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, 2005 and 2004, $5,815 and $7,003, respectively, of the net deferred tax assets are included in prepaid expenses and other current assets and the remaining $3,617 and $3,904, respectively, are included in other non-current assets in our consolidated balance sheets.
As of April 30, 2005, and April 30, 2004 we had valuation allowances of $1,496 and $2,275, 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.
U.S. income taxes have not been provided on unremitted earnings of our foreign subsidiaries, because our intent is to keep such earnings indefinitely reinvested in the foreign operations of the subsidiaries.
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, 2005 under the agreements described above were as follows:
Rent expense under operating leases included in continuing operations was approximately $2,231, $1,906 and $2,402 for 2005, 2004 and 2003, respectively.
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, a High Court 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 Appeal 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, our archival video footage containing the scratch logo during the period 1998-May 2002 and the scratch logo embedded in programming code of 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 Appeal 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 “wwf.” On October 29, 2004, the Fund filed a claim for damages in the English High Court. In this filing, the Fund seeks actual damages for legal and other costs of approximately $575, which we have provided for, and further asserts substantial monetary claims in an amount calculated as a royalty based on a percentage of profits from certain of our revenue streams, otherwise referred to as restitutionary damages, over the period January 1997 through November 2002. On January 6, 2005, we filed an application to determine as a preliminary issue the propriety of the Fund’s basis upon which damages have been claimed. On March 23, 2005, the English High Court ordered that there be a trial of this preliminary issue. On April 27, 2005, we served our defense to the claim for damages. The Fund’s evidence in support of its claim to be entitled to restitutionary damages and the Company’s evidence in response have been filed. The Fund will have an opportunity to reply. Limited disclosure of documents and further witness statements may then be submitted. The hearing of the preliminary issue is scheduled to take place in the week commencing January 16, 2006.
We strongly dispute that the Fund has suffered any loss or damage. We believe that we have strong defenses to the Fund’s unwarranted monetary claims and will vigorously defend against them. We cannot quantify the potential impact that an unfavorable outcome of the damages claim could have on our financial condition, results of operations or liquidity; however, based on the Fund’s assertions, it could be material.
Shenker & Associates; THQ/Jakks.
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.
F-17
In October 2003, as a result of misconduct by the plaintiff, including giving perjured testimony and fabricating evidence, 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 for tortious interference with business relations, conversion, fraud and conspiracy. 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 $7,900. A damages hearing on our counterclaims is scheduled for January 2006.
We also filed a complaint against James Bell, one of our former officers (“Bell”), 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. We filed a motion for summary judgment on all of our claims, which was granted on August 17, 2004. A damages hearing on these claims is to be scheduled by the Court. The Company also is seeking sanctions based on Bell’s discovery misconduct for which the Company is seeking a default judgment.
In December 2003, the parties entered into a stipulation regarding our application for prejudgment remedies, permitting us to attach assets up to $5,000 against SSAI and up to $850 against Bell and certain related entities (this latter amount was subsequently raised to $4,000). In January 2004, we began attaching assets.
On February 10, 2005, Bell pleaded guilty in United States District Court for the District of Connecticut to mail fraud stemming from a scheme beginning in or before January 1998 and continuing through October 2000 through which Bell was paid kickbacks from Stanley Shenker (“Shenker”) and SSAI based on the royalties derived from certain WWE licensing agreements.
On October 19, 2004, as a result of information uncovered in connection with the Shenker & Associates matter, we filed an action in the U.S. District Court for the Southern District of New York against Jakks Pacific, Inc. (“Jakks”), two foreign subsidiaries of Jakks, THQ Inc. (THQ”), THQ/Jakks, SSAI and Bell Licensing, LLC. The suit also names as defendants certain individuals employed by the corporate defendants, including three senior executives of Jakks, Shenker and Bell.
Our lawsuit alleges violations of the Racketeer Influenced and Corrupt Organization Act (RICO) and the anti-bribery provisions of the Robinson-Patman Act, and various claims under state law. The original complaint sought treble, punitive and other damages and a declaration that the existing videogame license with THQ/Jakks and a related amendment to the toy licenses with Jakks are void and unenforceable. On March 31, 2005, the Company filed an amended complaint which, among other things, added an antitrust claim under the Sherman Act. Certain of the defendants have objected to the procedure by which this amended complaint was filed, and letters from all sides relating to this issue have been filed. The parties await a ruling by the Court as to the schedule under which the litigation will proceed.
