, we completed an exchange offer that gave all active employees and independent contractors who held stock options with a grant price of $17 or higher the ability to exchange their options, at a 6 to 1 ratio, for restricted stock units, or, for holders with fewer than 25,000 options, for cash at 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 fiscal 2004, and the portion related to the grant of the restricted stock units to employees will be recorded over the units’ 24 month vesting period. As a result, $2.0 million of the compensation charge related to the option exchange program was recorded in fiscal 2004 and the remaining will be recorded as follows: approximately $3.6 million in fiscal 2005 and approximately $1.1 million in fiscal 2006.
Presented below is a summary of the LTIP’s activity for each of the three years ended April 30, 2004.
| | Options | | Weighted
Average
Exercise Price | |
| |
|
| |
|
| |
Options outstanding at May 1, 2001 | | | 6,670,700 | | $ | 16.36 | |
Options granted | | | 5,000 | | $ | 13.82 | |
Options canceled | | | (390,100 | ) | $ | 16.20 | |
Options exercised | | | (32,000 | ) | $ | 12.94 | |
| |
|
| |
|
| |
Options outstanding at April 30, 2002 | | | 6,253,600 | | $ | 16.40 | |
Options granted | | | 1,219,000 | | $ | 13.02 | |
Options canceled | | | (476,900 | ) | $ | 15.44 | |
Options exercised | | | (31,250 | ) | $ | 12.94 | |
| |
|
| | | | |
Options outstanding at April 30, 2003 | | | 6,964,450 | | $ | 15.89 | |
| |
|
| |
|
| |
Options granted | | | 852,500 | | $ | 9.63 | |
Options canceled | | | (4,837,775 | ) | $ | 16.89 | |
Options exercised | | | (23,550 | ) | $ | 12.94 | |
| |
|
| |
|
| |
Options outstanding at April 30, 2004 | | | 2,955,625 | | | | |
| |
|
| | | | |
Restricted stock units outstanding | | | 770,848 | | | | |
| |
|
| | | | |
Available for future grants at April 30, 2004 | | | 6,036,777 | | | | |
| |
|
| | | | |
The number of options exercisable as of April 30, 2004, 2003 and 2002 was 1,184,644, 5,021,600 and 3,618,735, respectively. The following table summarizes information for options outstanding and exercisable as of April 30, 2004:
F-20
WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
Range of Exercise
Prices | | Number of
Options
Outstanding | | Weighted
Average
Remaining
Life | | Weighted
Average
Exercise
Price | | Number of
Options
Exercisable | | Weighted
Average
Exercise
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
$7.66 – $17.00 | | | 2,955,625 | | | 6.2 years | | | $12.47 | | | 1,184,644 | | | $14.11 | |
12. Employee Benefit Plans
We sponsor a 401(k) defined contribution plan covering substantially all employees. Under this plan, participants are allowed to make contributions based on a percentage of their salaries, subject to a statutorily prescribed annual limit. We make matching contributions of 50 percent of each participant’s contributions, up to 6% of eligible compensation (maximum 3% matching contribution). We may also make additional discretionary contributions to the 401(k) plan. Our expense for matching contributions and additional discretionary contributions to the 401(k) plan was $1,217, $840 and $865, during 2004, 2003 and 2002, respectively.
13. Segment Information
Our continuing operations are conducted within two reportable segments, live and televised entertainment and branded merchandise. Our live and televised entertainment segment consists of live events and television programming. Our branded merchandise segment includes consumer products sold through third party licensees and the marketing and sale of merchandise, magazines and home videos. The results of operations for The World and for the XFL are not included in the segment reporting as they are classified separately as discontinued operations in our consolidated financial statements (See Note 16). We do not allocate corporate overhead to each of the segments and as a result, corporate overhead is a reconciling item in the table below. There are no intersegment revenues.
