The profit contribution margin for the Live and Televised businesses was approximately 42% for the current period as compared to 37% in the prior year period.
Live events cost of revenues decreased due to the production of sixteen fewer international events during the current period.
Advertising cost of revenues decreased primarily due to the absence of the television advertising participation costs under our new agreement with USA Network.
The following chart reflects comparative cost of revenues for certain of the businesses within our branded merchandise segment:
The profit contribution margin for branded merchandise was 53% for the current period as compared to 47% in the prior period. The increase in the cost of revenues for branded merchandise is directly related to increased revenues generated during the current period.
Licensing cost of revenues increased due to the additional talent royalties and commissions related to the higher revenues generated during the current quarter. The profit contribution margin for licensing was 69% during the current period compared to 66% during the prior period.
Home video cost of revenues increased due to costs associated with the additional units sold in the current quarter.
The following chart reflects the amounts and percent change of certain significant overhead items:
The increase in staff related expense is due in part to severance pay related to certain restructuring plans implemented during the current period. Legal costs were reduced by approximately $3.4 million related to favorable settlements of litigation. In addition, included in the prior year quarter in the all other category was a $2.1 million reduction of sales tax expense due to a tax refund.
| | October 28,
2005 | | October 29,
2004 | | better
(worse) | |
| |
| |
| |
| |
Stock compensation costs | | $ | 1.7 | | $ | 2.4 | | | 29 | % |
As previously discussed, the stock option exchange offer accounted for approximately $0.8 in the current fiscal period, with $0.3 million remaining to be paid in fiscal 2006 relating to this exchange offer. The remaining charge of approximately $0.9 million in the current fiscal period reflects the amortization of restricted stock grants issued to employees under our LTIP.
| | October 28,
2005 | | October 29,
2004 | | better
(worse) | |
| |
| |
| |
| |
Depreciation and amortization | | $ | 5.5 | | $ | 6.0 | | | 8 | % |
Investment income | | $ | 3.3 | | $ | 2.3 | | | 43 | % |
Interest expense | | $ | 0.3 | | $ | 0.3 | | | 0 | % |
| | | | | | | | | | |
| | October 28,
2005 | | October 29,
2004 | | | |
| |
| |
| | | |
Provision for income taxes | | $ | 14.6 | | $ | 6.5 | | | | |
Effective tax rate | | | 39 | % | | 38 | % | | | |
Discontinued operations — The World. During October 2004, we reached a tentative agreement to assign the remaining term of the lease for The World, our entertainment complex in New York City, 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. This assignment relieved the Company of all further obligations related to this property.
Liquidity and Capital Resources
Cash flows from operating activities for the six months ended October 28, 2005 and October 29, 2004 were $41.9 million and $5.1 million, respectively. Cash flows provided by operating activities from continuing operations were $41.7 million and $7.2 million for the six months ended October 28, 2005 and October 29, 2004, respectively. Cash flow used for the six months ended October 28, 2004 included $16.2 million for cash taxes paid. Working capital, consisting of current assets less current liabilities, was $278.9 million as of October 28, 2005 and $278.1 million as of April 30, 2005.
Cash flows provided by investing activities were $40.2 million and $44.3 million for six months ended October 28, 2005 and the six months ended October 29, 2004, respectively. As of November 22, 2005, we had approximately $187.1 million invested primarily in fixed-income mutual funds and short-term U.S. Treasury Notes. Our investment policy is designed to preserve capital and minimize interest rate, credit and market risk. Capital expenditures for the six months ended October 28, 2005 were $5.8 million as compared to $2.9 million for the six months ended October 29, 2004. Capital expenditures in the current period include approximately $4.5 million for the purchase of land adjacent to our television studio.
Cash flows used in financing activities for the six months ended October 28, 2005 were $15.2 million and were $8.3 million for the six months ended October 29, 2004. In July and October 2005, we paid quarterly dividends of $0.12 per share, or an aggregate of approximately $16.6 million, on all Class A and Class B common shares. During the six months ended October 29, 2004, we paid two quarterly dividends of $0.06 per share, or approximately $8.2 million, on all Class A and Class B common shares. On December 1, 2005, the Company’s board of directors authorized the increase of quarterly dividends to $0.24 on all Class A and Class B common shares. The record date for the first dividend at this increased rate is December 31, 2005 with a payment date scheduled for January 10, 2006.
21
We are producing feature films in order to further capitalize on our intellectual property and fan base. We have two film projects that are currently in post-production. As of October 28, 2005 we have approximately $33.2 million in capitalized film development costs. These two film projects represent the first steps for our film entertainment initiative, and subsequent films are expected to be developed.