By letter dated March 1, 2004, Jakks asserted that the filing of the lawsuit breached a covenant not to sue contained in a January 15, 2004 settlement agreement (the “settlement agreement”) relating to an audit we conducted concerning Jakks’ failure to report certain sales and claim of unsupported deductions. Jakks further asserted that, under an indemnification provision in the January 15, 2004 settlement agreement, it intended to seek indemnification from us for losses, attorney’s fees and costs incurred in connection with the lawsuit as well as various securities class actions filed against Jakks arising out of the same allegations. We deny any breach of the settlement agreement and intend to vigorously defend any asserted claims in that regard.
Jakks has been our toy licensee since late 1995 and operates under current licenses that expire by their terms in 2009. THQ/Jakks obtained a videogame license from us in 1998, which license is to expire in 2009, subject to a right by THQ/Jakks to extend the license for an additional five years. During the pendency of this litigation, we intend to continue to fulfill our obligations under the current licenses and expect Jakks and THQ to do likewise.
F-18
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 sought 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 indemnifying Universal in this action. In May 2003, we filed a motion for summary judgment on all claims which was granted in its entirety. Universal similarly filed a motion for summary judgment on all claims which was granted in part and denied in part. On February 11, 2005, the Court of Appeals affirmed the summary judgment for us, and granted summary judgment on all claims for Universal. The Company has filed a motion seeking approximately $1,250 in attorneys’ fees and costs, to which it believes it is entitled as the successful or prevailing party under the applicable license. A hearing on the motion has been scheduled for August 24, 2005.
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, our former Chief financial Officer (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.
While the Company strongly denies all allegations, the class plaintiffs and the issuer defendants, including the Individual Defendants and the Company, reached an agreement for the settlement of all claims. On February 15, 2005, the court issued an opinion and order granting preliminary approval of the settlement, subject to certain non-material modifications. This settlement, if consummated, is not anticipated to have a material adverse effect on our financial condition, results of operation or liquidity. The Company expects the settlement process will move forward; however, no assurances can be given in this regard.
Other Matters
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, the outcome of which is not expected to have a material adverse effect on our financial condition, results of operations or liquidity. We may from time to time become a party to other legal proceedings.
12. 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.
F-19
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, 2005, approximately 76 employees were participants in the plan. In fiscal 2005, employee participants purchased approximately 31,029 shares of our common stock under the plan at an average per share of $10.74.
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 between 5-10 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, approximately $3.6 million was recorded in fiscal 2005 and approximately $1.1 million will be recorded in fiscal 2006.
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.
In July 2004, we granted 1,074,500 options with an exercise price of $12.90 and granted 133,900 restricted stock units at a price per share of $12.90. Total compensation costs related to the grant of the restricted stock units, based on the estimated value of the units on the grant date, is $1,727 and will be amortized over the vesting period, which is seven years, unless EBITDA of $100 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. No compensation expense was recorded for the options granted under the intrinsic value accounting method followed by the Company.
F-20
Presented below is a summary of the LTIP’s stock option activity for each of the three years ended April 30, 2005.
| | Options | | Weighted
Average
Exercise Price | |
| |
|
| |
|
| |
Options outstanding at May 1, 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 | | $ | 12.47 | |
Options granted | | | 1,104,500 | | $ | 12.89 | |
Options canceled | | | (441,451 | ) | $ | 12.51 | |
Options exercised | | | (73,905 | ) | $ | 9.40 | |
| |
|
| | | | |
Options outstanding at April 30, 2005 | | | 3,544,769 | | | | |
| |
|
| | | | |
Restricted stock units outstanding | | | 424,911 | | | | |
| |
|
| | | | |
Available for future grants at April 30, 2004 | | | 5,743,215 | | | | |
| |
|
| | | | |
The number of options exercisable as of April 30, 2005, 2004 and 2003 was 1,849,173, 1,184,644 and 5,021,600, respectively. The following table summarizes information for options outstanding and exercisable as of April 30, 2005:
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 | | | 3,544,769 | | | 4.7 years | | $ | 12.61 | | | 1,849,173 | | $ | 13.02 | |
13. 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 $762, $1,217 and $840, during 2005, 2004 and 2003, respectively.
14. 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, television programming and feature films. 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 17). 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.