Revenues derived from sales outside of North America were approximately $63,453, $51,840 and $38,459 for 2004, 2003 and 2002, respectively. The table presents information about the financial results of each segment for 2004, 2003 and 2002 and assets as of April 30, 2004 and 2003. Unallocated assets consist primarily of cash, short-term investments and real property and other investments.
| | Year Ended April 30 | |
| |
| |
| | 2004 | | 2003 | | 2002 | |
| |
|
| |
|
| |
|
| |
Net revenues: | | | | | | | | | | |
Live and televised entertainment | | $ | 296,088 | | $ | 295,432 | | $ | 323,458 | |
Branded merchandise | | | 78,821 | | | 78,832 | | | 86,164 | |
| |
|
| |
|
| |
|
| |
Total net revenues | | $ | 374,909 | | $ | 374,264 | | $ | 409,622 | |
| |
|
| |
|
| |
|
| |
Depreciation and amortization: | | | | | | | | | | |
Live and televised entertainment | | $ | 4,415 | | $ | 3,709 | | $ | 3,205 | |
Branded merchandise | | | 2,729 | | | 2,062 | | | — | |
Corporate | | | 5,219 | | | 5,194 | | | 7,389 | |
| |
|
| |
|
| |
|
| |
Total depreciation and amortization | | $ | 12,363 | | $ | 10,965 | | $ | 10,594 | |
| |
|
| |
|
| |
|
| |
Operating income: | | | | | | | | | | |
Live and televised entertainment | | $ | 108,919 | | $ | 88,266 | | $ | 113,924 | |
Branded merchandise | | | 33,830 | | | 23,362 | | | 20,829 | |
Corporate | | | (69,169 | ) | | (85,021 | ) | | (90,040 | ) |
| |
|
| |
|
| |
|
| |
Total operating income | | $ | 73,580 | | $ | 26,607 | | $ | 44,713 | |
| |
|
| |
|
| |
|
| |
F-21
WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
| | At April 30 | |
| |
| |
| | | 2004 | | | 2003 | |
| |
|
| |
|
| |
Assets: | | | | | | | |
Live and televised entertainment | | $ | 78,162 | | $ | 73,727 | |
Branded merchandise | | | 17,437 | | | 17,395 | |
Unallocated (1) | | | 358,745 | | | 341,041 | |
| |
|
| |
|
| |
Total assets | | $ | 454,344 | | $ | 432,163 | |
| |
|
| |
|
| |
(1) Includes assets of discontinued operations of $21,408 and $21,129 as of April 30, 2004 and 2003, respectively.
14. Financial Instruments and Off-Balance Sheet Risk
Concentration of Credit Risk — Financial instruments which potentially subject us to concentrations of credit risk are principally bank deposits, short-term investments and accounts receivable. Cash and cash equivalents are deposited with high credit quality financial institutions. Short-term investments primarily consist of AAA or AA rated instruments. Except for receivables from cable companies related to pay-per-view events, concentrations of credit risk with respect to trade receivables are limited due to the large number of customers. A significant portion of trade receivables for pay-per-view events is received from our pay-per-view administrator, who collects and remits payments to us from individual cable system operators. We perform ongoing evaluations of our customers’ financial condition, including our pay-per-view administrator, and we monitor our exposure for credit losses and maintain allowances for anticipated losses.
Fair Value of Financial Instruments — The carrying amounts of cash, cash equivalents, money market accounts, accounts receivable and accounts payable approximate fair value because of the short-term nature, and maturity of such instruments. Our short-term investments are carried at quoted market rates. Our debt primarily consists of the mortgage related to our corporate headquarters, which has an annual interest rate of 7.6%. The fair value of this debt is not significantly different from its carrying amount.
