The following chart reflects the amounts and percent change of certain significant overhead items:
The prior year period included approximately $5.9 million related to a favorable settlement of litigation. The positive amount of $2.0 million in bad debt in the prior year was a result of a payment received from a pay-per-view service that had been previously fully reserved. In addition, included in the All other current period was a $2.1 million reduction of sales tax expense due to a tax refund.
During the third quarter of fiscal 2004, 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. Overall 4.1 million options were exchanged for either cash or restricted stock units. The exchange for the options tendered will result in a compensation charge of approximately $6.7 million in total over fiscal 2004, fiscal 2005 and fiscal 2006. The remaining amortization of the compensation charge related to this offer will be approximately $2.2 million in fiscal 2005 and approximately $1.1 million in fiscal 2006. The increase in the stock compensation costs was due to the amortization of the restricted stock units from this exchange offer in the current quarter.
The decrease in investment income relates to realized losses recognized with the sale of certain investments in the second fiscal quarter.
| | October 29,
2004 | | October 24,
2003 | |
| |
|
| |
|
| |
Provision for income taxes | | $ | 6.5 | | $ | 12.0 | |
Effective tax rate | | | 38 | % | | 38 | % |
Discontinued operations — The World. During the quarter ended October 29, 2004 we reached a tentative agreement to assign the remaining term of the lease to a third party. Based on these circumstances, we reduced the accrual for estimated shutdown costs to the amount required under the negotiated settlement of the lease assignment. As a result, income from discontinued operations of The World, net of taxes, was $1.3 million for the six months ended October 29, 2004 as compared to $0.1 million for the six months ended October 24, 2003. The transaction with the landlord and the new tenant closed on November 17, 2004, subsequent to the end of the fiscal quarter. This assignment relieves us of all further obligations related to this property.
Liquidity and Capital Resources
Cash flows from operating activities for the six months ended October 29, 2004 and October 24, 2003 were $4.3 million and $32.3 million, respectively. Cash flows provided by operating activities from continuing operations were $6.3 million and $33.8 million for the six months ended October 29, 2004 and October 24, 2003, respectively. Cash flows used for the six months ended October 29, 2004 included $16.2 million for cash taxes paid and $7.8 million for film production. Working capital, consisting of current assets less current liabilities, was $265.1 million as of October 29, 2004 and $265.2 million as of April 30, 2004.
Cash flows provided by investing activities were $45.1 million and cash flows used in investing activities were $53.3 million for the six months ended October 29, 2004 and October 24, 2003, respectively. Capital expenditures for the six months ended October 29, 2004 were $2.9 million as compared to $2.5 million for the six months ended October 24, 2003. For fiscal 2005, we estimate capital expenditures to be approximately $10-12 million. During the six months ended October 24, 2003, we acquired film libraries and certain other assets for approximately $1.6 million. As of November 30, 2004, we had approximately $143.1 million invested in fixed-income mutual funds, which primarily held AAA and AA debt rated instruments and $33.5 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 six months ended October 29, 2004 were $8.3 million as compared to $25.0 million for the six months ended October 24, 2003. In June 2003, we purchased approximately 2.0 million shares of our common stock from Viacom, Inc. for approximately $19.2 million. In fiscal 2005 we have paid two quarterly dividends, one of which was declared in fiscal 2004, of $0.06 per share, or approximately $4.1 million per quarter, on all Class A and Class B common shares. During the six months ended October 24, 2003, we paid a quarterly dividend of $0.04 per share, or approximately $5.5 million, on all Class A and Class B common shares. Subsequent to October 29, 2004, we increased our quarterly dividend to $0.12 per share on all Class A and Class B common shares.
The Company is producing feature films in order to further capitalize on our intellectual property and fan base. We currently have two film projects in the principal photography stage of filming. As of October 29, 2004, we have approximately $8.3 million in capitalized film production assets. The aggregate production budget for the two films currently in production is estimated to be approximately $32 million. We expect the majority of these costs to be incurred in fiscal 2005. These two film projects represent the first steps for our film entertainment initiative as subsequent films are expected to be developed.
We have not entered into any contracts that would require us to make significant guaranteed payments other than those that were previously disclosed in the Liquidity and Capital Resources section of our Annual Report on Form 10-K for our fiscal year ended April 30, 2004.
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 and capital expenditures.
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Application of Critical Accounting Policies
Accounting for Films. We capitalize costs of production and acquisition, including production overhead, as film production assets. These costs will be amortized to direct operating expenses in accordance with Statement of Position 00-2 “Accounting by Producers or Distributors of Films” (“SOP 00-2”). These costs are stated at the lower of unamortized film costs or estimated fair value. These costs for an individual film will be amortized and participation and residual costs will be accrued in the proportion that current year’s revenues bear to management’s estimates of the ultimate revenue at the beginning of the year expected to be recognized from exploitation, exhibition or sale of such film over a period not to exceed ten years from the date of initial release. Management regularly reviews and revises, when necessary, its ultimate revenue and cost estimates, which may result in a change in the rate of amortization of film costs and participations and residuals and/or write-down of all or a portion of the unamortized costs of the film or television program to its estimated fair value. No assurance can be given that unfavorable changes to revenue and cost estimates will not occur, which may result in significant write-downs affecting our results of operations and financial condition.
We have performed an initial estimate of our ultimate revenue for our two projects in production and believe no write-down is needed at this time.