Contractual Obligations
In addition to long-term debt, we have entered into various other contracts under which we are required to make guaranteed payments, including:
| • | Various operating leases for office space and equipment. |
| | |
| • | Employment contract with Vincent K. McMahon, which runs through October 2007, with annual renewals thereafter if not terminated by us or Mr. McMahon, as well as a talent contract with Mr. McMahon that is coterminous with his employment contract. Mr. McMahon is currently waiving his salary under this agreement. |
| | |
| • | Employment contract with Linda E. McMahon, which runs through October 2007, with annual renewals thereafter if not terminated by us or Mrs. McMahon. Mrs. McMahon is currently waiving her salary under this agreement. |
| | |
| • | Other employment contracts which are generally for one-to three-year terms. |
| | |
| • | Service contracts with certain of our independent contractors, including our talent, which are generally for one-to four-year terms. |
Our aggregate minimum payment obligations under these contracts as of October 28, 2005, assuming the continued waiver of salaries by Mr. and Mrs. McMahon, were as follows:
| | Payments due by period | |
| |
| |
| | Through
FY 2006 | | FY 2007 –
FY 2009 | | FY 2010 –
FY 2011 | | After
FY 2012 | | Total | |
| |
| |
| |
| |
| |
| |
| | ($ in millions) | |
Long-term debt | | $ | 0.4 | | $ | 2.6 | | $ | 2.2 | | $ | 2.4 | | $ | 7.6 | |
Operating leases | | | 0.5 | | | 1.5 | | | — | | | — | | | 2.0 | |
Talent, employment agreements and other commitments | | | 4.7 | | | 21.0 | | | 5.3 | | | 24.0 | | | 54.9 | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Total commitments | | $ | 5.5 | | $ | 25.1 | | $ | 7.5 | | $ | 26.4 | | $ | 64.5 | |
We believe that cash generated from operations and from existing cash and short-term investments will be sufficient to meet our cash needs over the next twelve months for working capital, capital expenditures and payment of quarterly dividends. As previously disclosed, on December 1, 2005 the Company’s board of directors authorized the increase of quarterly dividends to $0.24 on all Class A and Class B common shares. The record date for the first dividend at this increased rate is December 31, 2005 with a payment date scheduled for January 10, 2006.
Application of Critical Accounting Policies
There have been no changes to our accounting policies that were previously disclosed in our Annual Report on Form 10-K for our fiscal year ended April 30, 2005 nor in the methodology used in formulating these significant judgments and estimates that affect the application of these policies. Amounts included in our consolidated balance sheets in accounts that we have identified as being subject to significant judgments and estimates were as follows:
22
| | As of | |
| |
| |
| | October 28, 2005 | | April 30, 2005 | |
| |
| |
| |
| | ($ in millions) | |
Pay-per-view accounts receivable | | $ | 13.5 | | $ | 26.8 | |
Advertising reserve for underdelivery | | $ | 0.6 | | $ | 2.6 | |
Home video reserve for returns | | $ | 3.8 | | $ | 2.9 | |
Publishing newsstand reserve for returns | | $ | 3.3 | | $ | 4.6 | |
Allowance for doubtful accounts | | $ | 3.7 | | $ | 3.3 | |
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 and, in this regard, our agreement with UPN for the broadcast of our television show SmackDown runs until September 2006; (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 as we expand into new and complementary businesses such as subscription video-on-demand and feature films; (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; and (xvii) our Class A common stock has a relatively small public “float”. The forward-looking statements speak only as of the date of this Quarterly Report and undue reliance should not be placed on these statements.
23
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 have been prohibited from refinancing. 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
Under the direction of our Chairman and Chief Executive Officer, as co-principal executive officers, and our Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that our disclosure controls and procedures were effective as of October 28, 2005. No change in internal control over financial reporting occurred during the quarter ended October 28, 2005, that materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.
24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 9 to Notes to Consolidated Financial Statements, which is incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on September 15, 2005.
(c) At the meeting all eight Directors of the Company were reelected as follows:
| | Votes | |
| |
| |
Nominees | | For | | Withheld | |
| |
| |
| |
Vincent K. McMahon | | | 490,251,584 | | | 5,492,290 | |
Linda E. McMahon | | | 490,268,324 | | | 5,475,550 | |
Robert A. Bowman | | | 495,453,367 | | | 290,507 | |
David Kenin | | | 495,453,975 | | | 289,899 | |
Joseph Perkins | | | 490,864,690 | | | 4,879,184 | |
Michael B. Solomon | | | 495,403,593 | | | 340,281 | |
Lowell P. Weicker, Jr. | | | 495,452,052 | | | 291,822 | |
Michael Sileck | | | 490,004,596 | | | 5,739,278 | |
In addition, the appointment of Deloitte and Touche LLP as independent registered public accounting firm for the Company for the fiscal year ending April 30, 2006 was ratified as follows:
Votes |
|
For | | Against | | Abstain |
| |
| |
|
495,032,431 | | 699,864 | | 11,579 |
Item 6. Exhibits
(a.) Exhibits
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 Michael Sileck pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
31.4 Certification by Frank G. Serpe pursuant to Section 302 of Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Certification by Vincent K. McMahon, Linda E. McMahon, Michael Sileck and Frank G. Serpe pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (filed herewith).
25
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 1, 2005 | By: | /s/ Michael Sileck |
| |
|
| | Michael Sileck |
| | Chief Financial Officer |
26