15. Quarterly Financial Summaries (unaudited)
| | 1st
Quarter | | 2nd
Quarter | | 3rd
Quarter | | 4th
Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
2004 | | | | | | | | | | | | | |
Net revenues | | $ | 74,675 | | $ | 94,431 | | $ | 79,070 | | $ | 126,733 | |
Gross profit | | $ | 25,414 | | $ | 42,204 | | $ | 35,015 | | $ | 65,155 | |
Income from continuing operations | | $ | 2,743 | | $ | 16,819 | | $ | 8,863 | | $ | 21,148 | |
Loss from discontinued operations (1) | | $ | (158 | ) | $ | 266 | | $ | (76 | ) | $ | (1,413 | ) |
Net income | | $ | 2,585 | | $ | 17,085 | | $ | 8,787 | | $ | 19,735 | |
Earnings (loss) per common share: basic | | | | | | | | | | | | | |
Continuing operations | | $ | 0.04 | | $ | 0.25 | | $ | 0.13 | | $ | 0.31 | |
Discontinued operations (1) | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | | $ | (0.02 | ) |
Net income | | $ | 0.04 | | $ | 0.25 | | $ | 0.13 | | $ | 0.29 | |
Earnings (loss) per common share: diluted | | | | | | | | | | | | | |
Continuing operations | | $ | 0.04 | | $ | 0.25 | | $ | 0.13 | | $ | 0.30 | |
Discontinued operations (1) | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | | $ | (0.02 | ) |
Net income | | $ | 0.04 | | $ | 0.25 | | $ | 0.13 | | $ | 0.28 | |
2003 | | | | | | | | | | | | | |
Net revenues | | $ | 85,449 | | $ | 90,323 | | $ | 92,565 | | $ | 105,927 | |
Gross profit | | $ | 28,831 | | $ | 28,151 | | $ | 35,854 | | $ | 44,085 | |
Income from continuing operations | | $ | 3,790 | | $ | 195 | | $ | 5,923 | | $ | 6,194 | |
Loss from discontinued operations (1) | | $ | (1,327 | ) | $ | (1,863 | ) | $ | (21,988 | ) | $ | (10,379 | ) |
Net income (loss) | | $ | 2,463 | | $ | (1,668 | ) | $ | (16,065 | ) | $ | (4,185 | ) |
Earnings (loss) per common share: | | | | | | | | | | | | | |
basic and diluted | | | | | | | | | | | | | |
Continuing operations | | $ | 0.05 | | $ | 0.00 | | $ | 0.08 | | $ | 0.09 | |
Discontinued operations (1) | | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.31 | ) | $ | (0.15 | ) |
Net income (loss) | | $ | 0.03 | | $ | (0.02 | ) | $ | (0.23 | ) | $ | (0.06 | ) |
(1) Our discontinued operations include an after-tax impairment charge of $20,413 recorded in the third quarter of 2003 and after-tax charges related to the shutdown of The World of $8,866 recorded in the fourth quarter of 2003 (see Note 16).
F-22
WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
16. Discontinued Operations
In fiscal 2003, we recorded estimated shutdown costs of approximately $12,100, or $8,900 after tax, in connection with the closing of our operations of The World. The following is a listing of the major components included in the $12,100 charge:
Rent expense and other related costs | | $ | 9,900 | |
Severance and other related costs | | | 1,100 | |
Impairment of fixed assets | | | 1,000 | |
Inventory reserves | | | 100 | |
| |
|
| |
Total | | $ | 12,100 | |
| |
|
| |
The costs associated with these disposal activities have been classified in discontinued operations in our Consolidated Statements of Operations for the year ended April 30, 2003.
Rent expense and other related costs-In determining the shut-down costs for the rent expense associated with the lease of The World, we followed the guidance established in paragraph 16 of SFAS 146. We closed the restaurant in February 2003 and the retail store in April 2003. By April 30, 2003, we had physically vacated the premises, with no intention to reoccupy, and began to show the space to potential sub-lease tenants in early fiscal 2004. Accordingly, no future economic benefit will be received by us from this operation. In calculating our accrual for the costs that will continue to be incurred under this contract through its October, 2017 term, we assumed no sub-let income in fiscal 2004 and assumed sub-let income of 75% of the lease payments beginning in fiscal 2005. Based upon discussions with real estate brokers in New York City and a real estate appraiser engaged by us, it was determined to be probable that the property would not be rented within fiscal 2004. Factors include the large space of the facility, its unique Times Square location, the then remaining term of the lease (15 years) and the expected time needed to re-fit the space by any potential new tenant.
We analyzed broker fees incurred for similar type properties with multi-year leases in New York City in order to quantify the expected broker fee for the sublease of The World, and subsequently recorded as of April 30, 2003, approximately $900, which is included in the caption Rent expense and other related costs above.
Severance and other related costs- The World’s employees were involuntarily terminated. The termination payments made to them were not contingent upon any future service. In accordance with paragraphs 8 and 9 of SFAS No. 146, we expensed the $1,100 of estimated payments, of which approximately $700 had been paid as of April 30, 2003.
Impairment of fixed assets- The $1,000 fixed assets impairment charge included in shut-down costs represented the remaining net book value of the assets at The World which were deemed to have no value.
Inventory Reserves- We also recorded a $100 charge related to the write-off of the remaining miscellaneous inventory used in the operation of The World.