There have been no additional changes to our accounting policies that were previously disclosed in our Annual Report on Form 10-K for our fiscal year ended April 30, 2004 or in the methodology used in formulating these significant judgments and estimates that affect the application of these policies. Amounts included in our consolidated balance sheets in accounts that we have identified as being subject to significant judgments and estimates were as follows:
| | As of | |
| |
| |
| | October 29, 2004 | | April 30, 2004 | |
| |
| |
| |
Pay-per-view accounts receivable | | $ | 18.3 million | | $ | 28.3 million | |
Advertising reserve for underdelivery | | $ | 2.8 million | | $ | 4.4 million | |
Home video reserve for returns | | $ | 2.6 million | | $ | 2.6 million | |
Publishing newsstand reserve for returns | | $ | 3.4 million | | $ | 4.5 million | |
Allowance for doubtful accounts | | $ | 3.2 million | | $ | 2.6 million | |
The decrease in our pay-per-view accounts receivable balance was primarily due to collections of receivables related to our WrestleMania XX pay-per-view event, which was held March 2004.
The decrease in our advertising reserve for underdelivery is due to the delivery of “make-good” spots that have aired in the current period.
Recent Accounting Pronouncements
There are no accounting standards or interpretations that have been issued, but which we have not yet adopted, that we believe will have a material impact on our financial statements.
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 “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 maintain or renew key agreements could adversely affect our ability to distribute our television and pay-per-view programming. In this regard, our domestic cable television distribution agreement with SpikeTV for five hours of our programming runs through September 2005. We are currently in negotiations with SpikeTV and others
24
for an agreement after September 2005, and cannot give any assurance as to the outcome of these negotiations; (ii) 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; (iii) our failure to retain or continue to recruit key performers could lead to a decline in the appeal of our storylines and the popularity of our brand of entertainment; (iv) the loss of the creative services of Vincent K. McMahon could adversely affect our ability to create popular characters and creative storylines; (v) a decline in general economic conditions could adversely affect our business; (vi) a decline in the popularity of our brand of sports entertainment, including as a result of changes in the social and political climate, could adversely affect our business; (vii) changes in the regulatory atmosphere and related private sector initiatives could adversely affect our business; (viii) the markets in which we operate are highly competitive, rapidly changing and increasingly fragmented, and we may not be able to compete effectively, especially against competitors with greater financial resources or marketplace presence; (ix) we face uncertainties associated with international markets; (x) we may be prohibited from promoting and conducting our live events if we do not comply with applicable regulations; (xi) because we depend upon our intellectual property rights, our inability to protect those rights, or our infringement of others’ intellectual property rights, could adversely affect our business; (xii) we could incur substantial liabilities if pending material litigation is resolved unfavorably; (xiii) our insurance may not be adequate to cover liabilities resulting from accidents or injuries that occur during our physically demanding events; (xiv) we will face a variety of risks if we expand into new and complementary businesses; (xv) through his beneficial ownership of a substantial majority of our Class B common stock, our controlling stockholder, Vincent K. McMahon, can exercise control over our affairs, and his interests may conflict with the holders of our Class A common stock; (xvi) a substantial number of shares will be eligible for future sale by Mr. McMahon, and the sale of those shares could lower our stock price; (xvii) our Class A common stock has a relatively small public “float”; and (xviii) we may face risks relating to our recent restatement of our financial statements. 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.
Interest Rate Risk
We are exposed to interest rate risk related to our debt and investment portfolio. Our debt primarily consists of the mortgage related to our corporate headquarters, which has an annual interest rate of 7.6%. Due to the decrease in mortgage rates, this debt is now at a rate in excess of market, however due to the terms of our agreement we are prohibited from refinancing for several years. The impact of the decrease in mortgage rates is considered immaterial to our consolidated financial statements.
Our investment portfolio currently consists primarily of fixed-income mutual funds and treasury notes, with a strong emphasis placed on preservation of capital. In an effort to minimize our exposure to interest rate risk, our investment portfolio’s dollar weighted duration is less than one year.
Item 4. Controls and Procedures
Based on their most recent review, as of October 29, 2004, our Chairman, 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 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 9 to Notes to Consolidated Financial Statements, which is incorporated herein by reference.
26
Item 4. Submission of Matters to a Vote of Security Holders |
|
| The Annual Meeting of Stockholders was held on September 23, 2004. |
| |
| (a) The election of eight Directors of the Company: |
| | Votes | |
| |
| |
Nominees | | For | | Withheld | |
| |
| |
| |
Vincent K. McMahon | | | 490,410,351 | | | 6,375,262 | |
Linda E. McMahon | | | 490,438,118 | | | 6,347,495 | |
Robert A. Bowman | | | 496,376,089 | | | 409,524 | |
David Kenin | | | 496,322,761 | | | 462,853 | |
Joseph Perkins | | | 489,240,011 | | | 7,545,602 | |
Michael B. Solomon | | | 496,306,304 | | | 479,309 | |
Lowell P. Weicker, Jr. | | | 496,332,095 | | | 453,519 | |
Philip B. Livingston | | | 489,350,021 | | | 7,435,592 | |
| (b) The approval of an option exchange program completed in January 2004: |
Votes |
|
For | | Against | | Abstain |
| |
| |
| |
485,552,849 | | 8,551,368 | | 32,751 |
| (c) The appointment of Deloitte and Touche LLP as auditors for the Company for the fiscal year ending April 30, 2005: |
Votes |
|
For | | Against | | Abstain |
| |
| |
| |
496,189,905 | | 586,297 | | 9,411 |
Item 6. Exhibits and Reports on Form 8-K
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 the following Forms 8-K: |
| |
| (i) Filing Date August 23, 2004 Items 2.02 and 9.01 |
| |
| (ii) Filing Date October 19, 2004 Items 8.01 and 9.01 |
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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: December 7, 2004 | By: | /s/ PHILIP B. LIVINGSTON |
| |
|
| | Philip B. Livingston
Chief Financial Officer |
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