F-21
Revenues derived from sales outside of North America were approximately $87,594, $63,453, and $51,840 for 2005, 2004 and 2003, respectively. The table presents information about the financial results of each segment for 2005, 2004 and 2003 and assets as of April 30, 2005 and 2004. Unallocated assets consist primarily of cash, short-term investments and real property and other investments.
| | Year Ended April 30 | |
| |
| |
| | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
Net revenues: | | | | | | | | | | |
Live and televised entertainment | | $ | 286,660 | | $ | 296,088 | | $ | 295,432 | |
Branded merchandise | | | 79,771 | | | 78,821 | | | 78,832 | |
| |
|
| |
|
| |
|
| |
Total net revenues | | $ | 366,431 | | $ | 374,909 | | $ | 374,264 | |
| |
|
| |
|
| |
|
| |
Depreciation and amortization: | | | | | | | | | | |
Live and televised entertainment | | $ | 4,355 | | $ | 4,415 | | $ | 3,709 | |
Branded merchandise | | | 1,354 | | | 2,729 | | | 2,062 | |
Corporate | | | 6,165 | | | 5,219 | | | 5,194 | |
| |
|
| |
|
| |
|
| |
Total depreciation and amortization | | $ | 11,874 | | $ | 12,363 | | $ | 10,965 | |
| |
|
| |
|
| |
|
| |
Operating income: | | | | | | | | | | |
Live and televised entertainment | | $ | 92,191 | | $ | 108,919 | | $ | 88,266 | |
Branded merchandise | | | 30,442 | | | 33,830 | | | 23,362 | |
Corporate | | | (72,340 | ) | | (69,169 | ) | | (85,021 | ) |
| |
|
| |
|
| |
|
| |
Total operating income | | $ | 50,293 | | $ | 73,580 | | $ | 26,607 | |
| |
|
| |
|
| |
|
| |
| | At April 30 | |
| |
| |
| | 2005 | | 2004 | |
| |
|
| |
|
| |
Assets: | | | | | | | |
Live and televised entertainment | | $ | 109,050 | | $ | 78,162 | |
Branded merchandise | | | 12,300 | | | 17,437 | |
Unallocated (1) | | | 320,055 | | | 358,745 | |
| |
|
| |
|
| |
Total assets | | $ | 441,405 | | $ | 454,344 | |
| |
|
| |
|
| |
|
(1) Includes assets of discontinued operations of $544 and $21,394 as of April 30, 2005 and April 30, 2004, respectively. |
15. 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 of such instruments. Our short-term investments are carried at quoted market values. Our debt 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.
F-22
16. Quarterly Financial Summaries (unaudited)
| | 1st
Quarter | | 2nd
Quarter | | 3rd
Quarter | | 4th
Quarter | |
| |
|
| |
|
| |
|
| |
|
| |
2005 | | | | | | | | | | | | | |
Net revenues | | $ | 81,550 | | $ | 83,857 | | $ | 82,719 | | $ | 118,305 | |
Gross profit (Net revenues less cost of revenues) | | $ | 33,133 | | $ | 31,364 | | $ | 38,293 | | $ | 50,352 | |
Income from continuing operations | | $ | 7,756 | | $ | 3,005 | | $ | 10,988 | | $ | 16,029 | |
(Loss) income from discontinued operations | | $ | (111 | ) | $ | 1,445 | | $ | (69 | ) | $ | 104 | |
Net income | | $ | 7,646 | | $ | 4,449 | | $ | 10,919 | | $ | 16,133 | |
Earnings per common share: basic and diluted | | | | | | | | | | | | | |
Continuing operations | | $ | 0.11 | | $ | 0.04 | | $ | 0.16 | | $ | 0.23 | |
Discontinued operations | | $ | 0.00 | | $ | 0.02 | | $ | 0.00 | | $ | 0.00 | |
Net income | | $ | 0.11 | | $ | 0.06 | | $ | 0.16 | | $ | 0.23 | |
2004 | | | | | | | | | | | | | |
Net revenues | | $ | 74,675 | | $ | 94,431 | | $ | 79,070 | | $ | 126,733 | |
Gross profit (Net revenues less cost of revenues) | | $ | 25,414 | | $ | 42,204 | | $ | 35,015 | | $ | 65,155 | |
Income from continuing operations | | $ | 2,743 | | $ | 16,819 | | $ | 8,863 | | $ | 21,148 | |
(Loss) income from discontinued operations | | $ | (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 | | $ | 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 | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | | $ | (0.02 | ) |
Net income | | $ | 0.04 | | $ | 0.25 | | $ | 0.13 | | $ | 0.28 | |
17. Discontinued Operations
The World:
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, primarily relating to the rent expense associated with our lease, net of expected sub-lease income. We also recorded 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.