Included in the loss from discontinued operations for 2003 was an impairment charge of $32,925 as a result of an impairment test conducted on goodwill $2,533 and other long-lived assets $30,392 at The World. The charge arose from continued operating losses at that facility and was taken in accordance with SFAS No. 142 and SFAS No. 144, respectively. Estimates of the fair values of the long-lived assets at The World were determined by an independent, third party appraiser, based on valuation methods, such as cost and fair market value approaches, with the valuation method used based upon the nature of the underlying assets.
In fiscal 2004, we recorded additional shutdown costs of $2,571, or $1,671 after tax, representing the absence of projected sub-rental payments for the first nine months of fiscal 2005, which represents our revised estimate of the expected time necessary to assign or sub-let the remaining lease. In addition, we have also re-classified the deferred tax assets related to The World from short-term to long-term based upon our current expectations regarding the expected realization of these deferred tax assets.
The following table presents the activity in the accruals relating to the shutdown of The World during the year ended April 30, 2004.
| | Accrued Rent
and Other
Related Costs | | Accrued Severance
and Other
Related Costs | | Total | |
| |
|
| |
|
| |
|
| |
Balance as of April 30, 2003 | | $ | 9,900 | | $ | 400 | | $ | 10,300 | |
Amounts paid during fiscal year April 30, 2004 | | | (2,700 | ) | | (400 | ) | | (3,100 | ) |
Additional charge recorded in fiscal year April 30, 2004* | | | 2,100 | | | — | | | 2,100 | |
| |
|
| |
|
| |
|
| |
Balance as of April 30, 2004 | | $ | 9,300 | | | — | | $ | 9,300 | |
| |
|
| |
|
| |
|
| |
*Although we are actively seeking to sub-let the property, no tenant has been located to date. The additional charge relates to the modification of our assumptions related to the accrued rent. This accrual and the related assumptions will continue to be monitored and adjusted accordingly.
The results of The World business, which has been classified as discontinued operations in the consolidated financial statements, are summarized as follows:
| | 2004 | | 2003 | | 2002 | |
| |
|
| |
|
| |
|
| |
Loss from The World operations, net of taxes of $16,359 and $3,006 for 2003 and 2002, respectively | | $ | — | | $ | (26,691) | | $ | (4,903) | |
Estimated loss on shutdown of The World, net of taxes of $900 and $3,257 for 2004 and 2003, respectively | | | (1,671) | | | (8,866) | | | — | |
| |
|
| |
|
| |
|
| |
Loss from discontinued operations | | $ | (1,671 | ) | $ | (35,557 | ) | $ | (4,903 | ) |
| |
|
| |
|
| |
|
| |
| | 2004 | | 2003 | |
| |
|
| |
|
| |
Assets: | | | | | | | |
Cash | | $ | — | | $ | 586 | |
Accounts receivable | | | — | | | 5 | |
Income tax receivable | | | 7,002 | | | 5,343 | |
Prepaid expenses | | | 46 | | | 94 | |
Inventory | | | 60 | | | 65 | |
Deferred income taxes, net of valuation allowance of $2,638 and $1,350 for 2004 and 2003, respectively | | | 13,701 | | | 14,437 | |
| |
|
| |
|
| |
Total assets | | $ | 20,809 | | $ | 20,530 | |
| |
|
| |
|
| |
Liabilities: | | | | | | | |
Accounts payable | | $ | 14 | | $ | 19 | |
Accrued expenses | | | 9,304 | | | 10,648 | |
| |
|
| |
|
| |
Total liabilities | | $ | 9,318 | | $ | 10,667 | |
| |
|
| |
|
| |
F-23
WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
In early May 2001, we formalized our decision to discontinue operations of the XFL, and accordingly reported XFL operating results and estimated shutdown costs as Discontinued Operations in the Consolidated Statements of Operations for the year ended April 30, 2001. Estimated shutdown costs of approximately $27,000 consisted of fixed asset and other asset impairment charges of approximately $9,600, contractual labor costs of approximately $8,400, workers’ compensation and severance costs of approximately $5,400, lease costs of approximately $1,700 and other shutdown related costs of approximately $2,600.
During 2002, as a result of the reversal of shutdown reserves that were no longer required and the recognition of certain tax benefits for which a valuation allowance had been established, we recorded income from discontinued operations of $4,638, net of minority interest and taxes. The remaining shutdown liabilities consist primarily of XFL medical and other shutdown costs.