In fiscal 2004, we recorded additional shutdown costs of $2,571, or $1,671 after tax, representing the expected absence of projected sub-rental payments for the first nine months of fiscal 2005, which represented our revised estimate of the expected time necessary to assign or sub-let the remaining lease.
During the second quarter of fiscal 2005, we reached a tentative agreement to assign the remaining term of the lease to a third party, and, accordingly, reduced the accrual for estimated shutdown costs to the amount required under this assignment. The assignment relieved us of all further obligations related to this property. The transaction closed during the third quarter of fiscal 2005.
F-23
The following table presents the activity in the accruals relating to the shutdown of The World during the year ended April 30, 2005.
| | Accrued Rent
and Other
Related Costs | |
| |
|
| |
Balance as of May 1, 2004 | | $ | 9,300 | |
Amounts paid during fiscal year 2005 | | | (6,432 | ) |
Adjustments to estimates recorded during fiscal year 2005 | | | (2,818 | ) |
| |
|
| |
Balance as of April 30, 2005 | | $ | 50 | |
| |
|
| |
The results of The World business, which have been classified as discontinued operations in the consolidated financial statements, are summarized as follows:
| | Year ended April 30, | |
| |
| |
| | 2005 | | 2004 | | 2003 | |
| |
|
| |
|
| |
|
| |
Loss from The World operations, net of taxes of $16,359 for 2003 | | $ | — | | $ | — | | $ | (26,691 | ) |
Income (loss) on shutdown of The World, net of taxes (benefit) of $737, $(900) and $(3,257) for 2005, 2004 and 2003, respectively | | | 1,369 | | | (1,671 | ) | | (8,866 | ) |
| |
|
| |
|
| |
|
| |
Income (loss) from discontinued operations | | $ | 1,369 | | $ | (1,671 | ) | $ | (35,557 | ) |
| |
|
| |
|
| |
|
| |
Assets and liabilities of discontinued operations of The World consisted of the following:
| | April 30, | |
| |
| |
| | 2005 | | 2004 | |
| |
|
| |
|
| |
Assets: | | | | | | | |
Cash | | $ | 180 | | $ | — | |
Income tax receivable | | | — | | | 7,002 | |
Prepaid expenses | | | — | | | 46 | |
Inventory | | | — | | | 60 | |
Deferred income taxes, net of valuation allowance of $2,638 for 2004 | | | — | | | 13,701 | |
| |
|
| |
|
| |
Total assets | | $ | 180 | | $ | 20,809 | |
| |
|
| |
|
| |
Liabilities: | | | | | | | |
Accrued expenses | | | 74 | | | 9,304 | |
| |
|
| |
|
| |
Total liabilities | | $ | 74 | | $ | 9,304 | |
| |
|
| |
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| |
Upon the previously mentioned assignment of the lease, the benefits related to our deferred tax assets at The World became currently realizable. These assets, as well as certain other tax assets will be utilized by our continuing operations and are now reflected as assets of continuing operations in our consolidated financial statements.
F-24
XFL:
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.
Income on the shutdown of the XFL in fiscal 2004 was $290, net of taxes of $178. Assets and liabilities of discontinued operations of the XFL consisted of the following:
| | 2005 | | 2004 | |
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Assets: | | | | | | | |
Cash | | $ | 364 | | $ | 585 | |
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Liabilities: | | | | | | | |
Accrued expenses | | $ | — | | $ | 233 | |
Minority interest | | | 180 | | | 180 | |
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Total liabilities | | $ | 180 | | $ | 413 | |
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F-25
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 | |
| |
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For the Year Ended April 30, 2005 | | | | | | | | | | | | | |
Allowance for doubtful accounts | | $ | 2,612 | | $ | 675 | | $ | — | | $ | 3,287 | |
Inventory obsolescence reserve | | | 1,126 | | | 1,549 | | | (613 | ) | | 2,062 | |
Magazine publishing allowance for newsstand returns | | | 4,517 | | | 24,503 | | | (24,418 | ) | | 4,602 | |
Home video allowance for returns | | | 2,588 | | | 9,649 | | | (9,317 | ) | | 2,920 | |
Advertising underdelivery | | | 4,401 | | | 6,145 | | | (7,921 | ) | | 2,625 | |
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 | |
Magazine 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 | |
Magazine 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 | |
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(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-26