On June 12, 2000, we sold approximately 2.3 million newly-issued shares of our Class A common stock at $13 per share to NBC, our partner in the XFL, for a total investment of $30,000. As a result of this stock sale, which was at a below-market price, we recorded a deferred cost of $10,673, which was being amortized over 30 month term of the XFL broadcast agreement. As a result of our decision to discontinue operations of the XFL, we wrote off the remaining unamortized deferred cost of $6,974. In May 2002, we repurchased 2.3 million shares of our Class A common stock from NBC for $27,692, which was a discount to the then market value of our common stock. These shares were included in Treasury Stock in our Consolidated Balance Sheet as of April 30, 2003.
The results of the XFL business, which has been classified as discontinued operations in the consolidated financial statements, are summarized as follows:
| | 2004 | | 2003 | | 2002 | |
| |
|
| |
|
| |
|
| |
Estimated income on shutdown of the XFL, net of taxes of $178 and $2,917 for 2004 and 2002, respectively, and minority interest | | $ | 290 | | | — | | $ | 4,638 | |
| |
|
| |
|
| |
|
| |
Income from discontinued operations | | $ | 290 | | | — | | $ | 4,638 | |
| |
|
| |
|
| |
|
| |
| | 2004 | | 2003 | |
| |
|
| |
|
| |
Assets: | | | | | | | |
Cash | | $ | 599 | | $ | 599 | |
| |
|
| |
|
| |
Total assets | | $ | 599 | | $ | 599 | |
| |
|
| |
|
| |
Liabilities: | | | | | | | |
Accrued expenses | | | 238 | | | 1,175 | |
Minority interest | | | (180 | ) | | (288 | ) |
| |
|
| |
|
| |
Total liabilities | | $ | 58 | | $ | 887 | |
| |
|
| |
|
| |
F-24
WORLD WRESTLING ENTERTAINMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except share and per share data)
17. Subsequent Event
In June 2004, The Vincent K. McMahon Irrevocable Trust dated June 30, 1999 completed the sale of 7,066,644 shares of Class B common stock in a registered public offering. Upon the sale, the shares automatically converted into shares of Class A common stock on a one-for-one basis. The Company did not receive any proceeds from this sale of common stock.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
Description | | Balance at
Beginning
of Period | | Additions
Charged to
Costs and
Expenses | | Deductions (1) | | Balance at
End of
Period | |
| |
|
| |
|
| |
|
| |
|
| |
For the Year Ended April 30, 2004 | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 5,284 | | $ | (2,295 | ) | $ | (377 | ) | $ | 2,612 | |
Inventory obsolescence reserve | | | 892 | | | 1,270 | | | (1,036 | ) | | 1,126 | |
Publishing allowance for newsstand returns | | | 5,126 | | | 24,944 | | | (25,553 | ) | | 4,517 | |
Home video allowance for returns | | | 1,496 | | | 8,888 | | | (7,796 | ) | | 2,588 | |
Advertising underdelivery | | | 6,921 | | | 3,170 | | | (5,690 | ) | | 4,401 | |
For the Year Ended April 30, 2003 | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 2,840 | | $ | 3,697 | | $ | (1,253 | ) | $ | 5,284 | |
Inventory obsolescence reserve | | | 2,351 | | | 797 | | | (2,256 | ) | | 892 | |
Publishing allowance for newsstand returns | | | 4,178 | | | 29,327 | | | (28,379 | ) | | 5,126 | |
Home video allowance for returns | | | 3,150 | | | 5,366 | | | (7,020 | ) | | 1,496 | |
Advertising underdelivery | | | 3,935 | | | 4,813 | | | (1,827 | ) | | 6,921 | |
For the Year Ended April 30, 2002 | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 1,868 | | $ | 900 | | $ | 72 | | $ | 2,840 | |
Inventory obsolescence reserve | | | 457 | | | 3,780 | | | (1,886 | ) | | 2,351 | |
Publishing allowance for newsstand returns | | | 2,428 | | | 23,093 | | | (21,343 | ) | | 4,178 | |
Home video allowance for returns | | | 1,200 | | | 6,187 | | | (4,237 | ) | | 3,150 | |
Advertising underdelivery | | | 1,750 | | | 2,957 | | | (772 | ) | | 3,935 | |
(1) Deductions are comprised primarily of disposals of obsolete inventory, write-offs of specific bad debts, returns and advertising “make-goods” for underdelivery. When the Company does not deliver the guaranteed rating, additional spots, commonly referred to as ‘make-goods’ or at times, a cash refund, is given to the customer.
F-25
